Professionals urge overhaul of GCC consumer pension devices to plug funding deficit

GCC countries have to raise 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 remain reliant on government-function, pay-as-you-go defined advantage schemes," said Ebrahim K. Ebrahim, chairman of the Arab Pensions Conference 2020, which has been hosted on the web from Bahrain this week. "These programmes are very generous but are progressively facing funding deficits, making their long-term viability a mounting concern.

“Knowing of long-term savings is bound in your community. The ratio of retired persons to working people is set to double within the next three years. Public finances are going to continue to be under pressure and this will have implications for our economies,” Mr Ebrahim added.

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

The World Economic Discussion board estimated that the combined retirement financial savings gap is likely to reach $400 trillion by 2050 between eight important economies - Canada, Australia, the Netherlands, Japan, India, China, the UK and US.

Although expatriate personnel 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 happen to be possible, however, not formally regulated or incentivised," he said. "The number of tailored products designed for such savings is minimal.”

Delegates in the conference, which has been held beneath the theme Towards a good Future-proof Regional Pension Program, discussed how reforms could be implemented to address the financing deficit and needed the implementation of parametric reforms to build a future-proof pension system. These do not entail fundamentally changing the pension program, but rather recommends making targeted changes to its parameters to make it more balanced.

One of the reforms include increasing the retirement. In Bahrain, for instance, the average retirement of citizens is 48. In the UAE, Emiratis are eligible for pensions after reaching the age of 49. On the other hand, the average retirement for open public pensions is 64 in Organisation for Economic Co-operation and Production countries, Simon Herborn, a co-employee partner at professional offerings firm Aon, advised the conference.

“These young retirement ages on the GCC were viable a few decades ago, but no more," he said. "The surge in life expectancy means pensions should be paid out for longer. As well, falling fertility rates mean that the number of working age persons paying contributions is growing at a slower fee.”

Another proposed transformation is to shell out lower pensions to retirees. Regional schemes now have incredibly generous pension plans in accordance with other areas of the world.

Over the 37-member OECD countries, pensions are projected to be 59 % of someone's final give after a career of 35 to 40 years. Compared, most GCC retirees receive higher pensions and from a very much younger age. For instance, in Saudi Arabia, a citizen can retire after 25 years of service and receive a pension at about 65 % of their final earnings, Mr Herbon said.

He also suggested that members, employers or the federal government put more cash into the pension program. Although current pension contribution costs over the Mena average 15 to 25 % of pay, higher prices are needed because persons in your community retire earlier. “Different countries also have tax, which helps covers pension costs,” Mr Herborn stated.

In the UAE, for example, an eligible Emirati worker is required to contribute 5 % of their monthly earnings and the federal government employer must contribute 15 %. For private sector staff, employers would pay 12.5 %, with yet another 2.5 % being contributed by the federal government to the pension.

“Parametric reforms are just one component of general solutions for personal sustainability. The GCC governments should make an effort to cultivate other kinds of retirement cost savings,” Mr Herborn said.

He added that the point out alone cannot be in charge of providing all pension benefits. This should be topped up by personal savings and employee-connected savings such as the DIFC Employee Place of work Savings in Dubai, KiwiSaver in New Zealand, National Career Savings Rely upon 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 most parametric reforms”, Mr Herbon added.

Meanwhile, Covid-19 has had a wide-ranging effect on defined profit pension money, said Philip Wheeler, senior supervisor and pensions actuary at Ernst and Young. "Pension contributions and expenditure returns must at least equal advantage payments and expenditures to achieve financial stability," he added.

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