Ethiopia’s pension funds are approaching a pivotal shift, but this time the story is more nuanced than simply “low returns versus high inflation.” The numbers themselves are changing and so is the strategy.
For years, institutions like the Private Organization Employees’ Social Security Administration (POESSA) operated in a system where government securities offered relatively low returns while inflation ran high. That created a clear problem: pension savings were losing value in real terms.
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But as of late 2025, the landscape has started to rebalance.
Treasury bill yields have risen significantly, with the 91-day T-bill now averaging around 16.2%, while inflation has eased to about 9.8%. On paper, this changes everything. For the first time in years, “safe” government securities are offering positive real returns.
Here’s a simple way to understand it.
Imagine a pension fund invests 1 million Birr in Treasury bills at a 16.2% return. After one year, that grows to about 1.162 million Birr. If inflation is 9.8%, the real (inflation-adjusted) gain is roughly 6.4%.
In practical terms, that means the pensioner is not just preserving value but actually gaining purchasing power.
Compare this to a few years ago, when returns might have been 7–8% while inflation exceeded 20%. Back then, the same pensioner would be losing value every year despite “earning” returns.
So the question becomes: if government securities are now working again, why are pension funds still looking toward the capital market?
The answer lies in scale and sustainability.
POESSA manages around 183 billion Birr. As contributions grow and obligations to retirees increase, the fund cannot rely on a single asset class forever. Treasury bills may now offer positive returns, but they are still short-term instruments and heavily dependent on government policy and liquidity conditions.
There is also reinvestment risk. A 91-day T-bill must be rolled over multiple times a year, and future rates are uncertain. Today’s 16.2% may not hold tomorrow.
This is where the capital market becomes important.
Ethiopia, under the supervision of the Ethiopian Capital Market Authority, is preparing to operationalize its securities exchange. For pension funds, this opens access to longer-term and potentially higher-yielding assets such as equities and corporate bonds.
To illustrate, consider another simple example.
If a pension fund invests in a company listed on the exchange that grows its earnings by 15% annually, and pays dividends, the total return could exceed 16–18% over time. Even if inflation stays around 10%, that still delivers a solid real return.
But the real advantage is not just higher returns—it is diversification.
Instead of putting all funds into government securities, a pension portfolio could be split:
Part in Treasury bills for stability and liquidity
Part in corporate bonds for steady income
Part in equities for long-term growth
This balance reduces risk while improving overall returns.
Still, the shift is not automatic.
The earlier attempt by POESSA to move into real estate in Addis Ababa shows how difficult diversification can be in practice. Despite legal backing, the fund has struggled to access land, limiting its ability to deploy capital outside traditional instruments.
The capital market, if implemented effectively, could solve this bottleneck by providing a transparent and accessible investment platform.
At the same time, it introduces new risks. Unlike Treasury bills, stock prices fluctuate. Companies can underperform. Governance and transparency become critical. For pension funds, this means building new capabilities, investment analysis, risk management, and long-term portfolio strategy.
What is emerging is not a replacement of one system with another, but a transition toward a more balanced model.
Government securities are becoming attractive again, offering real returns after years of erosion. But they are not enough on their own. Pension funds need growth, diversification, and resilience.
In simple terms, if Treasury bills are now providing a safe 6% real return, the capital market offers a chance to push that higher while spreading risk across the economy.
For Ethiopia’s pension funds, the strategy is evolving from survival to optimization.
And for the country’s emerging capital market, their participation may be the difference between a slow start and a meaningful takeoff.
