Most of the GCC public pension schemes are on a trajectory where benefits expenditure would overtake the contributions received and eventually a point would be reached where the schemes would not have adequate resources to pay retirees, said a senior consulting actuary at Milliman Middle East and Africa.
“Some of the schemes in the region, typically the older ones that cover civil sector workers are facing the pressure now, whereas schemes that mainly cover private sector workers and a younger population are probably a couple more decades behind those problems,” said Mr Simon Herborn.
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, reported The National.
“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 recent gathering of 500 experts at a pension conference in Manama. “All of this is going to have an implication for our economies,” he said.
Mr Martin McGuigan, partner at Aon Retirement Solutions in Dubai said the issue facing regional pension 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 more.”
The UAE government is already starting to examine the matter, said Mr McGuigan, adding that “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”.
But switching national schemes from the current defined benefit system to a defined contribution model where residents make many more decisions about how their pension is managed, needs to be handled carefully.
Ms Hamdah Al Shamsi, acting general manager for the Public Authority for Social Insurance in Oman said introducing a defined contribution scheme would not work “at this stage” in the sultanate.
“In countries like Oman where 80% of the income comes from oil and the 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.”
Mr Han Yik, head of institutional investors at the World Economic Forum said with financial literacy levels a key weakness across the globe, it presents a challenge 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. M