GCC governments are relooking at existing models of both public and international pension funds to ensure they are sustainable.
George Triplow, MENA wealth & asset management leader, EY, said: “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.”
He added: “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.”
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 USD 40 bn. 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 percent of the pension assets are invested abroad, mainly in US Treasuries managed by the Saudi Arabian Monetary Authority.
Triplow said: “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.”
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.
Opportunities for GCC pension funds
The emergence of Islamic retirement products is a development that is relevant to both expatriates and nationals. To ensure that pension savings under Islamic schemes are in accordance with Islamic law, they need to be invested in Shariah-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 Shariah-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.” Triplow said.