The GCC region’s pension industry badly needs long-term reforms to make the industry sustainable. To address the concerns over the sustainability of the growing pension industry, GCC countries need to address issues such as the retirement age, contribution required and benefit levels, according to a top fund manager.
Given an option, majority of GCC investors would choose Sharia’ compliant product. Thus tailoring retirement products accordingly will provide major thrust to the industry. The pension fund investment which is mostly concentrated locally should seek geographical diversification and better professionally managed funds. This would help in smoothening volatility and provide better returns, Fahmi Alghussein (pictured), Chief Executive Officer, Amwal said.
In the region, inadequate contribution rates and high benefit levels render pension structure unsustainable. Further, payout to retirees at a staggering 80 percent of total government income from payroll taxes is going to place huge pressure on reserves and government funds given the GCC demographic shift. Introducing major reforms in the contribution rates and benefit levels in the Defined Benefit plan so that it covers primary living cost and supplementing it with an option for addition defined contribution plan to cover other costs would help in building a sustainable and mature pension market in the region.
Most GCC pension funds remain concentrated locally despite the market demanding greater sophistication, diversification and innovation in product development. The funds should not only be diversified geographically but also across asset classes by investing in alternative assets, fixed income funds and other asset classes, he said.
Investment restrictions in the region tend to constrain the growth of pension assets by devoiding it of the opportunity to invest in better growth markets and to diversify across asset classes. This could increase risk by way of concentrated exposure to a particular geography.
The region’s private sector is expected to drive development in Pension industry.
Establishment and expansion of private pension funds could help attract talent as well as boost capital market by channeling the funds thus aiding government’s policy objective of developing equity market and deepening the debt market.
Owing to low oil prices, GCC governments are under pressure to find new sources of funding for required investment in infrastructure projects. Pension Funds can help in developing the infrastructure bond market thus aiding project financing resulting in funding the cash strapped GCC infrastructure. Citing EY’s data, Alghussein said the GCC’s combined pension fund assets stood at $397bn as by Mid-2015, with Saudi Arabia having the biggest share of $270bn.
