Experts urge overhaul of GCC public pension systems to plug funding deficit

GCC countries need to increase the age of retirement and overhaul public pension systems to offset the economic impact of the Covid-19 pandemic and remain sustainable in the long term.

“Pension systems in the GCC are still reliant on government-run, pay-as-you-go defined benefit schemes," said Ebrahim K. Ebrahim, chairman of the Arab Pensions Conference 2020, which is being hosted online from Bahrain this week. "These programmes are quite generous but are increasingly facing funding deficits, making their long-term viability a mounting concern.

“Awareness of long-term savings is limited in the region. The ratio of retired people to working people is set to double in the next three decades. Public finances are going to remain under pressure and this will have implications for our economies,” Mr Ebrahim added.

The combined assets managed by pension funds in the GCC total just over $400 billion, according to Ernst & Young’s GCC Wealth and Asset Management Report 2017.

The World Economic Forum estimated that the combined retirement savings gap is expected to reach $400 trillion by 2050 between eight major economies – Canada, Australia, the Netherlands, Japan, India, China, the UK and US.

Although expatriate workers are paid mandatory end-of-service benefits in the Mena region, such schemes are inadequate as a pension arrangement, Mr Ebrahim added.

“Voluntary pension schemes are possible, but not formally regulated or incentivised," he said. "The range of tailored products available for such savings is minimal.”

Delegates at the conference, which is being held under the theme Towards a Future-proof Regional Pension System, discussed how reforms can be implemented to address the funding deficit and called for the implementation of parametric reforms to build a future-proof pension system. These do not involve fundamentally changing the pension system, but instead recommends making targeted adjustments to its parameters to make it more balanced.

One of the reforms include increasing the retirement age. In Bahrain, for example, the average retirement age of citizens is 48. In the UAE, Emiratis are eligible for pensions after reaching the age of 49. In contrast, the average retirement age for public pensions is 64 in Organisation for Economic Co-operation and Development countries, Simon Herborn, an associate partner at professional services firm Aon, told the conference.

“These young retirement ages in the GCC were viable a few decades ago, but no longer," he said. "The rise in life expectancy means pensions need to be paid out for longer. Also, falling fertility rates mean that the number of working age people paying contributions is growing at a slower rate.”

Another proposed change is to pay lower pensions to retirees. Regional schemes currently have very generous pension plans relative to other parts of the world.

Across the 37-member OECD countries, pensions are projected to be 59 per cent of a person's final pay after a career of 35 to 40 years. In comparison, most GCC retirees receive much higher pensions and from a much younger age. For example, in Saudi Arabia, a citizen can retire after 25 years of service and receive a pension at about 65 per cent of their final salary, Mr Herbon said.

He also suggested that members, employers or the government put more funds into the pension system. Although current pension contribution rates across the Mena average 15 to 25 per cent of pay, higher rates are needed because people in the region retire earlier. “Other countries also have income tax, which helps cover pension costs,” Mr Herborn said.

In the UAE, for instance, an eligible Emirati employee is required to contribute 5 per cent of their monthly salary and the government employer is required to contribute 15 per cent. For private sector employees, employers would pay 12.5 per cent, with an additional 2.5 per cent being contributed by the government to the pension.

“Parametric reforms are only one component of overall solutions for financial sustainability. The GCC governments should try to cultivate other forms of retirement savings,” Mr Herborn said.

He added that the state alone cannot be responsible for providing all retirement benefits. This must be topped up by personal savings and employee-linked savings such as the DIFC Employee Workplace Savings in Dubai, KiwiSaver in New Zealand, National Employment Savings Trust in the UK and the National Pension Scheme in India.

Although the “pace of change has been slow in the Mena, Jordan, Oman and Bahrain have made progress on some parametric reforms”, Mr Herbon added.

Meanwhile, Covid-19 has had a wide-ranging impact on defined benefit pension funds, said Philip Wheeler, senior manager and pensions actuary at Ernst and Young. "Pension contributions and investment returns must at least equal benefit payments and expenses to achieve financial balance," he added.

“The biggest impact on the finances of pension funds is due to the effect on investment returns, which contribute two-thirds to the actual assets of the fund and tend to be highly volatile,” he said at the conference.