Gulf pension funds expected to double, reaching US$5 trillion by 2020

Funds to record an annual growth of 8.8 per cent from 2012 onwards, according to report from PricewaterhouseCoopers.

The GCC pension fund industry is fairly young in comparison to counterparts in western markets. Silvia Razgova / The National

Arabian Gulf pension funds are expected to double to US$5 trillion by 2020 as regional governments plan for the retirement of their burgeoning populations.

That reflects annual growth of about 8.8 per cent from 2012 to the end of the decade, according to a report from PricewaterhouseCoopers (PwC).

Assets under management held for public service employees from the UAE, Qatar, Oman, Saudi Arabia and Kuwait stood at a total of $2.4tn in 2012, according to PwC.

By comparison, UK government pension funds stood at £171 billion in 2012 (Dh1.03tn), while corporate funds stood at £1tn in the same period, according to data from the Investment Management Association.

The GCC pension fund industry is fairly young in comparison to counterparts in western markets.

The burden has increased on financial institutions to create successful investment models that guarantee strong returns matching future liabilities. Factors include a surge in population growth and pressure for job creation programmes, which has largely comprised of state spending on building new industries to diversify revenues away from oil.

“My understanding is that they over allocate in fixed income, but also do a lot of investments out of the region,” said Sebastien Henin, the head of asset management at The National Investor, an Abu Dhabi-based investment bank.

Political turmoil in the region has caused governments to allocate more cash into pension funds and “development” sovereign wealth funds, Invesco said in a report last year.

Saudi Arabia has made the biggest contributions towards its pensions funds as more than 2.3 million Saudis are set enter the workforce in the next five years.

In the West, pension funds have come under fire for struggling to meet target yields amid a low-interest environment.

New regulations such as Solvency II, Basel III and the US Dodd-Frank Act are all expected to have implications on European pension schemes.

“There are a lot of debates in Europe now on how to meet those returns when the baby boomers will retire,” Mr Henin said.

Pension offerings in the GCC so far have been exclusive to nationals of the union’s respective countries.

Abu Dhabi and Dubai’s respective departments of economic development in March 2012 called for the creation of an expatriate pension scheme after feasibility studies were made.

Standard Life, the UK’s biggest corporate pension provider which opened a Dubai office just over a year ago, said the establishment of a government framework for expatriate pensions were among the biggest opportunities on offer.

National Bank of Abu Dhabi launched its own pension products, which combine employee and employer contribution in a manner similar to a US 401(k) or defined contribution scheme in the UK.

At present, firms must by law pay end-of-service benefits, also known as gratuities, which top out at two years of basic salary after 25 years of service.

However, financial firms have warned that these costs represent unfunded liabilities and a saver is left with nothing if a company goes bankrupt.

Expatriates tend to send their savings abroad, investing in real estate, equities and various assets and pouring some money into Bancassurance programmes.

Pension schemes offered by insurers and banks are expected to reach US$37.5bn by 2017, according to Alpen Capital, an investment bank based in Dubai.