Many working people see retirement as a period when they would do all the things they dreamed of while having to go to work every day – they would travel more, spend more time with their family and friends, or take up a hobby they never had time for. However, as numerous research shows, a vast majority of the working population simply won’t have enough money to finance such dreams.
There are two reasons for this – most people are either not willing to save enough for their retirement years, or, they are simply not able to. Most of the countries around the world have some kind of public pension scheme, but that usually isn’t enough – it is estimated a person needs a minimum of around 70 percent of their pre-retirement income to maintain their current standard of living in retirement, and considering the fact that on average people now spend as much as quarter of their lifetime in retirement, the sum of money needed for “decent” living in their old age is considerable.
In the GCC region, where the vast majority of the labour force consists of expats, who unlike nationals, work in the private sector, are not eligible for pensions provided by the governments of the Gulf States, formal retirement plans are still not prioritised by most companies or the working force itself. One of the reasons behind poor awareness of the importance of saving for the “golden years”, is the fact that the population is young – only around 0.5 percent of the GCC population is classified as elderly – aged 65 or above, so to most retirement seems a long way away. Thus it is partly understandable that a very small percentage of the population has some kind of long-term retirement plan at all.
In fact, Zurich International research reveals that only 33 percent of UAE residents have a formal retirement plan, while the report, ‘The Future of Retirement 2015’, by HSBC states that for 87 percent of people in the UAE saving for retirement is not a main priority. However, at the same time, 71 percent of pre-retirees are worried about not having enough money to live day-to-day and 68 percent fear that they will run out of money after they stop working.
Lack of savings critical
“Financial planning for retirement doesn’t seem to be a priority for many people across the Middle East, however, lack of savings is becoming critical. It is a region where culturally, retirement planning as a discipline is very much in its infancy when compared to Western economies. According to the National Bonds GCC Savings Index, 84 percent of GCC residents think that their savings are not adequate to support their long-term needs,” says Peter Cox, head of international pension plan sales for the Middle East and Asia Pacific at Zurich International Life.
Agreeing, I&C Engineer Rahadul Hasan, a former employee of Qatar Mesaieed Power Company Ltd, highlights how very difficult it is to save for retirement. “I haven’t been able to save anything up until now for retirement,” says the father of two. Qatar is a very expensive place to live in, especially rent and school fees are very high.”
Indeed, the rising costs of living in the Gulf region are heavily influencing the ability to save for the golden age. For instance, in Qatar, rentals usually constitute about one-third of average monthly expenses of an expat family. According to the 2016 Gulf Business Salary Survey, the average monthly expatriate salary in Qatar stands at around USD 12,080. It is worth mentioning that the cost of education in Qatar has jumped more than 11 percent since 2013, so it is easy to calculate that combined with other costs, to save enough for retirement is a hard goal to reach for many. But Hasan is optimistic and he believes that in Qatar it is possible to save for retirement. “I think it is possible, however, it depends from person to person and situation to situation. Establishing a savings target could be a good idea – one that lets you know roughly how much you need to put aside over time to fulfil your retirement goals,” he says.
Poorly managed funds
Another important question is, what is the best age to start saving for retirement and of course, how much. The answer is fairly simple – the best time to start saving is as early as one can, says Cox. “It’s best to start preparing early although that is not always possible as other goals may take priority e.g. property purchase. However, saving a small amount early in their working life, will encourage a savings discipline which can be built on later. The amount to save will depend on individuals’ ambitions in retirement in terms of lifestyle. It will also depend on the cost of living in their country of retirement. The rough rule of thumb is that you should save half your age as a percentage of salary. So, someone starting to save at 30 should save 15 percent of their salary. Pension plan providers, such as Zurich International, can help with retirement models on-line so that employees can continually monitor and adjust their savings goals,” says Cox.
One of the solutions to the problem is an international pension plan, and according to Cox, those plans can offer many benefits. “They can be used by employers to fund gratuity obligations or as a top-up to the gratuity entitlement in recognition that it is not enough. Plans provided by Zurich International make benefits visible to employees through a log-in and password so that they can see benefits building up in their name. A number of funds can be made available across many different asset classes to cater for everyone’s risk appetite and communication programmes can help with people’s understanding of savings and investment issues,” explains Cox.
On average, foreign employees across the region rely on pension funds of their company, but the problem is that more than 80 percent of companies which have some kind of pension fund, manage these funds themselves, so employees can easily lose all their money if the business is bad or in case a company goes bankruptcy. Moreover, most of the companies, if they are financing the funds properly, just leave the funds for end of service benefits (EOSB) on their balance sheets, instead of investing them separately.
Asked about EOSB in Qatar, Cox explains: “On leaving an employer, an employee, who has completed at least one year’s service, should receive a gratuity that is not less than 3 weeks final basic salary for each year of employment. The employee shall be entitled to a gratuity for fractions of the year in proportion to the duration of employment.”
The number of companies offering enhanced EOSB in the form of separate defined contribution (DC) pensions or savings plans has risen over the years across the region, primarily because they realised that attracting and retaining talent goes beyond lucrative tax-free income and housing allowance. However, most employers do not provide any kind of pension savings scheme, considering the obligatory end of service gratuity payment is a satisfactory alternative.
But, EOSB, although it can be a significant sum (depends on the salary at the time of leaving the service and the period spent at one employer), wasn’t intended to be a replacement for a retirement savings pot, and moreover, in most cases the money will be used to cover the debts, paying school fees, or for some significant purchase like property. Such is also the experience of Hasan who, like the majority of the workers in the region, is forced to do something else with the money. “I have a significant amount of bank loans, so my primary plan is to pay off the loan using my end of service benefits,” he says, confirming the results of the Zurich survey which reveal that just 22 percent of UAE residents plan to use gratuity payment for retirement, while the same percentage will put the money towards debt.
A growing gap
In Qatar, where the pension system is administered by the General Retirement and Pension Authority (GRPA), just Qatari citizens, employed by the government, who have made a total of 15 years’ worth of contributions, receive a state pension when they reach 60 (men) or 55 (women). The size of the pension is based on the salary in the last year of employment, while additional social allowance benefits are designated according to an individual’s final salary and time of service. Qataris who work in the private sector are not eligible under the government scheme, but it is possible that will be changed soon with the new retirement law. The estimated size of Qatar’s state pension fund assets were around USD 14 billion representing 7 percent of the country’s GDP or USD 51,000 per national, according to EY’s 2015 GCC Wealth and Asset Management report.
Qatar’s pension assets are sizeable relative to population, but the majority, as much as 70 percent, of investments are focused on local equities, showing strong confidence in the local economy, which can, on the long-term basis, be potentially risky in terms of the fund’s sustainability. Across the GCC the situation is the same – public pension funds in the GCC have reached a combined USD 397 billion, representing nearly a quarter of the GDP and USD 15,000 per national, states the report – but the funds of each member state are relatively small (in some western countries like the UK, public pension assets are larger than GDP) with the growing gap between contribution and benefits levels. For example, some experts warn that Oman’s state pension funds (estimated at USD 12 billion or 15 percent of the GDP by EY) will by 2036 turn to zero, because the contributions plus investment income will be less than benefits expenditure.
Consequentially, long-term, stable pension solution for foreign workers, as well as for nationals, is much needed across the GCC. “In Europe and North America, the retirement savings culture is facilitated by employers – a retirement savings plan is an accepted part of an employment package. Unfortunately, here in the Middle East it is not, and this is something that needs to change. Saving through the workplace is a far more efficient and cost effective way for employees to build retirement savings. These types of plans will also help employers with recruitment and retention issues. Forward thinking companies that rise to the challenge will become employers of choice. According to research carried out by Zurich International last year, 81 percent of individuals think that their employer should do more to help them financially prepare for their future,” Cox points out.
The number of retirees will soon grow significantly across the region, and the GCC governments must take action in order to ensure the financial sustainability of pension funds. On the global level, the situation is equally bleak: a good number of retired people live hand to mouth. The official data for the United Sates shows that almost half the middle-class workers will be poor or near poor once retired.
But there are countries where retirement is still something to look forward to: the Melbourne Mercer Global Pension Index 2015 shows that Denmark and the Netherlands have the best pension schemes in the world, described as “a first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity”. Denmark’s pensions system consists of a public basic pension scheme, a means-tested supplementary pension benefit and fully funded, mandatory private schemes, run by large funds rather than individual companies. The Netherlands’ retirement income system comprises a flat-rate public pension and a quasi-mandatory earnings-related occupational pension linked to industrial agreements. Most employees belong to these occupational schemes which are industry-wide defined benefit plans with the earnings measure based on lifetime average earnings, says the Mercer report. Topping the list of countries with strong pension schemes are also Australia, Sweden, Switzerland, Finland, Canada, Chile and the UK.