Melaku Andualem spends his retirement days reading books, watching television and keeping up with the latest developments.

The grandfather of six spent close to four decades working for several government institutions. His career began in his early 20s as a high school teacher with a monthly salary of 225 Br.

He recalls the simplicity of life back then and how he was able to live a good life on this income.

“My salary was one of the highest at the time,” said Melaku. “I had a good lifestyle and savings.”

Later on, he got married, built a home and fathered four children. By the end of his career, 22 years ago, his salary had grown to 1,400 Br a month.

In 1997, Melaku retired at the age of 50 and was entitled to a pension. Throughout Melaku’s employment over the years a certain amount of his salary had been deducted so that he would have retirement income in his later days.

Calculated based on the salary and the number of years he served, he was entitled to half of his last salary, around 700 Br, as a pension.

Twenty years down the line he still collects his pension at the beginning of every month from the nearest postal office, one of several institutions where a pension is paid by the state.

The 73-year-old Melaku is one of the 720,000 pensioners that are currently getting paid through the social security scheme.

The scheme, common around the globe, provides a means for individuals to accumulate savings over their working life so that they will have an income when they retire.

In Ethiopia, the law that provided the foundation for the establishment of the Ethiopian pension scheme was passed in 1960 and went through several amendments over the years.

Initially, the scheme covered only civil servants and the military. Private organisation employees were excluded from the scheme.

Private organisations, on the other hand, provided a scheme similar to the government pension. They deducted a certain percentage of their employees’ salaries and paid back the money in the form of a lump sum upon the employee’s departure.

However, in 2011, the private employee’s pension fund scheme, which made the state the sole body that has the right to collect a pension from private organisation employees, was established.

Accordingly, two separate agencies became responsible for the implementation of social security in Ethiopia.

The Public Servants Social Security Agency handles the pension funds of around 2.1 million government employees, excluding the military and police force. The other entity, the Private Employees Social Security Agency manages the pensions of 1.5 million employees working in around 187,000 private organisations.

The system works similarly in both schemes where the employer contributes 11pc and employees chip in seven percent of salaries, making the total contribution for pensions 18pc of gross salaries every month.

However, for the military, 32pc of gross salaries is contributed to a pension, of which the state covers 25pc. The two agencies have a combined workforce of around 5,000 employees and over 140 branches to carry out the collection of pension contributions.

Pension contributions from government employees are made directly to the Agency by the employer, while private employee’s pensions are collected when the organisations pay their tax to the tax authorities who then transfer employee’s pension funds to the Agency.

The institutions have continuously been gathering pension contributions and have accumulated immense capital. The country’s social security funds stood at 110 billion Br at the end of the last fiscal year.

Out of the total value, 76 billion Br is from public servants' pension contributions, while 34 billion Br was collected from private employee’s pension funds within the eight years of the Agency's existence.

The combined funds have reached close to one-third of the country’s budget in the current fiscal year, more than double the level of deposits at Awash Bank S.C., the largest private bank.

There are countries where pension funds can reach up to 50pc of the country’s GDP. Since pension funds are collected every month and are paid years later when individuals retire, the accounts accumulate vast amounts of money.

Pensions funds are also used as a great source of capital for investments. As pensioners do not immediately need the funds, the money can be invested to obtain the best possible rates of return.

The pension funds are among the largest source of investment capital in developed countries. In the United States, the 20 largest pension funds hold about one-tenth of the equity capital of publicly-owned companies.

In Ethiopia, the law allows the investment of pension funds. However, it limits the area of investment to only treasury bonds and gives the Ministry of Finance the power to identify other profitable and reliable investments.

But so far, no new areas have been identified, and the money is only used to buy treasury bills, which have a lower return.

When the law was passed, there were not a lot of investment opportunities for investing such fund, according to Gemechu Weyuma, director-general of the Private Employees Social Security Agency.

“Besides, nobody was willing to take the risk,” Gemechu said.

The Agency, which paid half a billion Br for 18,000 beneficiaries in the past fiscal year, usually buys treasury bills with a maturity date of 91 days.

The Agency offers 99.70 Br to the government and receives 100 Br in return, earning an interest rate of 0.3pc. The interest rate, approximately a one percent annualized rate, is offered in an economy that has had an average inflation rate of 15.5pc over the pastdecade and a half resulting in negative real interest rates, the rate of interest after allowing for inflation.

In the past fiscal year, the Agency bought around 113 billion worth of treasury bills, earning a profit of about 330 million Br.