Increasing life expectancies and the inadequacies of state pensions have cast the spotlight on private retirement plans. Coupled with the growth of takaful, these intersecting trends seem to point to great potential in Islamic pensions which has so far remained unfulfilled.
It is estimated that by 2030, many Muslim countries will experience a drop in old age support ratio, that is, the number of those capable of providing economic support to the number of older people that may be materially dependent on the support of others. “If not well planned, this will create financial and social problems similar to what we are witnessing in countries like Italy and Japan,” said Milliman in its 2013 report on takaful pensions.
The report stresses the need for Islamic occupational pensions plan given the prohibitive elements in conventional plans. A conventional annuity, for example, attracts riba (interest), gharar (uncertainty) and maysir (gambling) (see Figure 1).
But despite the obvious need, the development of a Shariah-compliant pension market has been inert to say the least.
The existing takaful retirement market
Some attempts have been made to fill the gap. In Saudi Arabia, SABB Takaful has been offering its retirement plan since 2007, while Al Ahli Takaful’s individual savings plans, including a retirement product, is reportedly “coming soon”. Al Rajhi Takaful also plans to offer a group pensions scheme.
Retirement plans are also available in Bahrain through family takaful provider Legal & General Gulf Takaful and composite player t’azur. In the UAE, life and health specialist Takaful Emarat is “still examining the opportunity to venture into pensions”, the company said.
In Malaysia, a national scheme comprising takaful and conventional annuity products was launched in 2000, but was soon withdrawn from the market due to negative publicity over conventional annuity products. HSBC Amanah Takaful offers a retirement plan, but such products are mostly missing from the stable of other leading Malaysian takaful providers, including Etiqa.
The UAE is likely to enter the takaful pensions arena soon, said Mr Ajmal Bhatty, CEO of Tokio Marine Middle East, “as the market evolves to become the global capital of Islamic economy due to a number of state initiatives in the pipeline that will result in infrastructural sukuks. Some of these instruments can specifically cater for long-term income streams needed for Islamic annuities”.
Tokio Marine currently does not offer Shariah-compliant retirement products, “but this is something that will happen in future”, he added.
Supply issues
There are two phases to retirement planning, said Mr Bhatty. The first is a savings phase to build a retirement fund, and the second is a pension phase where annuity payments are made.
“The first phase has more or less evolved reasonably well by family takaful companies,” he noted. “However, this is still in a nascent stage, as very few companies have been operating for a long time.
“For the second phase, it is perhaps the inability, rather than hesitation, preventing companies from finding the right solutions. The reason for this is the lack of investment instruments (sukuks and others) generating secure income for a period of 10 to 20 years.”
This lack of long-term sukuk is a key hindrance to the development of takaful pensions. In the first place, there is a shortage of sukuk in general for takaful operators as most sukuk are usually bought by large banks. Also, most Islamic bonds are of short to medium term in duration.
“Without appropriate assets, providing for annuity products can be capital intensive,” said Ms Farzana Ismail, Partner & Consulting Actuary with Actuarial Partners, in an article published in Middle East Insurance Review (MEIR). “The lack of availability of suitable assets to back annuities remains as one of the key stumbling blocks in developing takaful annuities.”
Annuities could instead be backed by real assets such as equities and properties, said Ms Farzana. “However, there is an issue with liquidity risk and the income stream is likely to be more volatile for these asset classes.”
Another inhibiting factor, said Mr Bhatty, is the large ticket size of minimum investment into available securities, which takaful companies cannot match. “The contributions into a takaful pensions pool are small amounts that build up to large amounts over a number of years. It is only if the takaful companies put a seed capital into such transactions that they are able to participate in such ventures.”
Lack of demand
The lack of awareness surrounding takaful products in many markets has also affected the demand for Shariah-compliant pension plans.
SABB Takaful is one of the few companies in Saudi Arabia providing a retirement plan, but this has received poor response, said CEO Adrian Flowers.
“Our sales advisors are trained on our retirement product,” he told MEIR. “However, we find there is a lack of awareness and willingness from the public to take up retirement or pensions products in the market.”
The main challenge in promoting retirement plans in the Kingdom is that “the need has been generously fulfilled by the government scheme (provided by the General Organisation of Social Insurance, or GOSI)”, he explained. “This is a compulsory deduction enforced on all companies and employees, and the share of retirement savings in any employee budget goes to that fund.”
Other challenges include the lack of guaranteed returns and absence of clear regulations on pension plans, added Mr Flowers.
Expertise available
There is also the question of whether there is enough expertise to develop takaful pensions, although there are differing viewpoints on this matter.
According to Mr Sohail Jaffer, Deputy CEO of FWU Global Takaful Solutions, “pension-related expertise is relatively scarce in the emerging markets, and takaful operators tend to use international employee benefit consultants. In the case of global insurance brands, the pool of expertise needs to be applied to develop a suitable offering and solve knotty technical issues”.
There is insufficient expertise within takaful companies to develop pensions, “let alone good expertise in savings products within family takaful”, said Mr Bhatty. “This applies perhaps more to markets other than Malaysia. Having said that, there is no dearth of expertise in the market that can be tapped into, including actuarial expertise specialising in pensions products.”
Developing the market
Actuaries have offered recommendations on structuring annuities in Shariah-compliant ways. Milliman, for example, has come up with a private occupational Islamic pension fund whereby participants donate money (family tabarru) based on a wa’ad iltizami (self-imposed promise) to a pension pot. This, it said, is a unilateral contract and thus does not attract riba, gharar or maysir. Actuarial Partners has suggested a scheme whereby the annuity vehicle is a cooperative rather than a takaful operator, based on a 1977 fatwa positing that cooperative insurance is Shariah compliant.
However, dealing with the root of the Shariah-compliant pension problem would lie mainly in raising awareness on the individual level, widening investment opportunities in terms of making available long-term sukuk on the provider level, and collaborative efforts between all stakeholders on the macro level.
Many takaful providers, particularly those in the Middle East, have focused on the high-growth areas of motor and health in attempts to go to market quickly. The result is an under-served family takaful market, particularly on the individual side, and a largely neglected pensions market. It is perhaps time for operators and regulators alike to heed the experience of developed countries and step in with proactive solutions that could help avert the ticking time bomb tied to longevity risks.