Market Analysis: Pension landscape shows promise
The UAE and wider GCC’s pension landscape is, ultimately, a nascent one. Its youthfulness gives it room for improvement, but it shows a great deal of promise. In a period of low oil prices and slower fiscal growth in the region, the subject of pension reform should be brought to the forefront of the economic agenda. From an asset management perspective, pension reform will have an important impact on the regional investment landscape, and we are looking forward to developments that will positively affect the opportunities available to fund managers and investors alike.
The UAE faces interesting challenges, with the government working hard to meet these by taking steps to implement a new and improved strategy for economic reform. While the UAE is a young country with a relatively youthful population, the median age is heading towards the 40s and the working demographic is predominantly expatriate. Major global corporates who have entered the private sector are largely managed and staffed by expatriates, and so it is of growing importance that multinationals pay into a pension fund structure that supports the economy in which they operate. A more comprehensive and sophisticated pension infrastructure will therefore be vital for ensuring the stability and sustainability of the country’s economy. Meanwhile, the disparity that exists between public and private sector pension contributions needs to be closed. This may have a part in encouraging greater levels of Emiratisation in the private sector, which will have the longer term effect of safeguarding the UAE economy through better integration of Emiratis in the corporate world.
State-run pension funds are not in themselves new to the region, but are more recent than those in mature markets. Saudi Arabia’s first public pension scheme was established in 1969, Bahrain’s in 1975 and Kuwait’s in 1976. Other GCC countries were slower to introduce public pension funds, with Oman establishing a range of separate funds for public and private sector workers in 1992, and the UAE setting up the General Pension & Social Security Authority (GPSSA) in 1999. Despite the GCC’s high concentration of wealth per capita, the combined assets managed by the countries’ pension funds is under USD 400 billion, a figure that is dwarfed by the pension funds of developed economies with comparable population size.
There is no reason why GCC governments shouldn’t consider creating employee- and employer-funded pensions similar to those in markets such as London and Hong Kong. While it may be difficult to force SMEs to pay for such initiatives, and exemptions would certainly need to be made, the economic advantages could be significant. The asset management industry would certainly benefit from the increased circulation of local money, enabling the development of local fixed income markets and the potential emergence of new asset classes. From a portfolio management perspective, pension reform will enable our industry to continue to develop and create new funds.
Pension reform, and a firmer commitment to boosting the size of UAE pension funds, is not just important: it is a necessary component for ensuring the sustainability of the country’s economy. With oil prices consistently low, redundancies increasing, and a generous state benefit infrastructure, pension contributions from employed citizens continue to grow in importance. At present, most of the money earned by expatriate workers flows directly out of the country, with international companies’ profits re-invested into regional expansion. With pension payments flowing directly from corporates into public pension funds, that capital will be given the opportunity to be invested and grown for the benefit of both workers and the economy at large.
An example of a non-Western market that has had considerable success in pension reform is Singapore. Here, the country’s Central Provident Fund offers a comprehensive range of schemes, with the CPF Investment Scheme (CPFIS) offering workers the opportunity to invest their savings in a wide range of areas, allowed them to enhance the value of their ‘nest egg’. The CPFIS reflects the varying goals and objectives of the individual by making a wide range of investments available, from shares and loan stocks to unit trusts, government bonds, statutory board bonds, bank deposits, fund management accounts, investment linked insurance policies, ETFs and gold. What this has meant is that pension assets contributed by both employees and employers can be invested easily in privately managed funds offered by asset management companies.
Our hope is that once a greater level of pension reform takes place in the UAE and GCC market, money will be predominantly allocated to the region, rather than outside it. The effect of this will be to help further deepen both fixed income and equity markets, with an attendant positive impact on the wider local and regional economy.
Usman Ahmed, Managing Director, Investments at Emirates NBD Asset Management, a member of The Gulf Bond and Sukuk Association.