GCC governments are relooking at existing models of both public and international pension funds to ensure they are sustainable, according to EY’s GCC Wealth and Asset Management 2015 report – Fast growth, divergent paths, launched at the FundForum Middle East 2015. Across the GCC, public pension funds amount to US$397 billion, representing nearly a quarter of GDP and US$15,000 per national, said EY.
George Triplow, MENA Wealth & Asset Management Leader, EY, says: “Public pension funds in the GCC are only just coming of age, just over a fifth is invested in local equities. Two big issues are currently driving significant rethinking in the sector. The first is the sustainability of public pension funds for nationals, given the relatively small size of the funds, demographics and the gap between contribution and benefit levels. Secondly, there is a growing recognition by many employers that end of service benefit (EOSB) payments received by expatriates are neither adequate nor suitable as an alternative to a pension.”
The size of GCC pension funds is relatively low, compared with employer-provided pension funds in the UK, for example, where these assets are larger than GDP and funds per individual are nearly four times the GCC average.
Kuwait has the best capitalised fund relative to the size of its economy and citizen population. This follows an initiative to recapitalise the pension fund from the budget since 2008, filling an actuarial deficit that had been estimated at nearly US$40 billion. In international terms, its assets relative to population are similar to those of the UK’s pension funds.
Qatar’s pension assets are also sizeable relative to the population, following a capital injection from the Ministry of Finance in 2012. Since then, Qatar’s General Retirement and Social Insurance Authority appears to have focused heavily on investment in local equities, including stakes in major companies.
Saudi Arabia naturally has the largest pool of pension assets. Assets are split between the Public Pensions Agency (for public sector workers) and the General Organization for Social Insurance (for private sector workers). The two often co-invest in companies together and alongside the Public Investment Fund. Aside from stakes in dozens of major listed companies, they also invest in private companies. However about 85% of the pension assets are invested abroad, mainly in US treasuries managed by the Saudi Arabian Monetary Authority.
“To address the concerns over the sustainability of the industry, Gulf countries will have to relook at the retirement ages, benefit levels and contribution requirements. This could require further recapitalisation of the funds and reforms to benefits and retirement age. Where fiscal means are limited, it may also involve the kind of three-tier system that is increasingly common elsewhere, combining a minimal state pension, defined contribution workplace pensions and additional personal contributions — but a wholesale shift in this direction is unlikely. More systematic reform is also possible in the most fiscally strapped countries to incorporate additional pension insurance elements. Recent changes in Gulf healthcare, with a steady shift towards private insurance, may set a precedent for such reforms,” commented George.
The report highlights three key areas which can benefit the GCC pension funds industry: new levels of regulation and governance, expanded EOSB schemes and shari'ah-compliant retirement products.
The emergence of Islamic retirement products is a development that is relevant to both expatriates and nationals in the GCC, says EY. To ensure that pension savings under Islamic schemes are in accordance with Islamic law, they need to be invested in shari'ah-compliant assets. However, there are concerns about annuities, which are typically purchased at retirement using pension fund pots, and the concept of a longevity sukuk has been developed as a shari'ah-compliant alternative.
“There will be significant changes in the way GCC pension provision is looked at in the coming years because the current system may find it difficult to cope with the needs of GCC residents. We expect a shift in the retirement ages of GCC nationals and changes to be made to the EOSB schemes to make them more relevant to the actual retirement needs of expats. There will be a lot of opportunity for local providers in the region, especially in the Islamic retirement product arena,” concluded George.