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Independent panel of experts call for pension system reform

United Arab Emirates: Monday, October 31 - 2011 @ 17:00

The paper, ‘Securing the Future – building a retirement income infrastructure for expatriates in the GCC’ analyses the main limitations of the current system, and offers suggestions for building a better alternative.

“The current system is failing three key groups: companies, staff and the wider economy,” said Nigel Sillitoe, Managing Director of Insight Discovery. “That’s because GCC countries lack organised systems to provide adequate retirement incomes for expatriates. The region needs a new system that takes the most effective elements from international best practice, to form a model that meets the unique needs of the Gulf.”

The report is based on a consultation process with regional experts from the private and public sector. Private sector contributors include Clyde & Co, Hawksford and Ryland Gray, as well as ING Investment Management and SEI. Public sector insight came from Harun Kapetanovic, Economic Adviser at the Department of Economic Development, Government of Dubai.

Key findings of the report include:

• The prevailing GCC system is largely based on the End of Service Benefit (EoSB) concept, better known as the gratuity. The scale of employer contributions is broadly in-line with international best practice, at about 8 percent of annual salary.
• However, the administration of these funds tends to be unstructured. There is no ring-fencing of funds, which are simply part of the company’s day-to-day accounts. The dangers of this system became apparent during the recent economic slowdown, when some companies in the region faced financial difficulties and were unable to pay EOSBs.
• The traditional ‘Western’ pension model cannot be adopted in its current form because two key elements – income tax incentives and fixed retirement ages – are not relevant to a Gulf expatriate workforce that pays no income tax and is highly mobile.
• The report proposes a system that takes many of the strong elements of ‘Western’ pensions (regular contributions from both employers and staff; ring-fencing funds; professional asset management and custodial services; strong regulation) and blends them with the private savings schemes already offered by banking, finance and insurance companies in the region.

“Many private sector companies make contributions to savings schemes on the behalf of their employees at a rate that equates to about 8% of compensation – which is comparable to what happens in many developed economies. However, the system of End of Service Benefit is inefficient,” said Jahangir Aka, Managing Director of SEI.

Simon Fielder, Managing Director of fund administration firm Ryland Gray, said, “Currently it is normal practice for payments to retired pensioners to be funded out of company income. The amounts being set aside are not enough to fund future liabilities, so that gap is ever increasing.”

Farah Foustok, CEO of ING Investment Management (Middle East) Limited, revealed that more pension funds are looking at asset/liability management and they are addressing how best to fund their future cash liabilities. She says: “Over the last 10 years, there was a short-term mentality approach, whether it was tactical shifts in asset allocation or an increase in alternative assets. Recently most people have been using the solvency ratio to set their objective.”

Foustok goes on to add, “One of the issues we are seeing is around the benchmark setting and how this translates to the indices set for different managers; frequently, there is a mismatch between the two.”

The Solution

All of the panelist experts at the roundtable were in agreement that a robust retirement income system has several key features. The paper outlines that these can include incorporating universal compliance measures and the costs to employers should be not so high that there is a clear disincentive for them to hire new workers. The investment operations should also be organised so that they meet the employees’ long-term needs.

On the quality of regional pension fund investment options, Foustok notes, “One issue facing pension funds in the GCC is that investing in the local bourses doesn’t offer the scale of return required to be sustainable. To say to an employee that the majority of the funds will be invested in regional markets could be very dangerous. We know these markets don’t have the depth, too much volatility and low liquidity levels; most of the expats that are here will eventually go back to wherever they are from.”

Expanding on this point, Foustok’s contribution to the report says that most expats would want their EOSB or pension fund to have an option to be diversified globally and that this would mean that individual GCC pension funds will probably need to have a team investing directly into the local equity markets or managers and an outsourced global management team looking at international markets.

This first leadership roundtable addressed several issues relating to pension coverage for expatriates in the GCC. As might be expected, given the size and complexity of the topic and the early stage of, the panel identified more questions than answers. However, the paper is clear in its concluding that the establishment of efficient retirement income systems across the region will lead to more sustainable economic development and present some exciting opportunities for financial services providers.

The roundtable session and its subsequent report is the first of a series of leadership roundtables and the pension review group met at the Capital Club in September 2011.

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Monday, October 31- 2011 @ 17:00 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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