Ageing populations and funding deficits weigh on Mena’s pension industry

Increasing employability of older people and more youth joining the labour force can help mitigate the long-term challenges

An increase in life expectancy and declines in fertility rates will put pressure on the old age dependency ratio, according to Mercer. Photo: Getty

Ageing populations are one of the main challenges faced by pension policymakers in the Middle East and North Africa, experts said at the Arab Pensions Conference 2021.

Policymakers now have to contend with longer lives to finance and a smaller cohort entering the labour market and contributing to pension schemes.

Defined benefit pension schemes tend to be generous, but are facing a funding deficit, making their long-term viability a concern, the experts said during a panel session at the annual conference on Tuesday.

Held online and hosted from Bahrain, the theme of this year's conference is "What should Mena pension systems look like for the next 50 years?"

“People are having fewer children and life expectancy is expected to continue increasing,” said Sheikh Mohammed Al Khalifa, chairman of Bahrain's Supreme Council for Health and chairman of Al Hekma Retired Society.

“The ratio of retired people to workers is set to double in the next three decades. Public finances are expected to remain under pressure.”

Although Bahrain has started to address the issue of pension fund sustainability, “we, as a society and region, need to build awareness of the need for retirement planning”, he added.

Retirees around the world will outlive their savings by about eight to 20 years on average, with the highest burden on women, a 2019 report by the World Economic Forum said.

The combined retirement savings gap is expected to reach $400 trillion by 2050 between eight major economies – Canada, Australia, the Netherlands, Japan, India, China, the UK and the US, the WEF said.

“People in the Gulf expect salaries in perpetuity from the government in exchange for working for the public sector. This accounts for a large percentage of citizens,” said Omar Al Ubaydli, director of research at the Bahrain Centre for Strategic, International and Energy Studies.

“In contrast, in countries such as the UK, about 80 per cent of citizens work in the private sector and they start thinking about pensions quite early in their working lives.”

Calling for a shift in societal perception of working beyond retirement, Mr Al Ubaydli said the Mena region has a poor track record of making use of older people's capacity.

"In OECD countries, even people who are past their retirement age are considered able to make positive contributions to society through their work and skills. In the Gulf, this does not happen. They tend to professionally disappear after they retire and do not contribute to the economy in an active way," he said.

“This is slowly changing. In both public and private sectors, there has been a shift to meritocratic hiring practices and a greater appreciation of the older generation’s experience and skills.”

Governments in the region need to increase employability of older people by retraining them, especially in digital skills, Shereen Hussain, professor of health and social care policy at the London School of Hygiene and Tropical Medicine and founder of Mena Research on Healthy Ageing network, said.

“The re-entry of older workers into the job market must be by choice. They can make higher pension contributions to mitigate the longevity risk,” she said.

Longevity risk is the risk that people live for longer than is currently expected.

“Longevity risk has implications on how long pensions will be paid out. A huge volume of people are retiring in the Arab and Mena region,” Ms Hussain added.

Although the Mena region has a window of opportunity compared with Europe because of its large youth population, not every young person is contributing to pensions or taxation.

“People need to be brought into the labour force in a documented way and made to pay taxes. Taxation will help reduce financial deficits in pension systems,” she said.

Policymakers and individuals must also distribute risk of where income is generated during old age. Pensions need not be the only source of income; governments can also provide long-term health care insurance, Ms Hussain added.

An increase in life expectancy and declines in fertility rates will put pressure on the old age dependency ratio, said Hazem Rahman, an actuarial consultant with Mercer.

In Oman 20 years ago, there were 15 employed individuals for every person aged above 60. In the UAE, there were 14 employed individuals for every person aged above 60. This is expected to drop to three employed people for every person aged above 60 in the GCC by 2050, he said.

“Fewer people working to support elders will have an impact on the sustainability of pension systems and be a burden on governments,” Mr Rahman said.

Policymakers should focus on private pensions and voluntary savings solutions to fund the pension shortfall, he said.

The pressure on pension funds can be mitigated in many ways, according to Jean-Xavier Bourre, head of OCIO investment and strategy advisory with Amundi Asset Management.

“Have a clear understanding of the trajectory in which your liabilities or retiree population will evolve over time,” he said.

“Build a sound, hedging tool to transfer some risks to third-party insurers. The global pension fund industry is used to transferring longevity risk to the private sector.”