Key Strategies for Growth and Security

Tanzania does not rank among the top 10 African countries with the largest pension assets, as per the Absa Africa Financial Markets Index for 2023. The ability to foster local investment is closely tied to the strength of a country's pension assets, a key observation highlighted in the 2023 Financial Market Report by Absa.

The term "large pension assets" denotes a substantial pool of financial resources held within pension funds or retirement savings accounts. These resources are earmarked and invested to ensure financial security and income for individuals during their retirement years.

In Absa's 2023 Africa Financial Markets report, the measurement of local investor capacity is one of the six fundamental pillars used to assess the most thriving financial markets throughout Africa. This specific pillar concentrates on local investor capacity by evaluating the growth of pension systems. According to the report, pension funds possess the potential to drive the development of capital markets due to their extended investment horizons and their ability to diversify across a wide array of asset classes, including listed equities, corporate bonds, and private markets.

The report further elaborates that this pillar relies on two main components: the assessment of pension fund assets per capita to gauge their size and their comparison to domestically listed securities to assess their contribution to local capital markets.

The absence of substantial pension assets in Tanzania has a direct impact on the country's ability to invest locally, develop its capital markets, ensure retirement security, and support infrastructure development. Addressing these issues by strengthening the pension system can contribute to the country's long-term economic well-being and prosperity.

What Tanzania is missing out:

Limited Local Investment:

With inadequate pension assets, Tanzania's ability to invest locally is constrained. A significant portion of pension funds from other countries can be invested in local infrastructure projects, businesses, and financial markets, contributing to economic growth and job creation.

Reduced Capital Market Development:

Robust pension assets play a crucial role in developing a nation's capital markets. These assets provide stability and liquidity, attracting more investors and fostering the growth of financial markets. Tanzania's limited pension assets mean it's missing the opportunity to build a thriving capital market, which is essential for long-term economic stability.

Retirement Security:

Inadequate pension assets can result in limited retirement security for the country's aging population. Without substantial pension savings, retirees may struggle to maintain their standard of living, increasing the burden on social safety nets and potentially leading to financial insecurity among the elderly.

Limited Infrastructure Investment:

Pension funds often invest in long-term infrastructure projects, such as roads, bridges, and energy facilities. Tanzania's lack of significant pension assets means less funding available for such projects, which are crucial for the country's development and economic competitiveness.

Missed Diversification Opportunities:

Pension assets can serve as a source of diversification in the investment portfolio. Insufficient pension assets limit the ability to invest in a broad range of asset classes, potentially missing out on opportunities for higher returns and risk management.

Reduced Economic Growth:

A robust pension system can contribute to economic growth by channeling savings into productive investments. Tanzania's limited pension assets mean less capital available for productive investments, hindering economic growth and development.

Tanzania can create an environment conducive to the growth of large pension assets, ensuring financial security for retirees and contributing to the long-term economic development of the country:

Reform and Strengthen Pension Legislation:

Tanzania should focus on revising and enhancing pension laws and regulations to provide a robust legal framework for pension funds. This includes defining contribution rates, eligibility, and ensuring compliance with international best practices.

Encourage Private Pension Participation:

Promote the growth of private pension schemes, allowing individuals and employers to contribute to retirement savings beyond government systems. Incentives and tax breaks can be introduced to encourage participation.

Increase Financial Literacy:

Improve financial literacy among the population to raise awareness about the importance of saving for retirement. Financial education programs can empower individuals to make informed decisions about their pension contributions and investments.

Diversify Investment Options:

Allow pension funds to invest in a broader range of asset classes, including equities, bonds, and alternative investments. Diversification can potentially yield higher returns and reduce risk.

Enhance Governance and Transparency:

Implement strong governance and transparency standards within the pension industry to build trust among participants and investors. Robust oversight can prevent mismanagement and fraud.

Promote Employer-Sponsored Plans:

Encourage employers to establish pension plans for their employees. Mandatory or voluntary employer-sponsored plans can significantly increase the coverage and contributions to pension funds.

Introduce Auto-Enrollment:

Consider implementing auto-enrollment systems, where employees are automatically enrolled in pension plans, but they have the option to opt out if they choose. This can boost participation rates.

Long-Term Investment Focus:

Encourage a long-term investment approach by pension funds. Regulations can be designed to discourage short-term thinking and promote investments in infrastructure and other long-term projects.

Public Awareness Campaigns:

Launch public awareness campaigns to educate citizens about the benefits of pension savings and the potential consequences of not saving for retirement.

Collaborate with Financial Institutions:

Partner with financial institutions to provide pension products and services that cater to various income levels, making pension participation accessible to a broader segment of the population.

Regular Monitoring and Evaluation:

Continuously monitor and evaluate the performance of pension funds and the effectiveness of pension policies, making adjustments as necessary to ensure growth and sustainability.

Government Contributions:

Explore the possibility of government contributions to pension funds, particularly for low-income individuals who may struggle to make adequate contributions themselves.