Saudi Arabia’s pension assets largest in GCC
size of GCC pension funds is relatively low, compared with employer-provided pension funds in the UK
Public pension funds across the GCC amount to $397 billion, representing nearly a quarter of GDP and $15,000 per national, EY’s GCC Wealth and Asset Management 2015 report “Fast growth, divergent paths”, launched at the FundForum Middle East 2015 revealed. GCC governments are relooking at existing models of both public and international pension funds to ensure they are sustainable.
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.
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. 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 capitalized fund, relative to the size of its economy and citizen population. This follows an initiative to recapitalize the pension fund from the budget since 2008, filling an actuarial deficit that had been estimated at nearly $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.
Areas which can benefit the GCC pension funds industry: new levels of regulation and governance, expanded EOSB schemes and Sharia-compliant retirement products.
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. There will be a lot of opportunity for local providers in the region, especially in the Islamic retirement product arena,” George noted.
This article first appeared in the Saudi Gazette on Oct. 6, 2015.