Today, pension funds account for a massive share of the global economy, with funds in the world’s largest economies controlling more than USD 68 trillion in assets in 2025. In Africa, USD 220 billion in pension fund assets make them the largest source of investable capital on the continent.
Studies suggest that if these funds are utilized beyond their traditional social security functions and strategically directed toward investment, they could significantly reduce Africa’s reliance on external financing and play a transformative role in driving the continent’s economic development.
The same holds true for Ethiopia, where the history of a modern pension fund system goes back more than half a century but is still almost inextricably linked to investment in government securities.
RELATED POSTS
The two pension funds in the country (one for public servants and another for the private sector) control 530 billion Birr in assets, or 10 percent of the financial system. More than 80 percent of their total assets are invested in Treasury Bills and government bonds, which regulators at the National Bank in Ethiopia (NBE) recently warned “indicates the existence of systemic risk that can affect the financial system’s liquidity market.”
But why is investment so narrow, and how can the agencies that manage Ethiopian pension funds diversify? The Reporter Magazine’s Yibel Kassa spoke to Abate Mitiku, chief executive of the Private Organizations Employee’s Social Security Administration (POESSA), to gain a better understanding of the history of pension funds in Ethiopia, their role in economic development, and plans for portfolio diversification. EXCERPTS:
The Reporter Magazine: Could you explain how a pension fund works in the context of Ethiopia?
Abate Mitiku: The provision of pension benefits in Ethiopia, particularly what we refer to as the modern pension system, has existed for more than half a century. The Government Employees’ Pension Fund began operations around 1956 (E.C.). Before that, the country recognized and rewarded citizens who served it with various forms of benefits. For instance, individuals who served on the battlefield, both before and after the Battle of Adwa, were granted land (such as Gult or Rist) as a form of recognition in their later years.
The modern pension system, however, was formally introduced in the 1960s (G.C.). Initially, coverage was limited to government employees, members of the military, and the police. Over time, as economic policies evolved and private institutions expanded within a market-oriented system, a growing number of workers became employed in the private sector. This led to the establishment of the Private Organization Employees’ Social Security through a proclamation in 2003 (E.C.), with contribution collection beginning in 2004 (E.C.). As such, the private-sector pension scheme has now been in place for nearly 14 years.
The public pension system, as noted earlier, has existed for over half a century. The key distinction between the two is that the former covers civil servants and uniformed personnel, while the latter extends coverage to employees of private organizations. As a result, a significant portion of the workforce is now included in the pension system, supported by a comprehensive legal framework.
Beyond its traditional role as a social security mechanism, what has been Ethiopia’s experience in utilizing pension fund assets for investment and reinforcing the nation’s economic development?
When we refer to “social security,” it encompasses a wide range of services. For example, health insurance and safety net programs are also components of social security. Pension, in this context, is just one part of the broader system.
Currently, private-sector employees contribute seven percent of their salary, while employers contribute 11 percent, making a total monthly contribution of 18 percent. These funds are collected by the Ministry of Revenue, similar to income tax collection.
By law, these contributions must be invested. However, we have not yet significantly diversified our investment portfolio. This is largely because our operations share similarities with insurance companies and are guided by actuarial studies. These studies assess critical factors such as investment risks, demographic trends, life expectancy, salary structures, and pension payout obligations.
Maintaining sufficient liquidity is essential. For example, just as a bank must ensure it has enough funds to meet withdrawals—otherwise risking a bank run—we must ensure that pensioners receive their payments without interruption. Therefore, a careful balance between liquidity and investment is crucial.
Given this need to balance liquidity with investment, what are your priority investment areas? What does your current portfolio look like?
Our legal framework allows us to invest in any sector. However, our investment decisions are guided by actuarial analysis and strategic planning. Accordingly, we allocate funds across short-term, medium-term, and long-term investments while maintaining adequate liquidity.
At present, approximately 98 percent of our portfolio is invested in Treasury Bills and government bonds. These instruments offer two key advantages. First, they are virtually risk-free. Second, their returns have become increasingly attractive. Treasury Bills, depending on their maturity period (ranging from 28 to 364 days), currently offer returns between 14 and 17 percent.
Government bonds also provide stable returns, and their attractiveness has improved over time. In many countries, social security funds operate similarly to private financial institutions and can account for a substantial share of GDP. In Ethiopia as well, these funds represent a significant pool of capital.
Additionally, investing in Treasury Bills directly supports the national economy. It helps finance government budget deficits, supports macroeconomic stability, and contributes to inflation management. At the same time, it aligns with our mandate to prioritize the safety and security of pensioners’ funds.
Aside from Treasury Bills and government bonds, are there other areas where your organization is currently investing?
Yes, although still limited, around two percent of our portfolio is allocated to other investments. These include purchasing shares in financial institutions such as banks and insurance companies, as well as time deposits.
Many banks have expressed interest in working with us, and we are investing in selected institutions while carefully managing our liquidity. Although this represents a small percentage, the absolute value is substantial due to the size of the fund.
We have not yet entered the real sector. This is primarily because our institution is relatively young, and we must prioritize liquidity and maturity alignment. Additionally, many private-sector beneficiaries were previously civil servants, and their pension entitlements have not yet been fully transferred. Therefore, ensuring sufficient funds to meet future obligations remains our top priority.
What outcomes have you achieved from your current investment portfolio? Can you highlight key successes?
We are currently generating strong returns from our investments, particularly from Treasury Bills, government bonds, shares, and time deposits. Since the establishment of POSSA, we have accumulated approximately 198 billion Birr in contributions and 53 billion Birr in returns.
For this fiscal year, we planned to collect 55 billion Birr in contributions and 20 billion in returns. As of the eighth month, our performance indicates that we are on track to meet these targets.
One of our key achievements is the improvement of pensioners’ benefits. Legally, pension payments are supposed to be adjusted every three years. However, due to our strong financial performance, we have been able to increase payments annually for the past three consecutive years.
As a result, the minimum pension has increased from 1,600 Birr to 4,669 Birr. This demonstrates our growing financial strength and reliability in meeting obligations.
By investing in government instruments, we contribute to financing national development, reducing reliance on external borrowing, and supporting large-scale domestic projects. In this way, pension fund investments play a meaningful role in broader economic growth.
What are your plans for diversifying your investment portfolio?
Given the growth of our fund and the evolving economic environment, we plan to diversify into alternative investments, particularly in the private sector. We are especially interested in real estate development in Addis Ababa and are preparing to undertake large-scale projects. We have already requested land from the city administration and are awaiting a response.
In addition to real estate, we are considering investments in agriculture, manufacturing, and trade. Our legal framework allows us to invest in any sector, provided that we maintain sufficient liquidity and prioritize the financial security of our pensioners.
Why is it important to expand into private-sector investments?
Diversification is essential to enhance returns and improve pension benefits. While our current investments are largely limited to Treasury Bills and bank deposits, expanding into sectors such as real estate, manufacturing, and services will allow us to generate higher returns.
This, in turn, will improve benefits for pensioners and strengthen the institution’s capacity. Moreover, investing in the private sector contributes to overall economic development.
How will the introduction of a capital market in Ethiopia affect your investment strategy?
The development of the capital market presents a significant opportunity. In many countries, social security institutions are among the largest participants in capital markets due to the scale and liquidity of their funds.
We view this as a promising avenue for achieving better returns while ensuring financial sustainability. Accordingly, we are preparing to participate in the capital market and play an active role in its development.
Are there plans to include informal sector or gig economy workers in the pension system?
Our framework does not strictly differentiate between formal and informal employment. According to our proclamation, any individual working for wages or a salary is eligible for pension benefits.
Whether an employee is permanent or contractual does not matter. Anyone who has worked for at least 45 days qualifies for coverage.
We are actively working to expand coverage, particularly in sectors such as construction, agriculture, manufacturing, hospitality, transport, and domestic work. Currently, we are organized into 12 districts, 42 branches, and six field offices nationwide.
Approximately 2.6 million employees are covered under the pension system. However, we recognize the need to expand further to ensure that all eligible workers benefit from the national pension scheme.
