“For African pension funds to expand, currency risk must be neutralised”

Dr Leslie Ndawana, Chief Executive Officer and Principal Executive Officer, National Fund for Municipal Workers (NFMW), South Africa

African pension funds collectively manage over US$1tn, yet much of that capital remains domestically anchored. In this interview with Bizweek Africa, Dr Leslie Ndawana, Chief Executive Officer and Principal Executive Officer of the National Fund for Municipal Workers (NFMW), contends that managing currency risk is the key constraint to continental expansion. He outlines how regulatory alignment, stronger governance and collaborative investment structures could position African pension capital as a more influential driver of regional growth.

The global investment landscape is being reshaped by geopolitical fragmentation, currency volatility, and shifting monetary cycles. How are these dynamics influencing long-term asset allocation within South African pension funds?

It is true that currently, the global investment landscape is being reshaped by geopolitical fragmentation, currency volatility, and shifting monetary cycles. The policy uncertainty created by the US administration has led to a rethink of alliances and trade partners worldwide and, of course, may influence various macroeconomic factors over time.

While we must be careful not to overreact to short-term policy uncertainty from any single administration, it is prudent to closely monitor possible structural trends that may redefine long-term strategies. As such, pension funds must be prepared to assess specific factors that may influence longer term strategic asset allocation. 

Factors that may come into play when formulating long term strategies could include: 

• A global trend towards diversification away from US-centric portfolios due to expanding fiscal deficits and high valuations. It could result in a longer-term weaker Dollar, which may mean portfolios and asset allocation need to be tilted towards ex-US opportunities. 

• A more active approach to currency management by funds.

• Shifting trade alliances that may impact economic growth parameters as global trade partners realign, which directly impacts geographic asset allocation and expected growth, and ultimately, where to allocate assets.

• The inclusion of defensive assets (e.g. gold) to some extent, although this may arguably be classified as more of a shorter-term tactical adjustment.

Ultimately, with increased freedom to invest offshore, the primary challenge is a complex balancing act between greater global diversification and maintaining local resilience to ensure alignment between long-term assets and liabilities.

Do you see current market turbulence as a cyclical adjustment, or does it signal a deeper structural reset requiring pension funds to rethink core investment assumptions?

Current market turbulence is largely a result of recent shifts in US administrative policy. We are witnessing a transition away from the high-growth, low-inflation environment of previous decades toward a model defined by decelerating globalisation and rising protectionism. Consequently, global trade is being reconfigured around national security and strategic interests, leading to long-term structural changes in supply chains and the formation of new trade alliances. 

While corporate earnings have remained surprisingly resilient despite these policy shifts, the widespread implementation of tariffs and export controls is expected to reduce global trade volumes for the foreseeable future. In this environment, it is prudent for pension funds to reassess their investment assumptions, particularly regarding geographical and currency exposures and shifting economic growth opportunities. Given the structural reset, funds should probably think more carefully about the following investment principles:

• Diversification remains key within any investment strategy, but with US valuations at historic highs, the US policy uncertainty and market concentration in tech is arguably a major risk – funds may have to consider a rotation away from US-centric portfolios.

• As geopolitical shifts drive foreign exchange volatility, currency hedging strategies become more important to protect real returns.

• To counteract the weakening reliability of traditional stock-bond correlations, funds should consider increasing exposure to private markets and real assets, which offer distinct diversification benefits.

• Careful analysis must be applied to AI-driven capital expenditure and the future impact thereof. Assessing how artificial intelligence will transform future productivity and labour markets is critical, as these shifts will impact growth and sectors across various industries and geographical areas.

African pension funds collectively manage well over USD 1 trillion in assets. Yet infrastructure and development financing gaps remain substantial. Is the challenge primarily regulatory, structural, or cultural in terms of risk appetite?

Maybe the challenge to take on these risks is embedded in confidence and sentiment. This arguably goes hand in hand with regulatory frameworks, which need to be well managed and flexible enough to support allocations, while also providing a framework for good governance. For example, while South Africa has increased its allowable infrastructure limit to 45% under Regulation 28, many other African nations maintain strict caps on alternative investments, often limiting them to just a few percentage points of total assets.

In terms of structural issues, it is arguably not a lack of capital that creates the alternative asset gap but rather a lack of factors that build investor confidence, like proper risk mitigation and feasibility strategies. Size is another constraint, as many pension funds are too small to participate in large-scale projects unless they act collectively through consortia, which only adds to the uncertainty.

In my view, the cultural challenge refers to established and more traditional investment philosophies of fund trustees and managers, and a general reluctance to venture outside the box. One may argue that there is a strong preference for traditional assets, such as government bonds and equities, which are more familiar to managers and trustees than the relatively new concept of infrastructure as an asset class. A lack of skills and experience among decision-makers often translates into a perception of risks associated with alternative assets like infrastructure and development finance.

To what extent are African pension funds under-allocated to productive long-term assets such as infrastructure, private equity, and private credit?

In general terms, when measured against global peers and the continent’s developmental needs, African pension funds remain significantly under-allocated to productive, long-term assets. Typically, large pension funds in the developed world maintain exposure to private markets of 20% or higher, whereas the African average remains in the low single digits. Data suggests that increasing this allocation to 10% would not only diversify risk for members but also provide the necessary capital to industrialise African economies to a meaningful extent.

Increasing the allocation to private markets remains a challenge. Specifically for private equity, exit strategies create barriers for entry, whilst concentration risk sometimes results in skewed exposures. Pension funds are hesitant to enter private equity without a clear exit strategy (which is often unknown or uncertain). Furthermore, Private Equity investments typically follow higher-growth, more popular sectors such as renewable energy, financial services, and telecommunications, leaving critical development sectors like manufacturing and agriculture behind.

Private markets are increasingly positioned as tools for diversification and resilience. What governance safeguards must be in place before trustees meaningfully increase exposure to alternative assets?

To enhance the attractiveness of private markets and create more palatable investment conditions, I believe four key areas require immediate attention:

• Enhanced Fiduciary “Fit and Proper” Standards. Trustees and those responsible for asset allocation must demonstrate “fit and proper expertise,” specifically in alternative assets. This includes proficiency in risk assessment, valuation methodologies, and legal project structuring. Consequently, Boards should increasingly adopt formal fiduciary education programs to bridge the expertise gap in unlisted markets.

• Robust Valuation Frameworks. The illiquidity and pricing uncertainty inherent in private markets require specialised oversight mechanisms. Independent valuation is a non-negotiable building block for ensuring good governance and fair pricing. Such frameworks must be supported by regular, robust reporting aimed at validating the underlying assumptions and methodologies used to value unlisted assets.

• Conflict of Interest and Beneficial Ownership Controls. Private market transactions often involve complex networks of stakeholders, necessitating strict transparency. Maintaining accurate and up-to-date beneficial ownership registers with regulators is essential to prevent corruption and identify related party risks. Furthermore, explicit codes of conduct must be implemented to manage potential conflicts of interest among all stakeholders, including fund managers, trustees, and the private entities receiving capital.

• Liquidity Risk Management. As private assets are long-term and illiquid, governance frameworks must adapt to distinct risk profiles and time horizons. Trustees must account for fund-specific liquidity requirements by implementing rigorous risk management measures. These should include periodic stress testing and scenario analysis to ensure the fund can meet benefit payments while maintaining stakes in illiquid infrastructure or private equity.

How should pension funds balance liquidity needs with the pursuit of higher real returns in less liquid private market instruments?

The answer to this can be very fund-specific, as liquidity management for funds must ensure its cash flow processes can accommodate the unique demands of their private market exposure. In general, cash flow-positive funds may have more flexibility to gain private market exposure than those required to liquidate assets continuously to meet benefit payments and other cash flow requirements. However, several cash flow management strategies and liquidity models can help funds meet their liquidity requirements, even with private market exposure. Some suggestions in this regard may be to: 

• Prepare a liquidity budget which explicitly plans for short-term cash needs against the long-term illiquidity premium earned from private markets. Funds should diversify across private equity, private debt, and mezzanine structures, as these often provide regular interest and capital repayments. This essentially creates self-liquidating distribution streams, which can be used for cash flow purposes.

• Choose a relevant legal structure. The choice of private market legal structures may help to provide liquidity, even for private equity exposure, where some open-ended or semi-liquid funds specifically cater for managed and structured withdrawals.

• Use a phased-in approach over time when investing and building up private market exposure. Such a diversification strategy ensures that portfolio maturities and exits occur at different intervals. This creates a natural cycle in which capital distributions from older, maturing investments can fund new commitments or support benefit payments.

• Use secondary market exits. Their increasing use has become more prominent of late and can contribute meaningfully to managing liquidity. It basically helps funds to sell existing private equity or venture capital stakes before the end of the fund’s natural life cycle. 

Pension trustees are bound by fiduciary responsibility. How can funds align capital preservation with the expectation that institutional capital contributes to economic transformation?

Arguably, the Code for Responsible Investing in South Africa (CRISA) 2.0, as well as the ESG considerations specified in Regulation 28, provide a framework for trustees to balance the complexities of social and economic impact without breaching their duty of due care and diligence, or the ultimate goal of capital preservation. As such, trustees should align fiduciary responsibility with economic transformation by treating developmental impact as a core risk-management tool. The alignment is achieved through sustainability, as long-term returns will be forthcoming within a thriving, growing economy, creating a compelling case for productive impact investments in any portfolio. 

Trustees need to embrace a long-term perspective that validates allocations to essential sectors such as infrastructure, renewable energy, healthcare, and education, among others. A strong feedback loop is created by targeting job creation (i.e. through labour-intensive sectors). By supporting employment, funds actively mitigate the long-term risk of a shrinking contribution base caused by high unemployment. In addition, most private market initiatives are designed to provide stable, inflation-linked returns, underpinned by capital preservation when invested over a longer-term period.

Are existing pension regulations across Africa sufficiently flexible to allow innovation, or do they require targeted reform to reflect evolving investment realities?

Arguably, pension regulations across Africa are currently undergoing a major transition, shifting from rigid, rules-based systems toward more flexible, outcome-focused frameworks. While significant progress has been made across the continent, substantial structural hurdles remain. In South Africa, for instance, recent revisions to Regulation 28 were explicitly designed to foster innovation in private credit and infrastructure, setting a precedent for more progressive asset allocation. 

Despite these advances, systemic gaps persist that necessitate further legislative and regulatory intervention. Broad regional reform and increased flexibility are essential to reflect modern investment realities and unlock capital for innovation. Some areas that may be considered for regulatory improvement could be:

• Climate Change and Just Transition. Integrating climate-resilience requirements to protect long-term capital from environmental volatility.

• Cross-Border Integration. Facilitating regional economic enhancements through streamlined intra-African investment regulations.
• Socio-Economic Inclusion. Enhancing infrastructure for informal settlements, including technological and fintech accessibility.

• Resource Availability and Food Security. Developing frameworks that allow pension capital to support sustainable agriculture and critical resource management.

• Retirement Flexibility. Re-evaluating rigid retirement ages to better align with changing demographics and economic participation.

ESG and sustainability considerations are evolving globally. In your view, should sustainability be framed primarily as a values-based approach or as a long-term risk management discipline?

While a values-based or ethical investing approach has merit, it can often be subjective, prone to vague “feel-good” statements, and difficult to quantify and define among all stakeholders. This may potentially create challenges around trustees’ fiduciary duty to enhance members’ returns, taking account of various risks.

In my opinion, ESG and sustainability considerations should therefore rather be framed as a long-term risk management discipline, for the following reasons:

• Framing ESG and sustainability in the context of financial materiality (i.e. risk vs return outcomes) aligns perfectly with most legal and regulatory obligations. For example, if trustees of a fund ignore the transition risk posed by stranded or dying assets (e.g., coal mines with a declining lifespan), they may fail in their duty to preserve capital. Also, from a financial material perspective, sustainability will ensure that the economy remains functional for members over the very long term.

• A risk-based approach demands data and disclosure, which can be audited at any point in time. By treating ESG as a financial risk, funds can focus on measurable outcomes such as carbon intensity, water usage efficiency, labour turnover rates, etc.

• Incorporating ESG and sustainability as a risk management tool is paramount to any long-term investment strategy. Various social issues, challenges and risks can be addressed through this approach. For example, high inequality and unemployment are not just social issues; they are systemic risks that can lead to civil unrest, strikes, and policy volatility – a risk that can be mitigated when investors integrate sustainability factors into their core investment philosophies. 

How important is cross-border collaboration among African pension funds in building scale, strengthening due diligence, and accessing larger private market opportunities?

This aspect is very important and arguably one of the most important factors when considering private market opportunities, which should be essential rather than optional. Of course, one of the main objectives of collaboration is to bypass individual fund size constraints. By pooling resources, relatively small pension funds can also participate in large-scale projects that would otherwise exceed their individual capital capacity. 

Collaborative investing is also a powerful risk-mitigation tool. It allows funds to share the high administrative (and possibly management) costs and technical demands associated with private market oversight. Such multi-stakeholder partnerships naturally provide funds with superior access to expert advisory services and more rigorous due diligence. 

Hopefully, cross-border partnerships unlock unique investment avenues that traditional, focused strategies often overlook. For instance, regional trade can be significantly streamlined by financing cross-border infrastructure corridors (such as rail, logistics, and port networks), which require highly coordinated cross-border execution.

As investment strategies become more sophisticated, what capabilities must pension funds strengthen internally — governance, risk analytics, trustee education?

The answer is largely self-evident: pension funds must undoubtedly enhance their oversight capabilities as investment strategies become more complex and sophisticated. With the take-on of private market exposure, funds will have to invest in their oversight processes to actively monitor and assess risk, as well as carry out more accurate liquidity stress tests.

Some of the principles that funds can adopt to enhance their risk management include:

• Independent oversight mechanisms to incorporate specialised expert advice on complex unlisted deals and legal structures.

• Improvement of quantitative models that move beyond historical tracking toward predictive supervision. In moving with the times, funds can employ Artificial Intelligence for predictive analytics to forecast cybersecurity threats and detect fraud. The key to this enhancement will be data integrity, which means that data governance must become a priority to ensure the AI-driven reporting remains accurate and relevant for investment decisions.

Of course, implementation requires skilled personnel, which underscores the necessity of trustee education. This critical requirement will inevitably become more demanding. As such, the Financial Sector Conduct Authority (FSCA), the regulatory authority in South Africa, already made significant strides in advancing this area to improve overall governance and oversight through advanced education requirements and tools.

As Chief Executive and Principal Executive Officer of the National Fund for Municipal Workers, how is NFMW positioning itself within South Africa’s pension landscape, and what differentiates its long-term investment strategy?

NFMW has intentionally taken a strategic position by allocating investments to the alternative asset class to address broader socio-economic issues in South Africa that, if unattended, add political risk and additional uncertainties to our investment universe, especially given that about 70% of total assets under management is invested in South Africa. In 2021, NFMW adopted an organisational strategy that defined its vision as “To positively impact the lives of our members, their families and their communities, today and tomorrow.”  In line with this vision, NFMW intentionally contributed significantly to the well-being of not only its members but also the broader society through its impact program. NFMW funded the impact programme through additional allocations to alternative assets; we transitioned from approximately 5% of AUM in 2021 to approximately 10% of AUM in 2026. 

The clear differentiator at this point is, of course, the strategic alternative asset exposure and the formal impact program, which is unique, I believe, in the SA industry. It already contributes handsomely to the funds’ risk and return profile, and will, without any doubt, result in very good outcomes for members over the long term.

Looking ahead, what structural shifts must occur for African pension funds to become more influential drivers of continental growth rather than largely domestic asset allocators?

It is probably true to say that most African pension funds are biased toward their local financial markets for various reasons, such as matching member liabilities, managing currency risk, and regulatory constraints or requirements.

Broadly speaking, for African pension funds to become more continental (or global) within their investment strategies, currency risks need to be neutralised, as fluctuations can severely impact investment returns – a risk that is particularly high within the African context. Neutralising this volatility requires both regulatory flexibility and advanced investment expertise.

Continental regulatory standardisation may also be required to some extent as different regulatory frameworks create challenges for cross-border collaboration projects. 

Building on regulatory alignment, standardised reporting is also essential. This ensures that funds can evaluate and compare the productive impact of various projects on a consistent, like-for-like basis.

Finally, to encourage private market participation, funds may require structural protections such as loss limitations or credit guarantees. A “first-loss cover” mechanism, as a start, where a government body or multilateral organisation absorbs a set percentage of initial losses, can provide the necessary security and guarantees for pension funds to commit capital more generously.