The GCC’s pension systems are ripe for reform

While the current schemes for citizens are considered generous by international standards, experts say they are not sustainable

While expatriates in the GCC have their retirement needs serviced by the end of service gratuity, citizens have a defined benefit scheme, which pays out a percentage of an individual’s final salary once they reach retirement age. Getty
While expatriates in the GCC have their retirement needs serviced by the end of service gratuity, citizens have a defined benefit scheme, which pays out a percentage of an individual’s final salary once they reach retirement age. Getty

Providing generously for retirement is a source of pride for the region, but funding a financially secure future is an expensive proposition for any government.

With most of the world shifting to a defined contribution system, that places the onus on the individual to save and provide for their future, the GCC still relies on a defined benefit system – where the income is guaranteed until death.

These generous policies for the local populations now face a key problem: how to ensure they remain sustainable in the long-term.

“People are having fewer children, life expectancy is expected to continue increasing, the ratio of retired people to workers is set to treble in years to come and public finance is going to remain under pressure,” said Sheikh Mohammed Al Khalifa, president of the Supreme Council of Health and Chairman of Al-Hekma Society for the Retired in Bahrain. He was speaking at a gathering of 500 experts at last month’s Mena Pensions Conference in Manama.

“All of this is going to have an implication for our economies,” he said.

According to the World Economic Forum, there is a combined retirement savings gap in excess of $70 trillion spread between eight major economies - Canada, Australia, Netherlands, Japan, India, China, the United Kingdom, and the United States.

The WEF says the deficit is growing by $28 billion every 24 hours and if nothing is done to slow the growth rate, the deficit will reach $400tn by 2050, or about five times the size of the global economy today.

Zone in on the region and the combined assets managed by the countries’ pension funds is just over $400bn, according to EY’s GCC Wealth and Asset Management Report 2017.

However, a World Bank report the same year said there was “an urgent need to address pension issues in the region to address fiscal, macroeconomic, sustainability, equity and welfare challenges”.


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While expatriates in the GCC have their retirement needs serviced by the end of service gratuity, citizens have a defined benefit scheme, which pays out a percentage of an individual’s final salary once they reach retirement age.

Martin McGuigan, partner at Aon Retirement Solutions in Dubai, said the issue facing regional pensions schemes is “a maths problem".

“There is not enough money going into the system to keep up with the promises made in terms of how much pay people will get when they retire,” he said. “So there are two things that can happen: the retirement age can be raised or you can increase the contribution rate. The actuaries are telling us we don’t have enough money in the system so we need you to pay in more.”

Simon Herborn, senior consulting actuary at Milliman Middle East and Africa, said the UAE schemes “are better capitalised than some of the funds in the region”.

According to the official portal of the UAE government, Emiratis working in government and private sectors are eligible for pensions and other retirement benefits after reaching the retirement age of 49 or serving a minimum 20 years in total.

While Abu Dhabi has its own pension scheme, the General Pensions and Social Security Authority is the federal body administering the pensions for the rest of the emirates. Under that scheme, if an employee contributes 5 per cent of their monthly salary, a government employer contributes 15 per cent; a private employer contributes 12.5 per cent, which is topped up with a further 2.5 per cent by the government.

Many regional schemes are still running cash flow surpluses, meaning that contribution revenues exceed benefit expenditures, mainly because the GCC's young population has significantly more people paying in than receiving benefits.

“Looking at the region as a whole, the youthful population means there are several contributors for each pensioner receiving benefits," said Mr Herborn. “In the short-term, this may allow the schemes to generate annual contribution surpluses and build up assets."

However, this outlook cannot last, warn analysts.

“The age profile of the scheme members will rise. In tandem, there will be a steady rise in the ratio of pensioners to contributors”, said Mr Herborn. “Over time, this could lead annual benefit spending to exceed contribution income – indeed, some of the schemes with older memberships could be facing this pressure already."

While in the near-term the assets held will grow because of cash flow and investment income, over time the benefit expenditure will rise at a rapid rate as the region's population ages.

“For many schemes it seems likely we will reach a point where the benefits expenditure overtakes the contributions received and eventually we might reach a point where the schemes do not have adequate resources to pay retirees,” said Mr Herborn. “That’s the trajectory that most of the GCC public pension schemes are on at the moment.”


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Discussions at the Mena Pensions Conference, hosted by Takaud - a Bahrain provider of savings investment and pension solutions - centred around how reforms could be implemented. Options included adapting the benefits, raising the retirement age, or introducing a defined contribution scheme, which only pays out whatever a member has put in.

So will GCC nationals entertain such a move?

“With the population demographics – it requires a rethink,” said Mr McGuigan. “If you are in the Saudi system, 65 per cent of the 27 to 28 million citizens, are below the age of 25. They have to take a longer term view – how do we combat that problem, armed with the knowledge we have now?”

Mr McGuigan said the UAE government is already starting to examine the matter.

“They are talking about it in schools and universities as part of the education programme but have they changed the legislative framework? No, not yet,” he said.

But switching national schemes to a defined contribution model, where residents make a lot more decisions about how their pension is managed, needs to be handled carefully.

“We have to change the culture where young Emiratis realise when it comes to their time to retire, we may not be an oil-dependent country globally," said Mr McGuigan. "We may not have the money and the liquid resources it has today. So you have to take responsibility and that has to be pushed centrally.”

Hamdah Al Shamsi, acting general manager for the Public Authority for Social Insurance in Oman, said introducing a defined contribution would not work “at this stage” in her country.

“In countries like Oman where 80 per cent of the income comes from oil and your private sector is not mature – even the private sector depends on the government sector,” she said. “You need a high level of financial literacy and a good economy to support that shift.”

Han Yik, head of institutional investors at the World Economic Forum, said with financial literacy levels a key weakness across the globe, it provides a challenge for changing a pension system.

“The problem with defined contribution is that we are asking individuals to now become their own investment editor, financial planner or actuary and so forth and unless we have given them the tools to do that, that is very dangerous," said Mr Yik.

He believes the best option is a combination of both types of schemes so that the entire burden of retirement is not placed on the individual.

Ultimately, the solution has to be sustainable.

“Sustainability in a pension structure is where you have alignment between the pensions people receive and the funding that will go into the system, so that in the long run the scheme is adequately funded," said Mr Herborn. "One way to achieve that might be an element of defined contribution – where there is a direct connection between contribution and benefits. Another is to retain the kind of structures we have at the moment in the GCC with social insurance but just to adapt the benefits into making them slightly less generous or to raise the contribution."

Updated: December 10, 2018 09:16 AM


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