Public pension funds are a relatively recent development in the GCC and the Middle East more broadly.
The region’s first public pension fund was launched in Algeria in 1949, and it was not until 1969 that Saudi Arabia launched its first scheme. Bahrain’s Social Insurance Organisation was set up in 1975, and Kuwait’s Public Institute for Social Security (PIFSS), which manages the state-run pension fund, was established in 1976.
Others joined much later. Oman’s Public Authority for Social Insurance (for private sector workers) and Government Pension Schemes (eight separate funds introduced for public sector workers) launched in 1992. The UAE’ s General Pension & Social Security Authority (GPSSA) launched in 1999, while Qatar didn’t set up its General Retirement Social Insurance Authority (GRSIA) until 2002.
But despite the significant wealth found across the GCC region, the size of assets managed by these funds is frighteningly small – all told, just under US$400bn between the six countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE), according to estimates by Ernst & Young, a consultancy. To put this in perspective, pension funds in the UK – a country with roughly the same size population as the whole of the GCC – manage roughly US$3.4tn in assets for both public and private sector employees.
It may come as no surprise that, given the current context of persistently low oil prices and growing redundancies, analysts have raised questions about the sustainability of the region’s pension infrastructure – and these countries’ ability to match contributions from employed citizens with what many view as fairly generous benefits. In Qatar, for instance, early retirement is permitted at the age of 40 (for women) or 45 (for women), and citizens are entitled to receive full benefits after just 20 years of service. In the UAE, the retirement age was extended to 50 years in 2016.
This doesn’t jibe well with swelling budget deficits, growing debt-to-GDP, and high unemployment - three features that have become consistent across most GCC countries after a steep drop in oil prices (from US$116 per barrel in 2013 to just under US$55 per barrel today). Despite a moderate improvement in GDP growth in countries like the UAE and Kuwait, aggregate unemployment across the region grew by 4% to reach 16% in 2016, according to the IMF, with some economies faring worse than others (Oman, which is struggling with mass youth unemployment, for instance).
This was largely the result of significant austerity measures put in place over the past year by GCC governments, which – if you include government-linked entities – are among the largest employers of GCC nationals. These measures have translated into job cuts ranging in the thousands within government and government-linked entities, public sector wage freezes, and delayed or cancelled projects – which continues to reverberate throughout the real economy.
“It would be fair to say that against this backdrop, there is an unwillingness of some of the region’s governments to acknowledge the true cost of benefits, and the current contributions are not really adequate to cover new benefits or the needs of retirees on an ongoing basis,” explains George Triplow, MENA Wealth and Asset Management Leader at Ernst & Young, and one of the region’s leading pension specialists.
“The shrinking workforce isn’t just a function of the tough economy. In the long term, rising life expectancies in the region will only exacerbate the gulf between benefits and contributions. But who’s going to bring this up when oil is pricing at US$50 per barrel? Nobody.”
Publicly and privately-funded pensions cover less than 40% of the working population in the GCC, according to EY, which is worrying in large part because the region’s population is ageing. A report published last year by Indosuez Wealth Management shows that in Kuwait, for instance, assuming current birth rates, the ratio of people aged 65 and over to those between the ages of 15-64 will swell from 2.6 in 2015 to 15 by 2035. At the same time, high youth unemployment – up to 50% in some cases – is putting upward pressure on dependency ratios.
“Ultimately, there is a need to pare back benefits, increase the mandatory retirement age, and increase mandatory contributions from employers or employees,” neither of which are particularly salient given the current economic environment or the uproar that typically ensues following entitlement reform.
Some GCC states have been more proactive than others.
The UAE for instance is looking to introduce a new law that would equalise pension benefits for public and private sector employees (which currently receive one sixth the pension pay-out state employees enjoy), increasing private sector employer contributions; it is also clamping down on contribution evaders, levying steep fines for companies that fail to accurately document and pay mandatory contributions, according to Obaid Humaid Al Tayer, State Minister for Financial Affairs and Deputy Chairman of the General Pension and Social Security Authority.
Expats: The Elephant in the Room
While governments are primarily tasked with protecting and nurturing their own citizens, it is undoubtedly expatriate workers – which make up nearly 85% of the labour force in some GCC countries – that should give policymakers pause.
Currently, none of the GCC countries entitle expats to state-backed pensions (even if they work in the public sector), and the private pension industry is worryingly small, with most relying on some form of End of Service Benefits (EOSB) – usually, more less, some function of one’s monthly salary multiplied by the number of years worked at a company – paid out once an employee leaves a company. These EOSBs are generally understood to be insufficient for retirement.
Saving rates among expats in the GCC are also alarmingly low. According to a Towers Watson survey, nearly a quarter of GCC expats don’t put any money away for long-term saving, and 55% set aside less than 10% of their income for the future.
The high proportion of expat workers combined with a lack of robust retirement support mechanisms in the region is problematic. It threatens the ability of companies to attract and retain older, more experienced candidates to the region, and makes it more difficult and less attractive for expats to stay in the region long-term.
Crucially, it makes the likelihood of socio-economic contagion in the event of a default or bankruptcy much more likely. Because EOSBs are not vested anywhere in the vast majority of cases (there are exceptions – for instance, Emirates Airlines’ Provident Fund) and typically feature as an accrual on corporate balance sheets, and because there is no legal requirement for companies to fund them, a default or bankruptcy would have a dramatic effect on expat employees and the wider economy because these EOSBs would simply disappear.
“The prospect of a large bankruptcy may have seemed unlikely when oil was priced at US$120 per barrel, when many operated on the assumption that the state had enough fiscal headroom to bail-out a company in such an event; with oil likely to stay within a much lower price range, that assumed backstop is no longer there,” said a senior fund manager based in Dubai.
Analysts who spoke with Bonds & Loans say the GCC region’s governments could model joint employee/employer-funded pensions on similar schemes implemented in other large financial centres like London and Hong Kong, which are extended to expats and nationals alike. Admittedly, the experts saw a much higher chance of such schemes being introduced in the UAE than, for example, Saudi Arabia.
That kind of reform is easier said than done. Compelling small and medium-sized business to pay for the scheme may be difficult, and special measures and exemptions would likely need to be introduced or made in order to make the reforms politically viable; other laws, like those governing age restrictions for expats, would need to be amended or scrapped altogether. Lawmakers will need to be cautious about creating a backlash against expat workers, which form the backbone of many of the region’s economies.
Nevertheless, the potential economic benefits would be significant for the real economy, and it would be a huge boon to the region’s asset management industry – the relative size of which has led the GCC to rely extensively on hot money and government.
“We think this could lead to a massive boom in the local asset management industry, and create the conditions that would allow more local money to circulate within the economy. Crucially, it could further develop the local fixed income markets and help foster new asset classes,” the fund manager said.
Sadly, appetite for pension reform seems painfully low at present. With the region’s economies staring down the barrel of lower growth for longer, other priorities seem to be prevailing in the battle for lawmakers’ attention; but, in the interest of deferred gratification and economic sustainability, it may be more prudent to pull the trigger on this sooner rather than later. Perhaps the time has come for GCC states to retire their dated approach towards social security and pensions.
