Public pension funds in the Gulf Cooperation Council are collectively worth $397bn, representing nearly a quarter of gross domestic product and $15,000 per national. That’s according to a new report by consultancy EY.
However, GCC pension funds are much smaller when compared with employer-provided pension funds in other parts of the world, the report stated.
In the United Kingdom, for example, these assets are larger than GDP and funds per individual are nearly four times the GCC average.
Wealth and Asset Management leader for the Middle East and North Africa at EY George Triplow 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 payments received by expatriates are neither adequate nor suitable as an alternative to a pension.”
Governments in the Gulf region must relook at existing models of both public and international pension funds to ensure they are sustainable, the report said.
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.
In international terms, its assets relative to population are similar to those of the UK’s pension funds, EY stated.
Qatar’s pension assets are also sizeable relative to the population, following a capital injection from the Ministry of Finance in 2012.
Meanwhile Saudi Arabia has the largest pension fund regionally, with assets split between the Public Pensions Agency (for public sector workers) and the General Organization for Social Insurance (for private sector workers).
However, about 85 per cent of the kingdom’s pension assets are invested abroad, mainly in US Treasuries managed by the Saudi Arabian Monetary Authority.
“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,” said Triplow.
This can be achieved through further recapitalisation of the funds while more systematic reform is also possible in fiscally strapped countries.
“Recent changes in Gulf healthcare, with a steady shift towards private insurance, may set a precedent for such reforms,” he added.
The report also highlights three key areas which can benefit the GCC pension funds industry: new levels of regulation and governance, expanded end of service benefit schemes and Sharia-compliant retirement products.
“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,” said Triplow.
“There will be a lot of opportunity for local providers in the region, especially in the Islamic retirement product arena,” he added.