Pension funds across the GCC are the second largest set of institutional investors in the region after the Sovereign Wealth Funds (SWFs), according to a report by Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre (Markaz).
“However, this investor class has seldom been researched in detail despite its widespread influence in the economy,” the report commented.
GCC pension funds are a recent development as concepts such as retirement benefits and payouts to citizens did not receive the required attention, Marmore MENA Intelligence said in its report.
This lack of attention was mainly due to the presence of high salaries in the public sectors and associated benefits, along with the increased number of expatriate workers, the Markaz subsidiary explained.
The growing population and the challenges caused by it are reflected in the unemployment rates and the evident progress in healthcare in GCC countries is extending the life expectancy of retirees, the report continued.
“Early retirement schemes and higher payouts have created an asset liability mismatch and needs immediate attention,” according to Marmore.
On the other hand the considerable number of youth in the GCC counties expands the pension subscription base and enables it to increase its assets, and The Pension fund asset will grow backed by the growth in these countries, the company added.
“According to our estimates, the total pension fund asset in GCC by 2020 is estimated to be USD 602.4 Billion and by 2025 is estimated to be $938.6 billion,” the company said in the report.
“However, GCC pension systems are at a nascent stage and are only partially funded with most retirement benefits being paid out with the help of excess contributions from the employees rather than income derived from pension assets,” Marmore added.
The report explained that this may cause an unstable position if the pension system did not undergo some structural reforms, noting that “Pension funds are important force for the stability and growth of GCC markets.”
“Currently there is no One-Size-Fits-All rule to define the proper level of basic pension or replacement rate. GCC region needs to take into account a multitude of factors to find the right mix,” Marmore MENA Intelligence concluded.