Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre “Markaz”, recently released a report on GCC Institutional Investors III - Pension funds. It is the third report in the series of GCC’s Institutional Investors; which had earlier covered State Owned Entities (SOE) and Sovereign Wealth Funds (SWF). GCC Pension Funds are the second largest set of institutional investors in the region after the SWFs. However, this investor class has seldom been researched in detail despite its widespread influence in the economy. This report covers the size, development, roles and future of this investor class in the region.
The report stated that pension funds in the GCC are a recent development barring the exceptions of Kuwait, which founded a pension fund in 1955 and Saudi Arabia, which founded a similar fund in 1958. Until recently, concepts such as retirement benefits and payouts to its citizens were not given much importance, due to the generous government salaries and associated benefits coupled with the higher proportion of expatriate workers. Non-Transparent actuarial information and limited public disclosure of data by the respective authorities make it very difficult to assess the solvency and sustainability of current pension schemes.
As a fallout of the rapid economic development of the GCC countries, the aggregate population increased by more than tenfold in little over half a century which is widely considered the most rapid population growth rate anywhere in the world during that period. It is estimated that the population will further grow by another third to 53 million people by 2020. Swelling population and the challenges it poses are well reflected in the growing unemployment rates. Advancing healthcare facilities available in the GCC countries is extending the life expectancy of retirees. Early retirement schemes and higher payouts have created an asset liability mismatch and needs immediate attention. The report elaborates on these factors and its impact on the funding shortfall that could likely take place in these retirement funds going forward.
On the positive side, current demographics of GCC countries, dominated by youth population, allow for the pension subscription base to expand and mop up further assets. The Pension fund asset is bound to grow in the future as these countries transform themselves through their economic visions. 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 USD 938.6 Billion. Millennials who are currently entering the workforce have close to thirty-forty years before they retire. 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. This position may not be sustainable unless structural reforms in the pension system are introduced.
Pension funds have the mandate to invest in the local stock markets and they currently contribute about 5% of the market cap. Saudi Arabia has the highest exposure to the stock market followed by Kuwait and Qatar. They serve as anchor investors with a long-term investment horizon, thereby providing support in times of crisis and reducing the volatility. Pension funds, being one of the largest investor class, are important force for the stability and growth of GCC markets. Considering the growth in pension assets from a youthful population, these funds have the room to take higher risk. This opportunity should be used proactively in order to widen the scope of investments and delve into products such as ETFs, REITs and other structured investments.
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. Cultural factors, such as family structures or the willingness of individuals to save for old age play a big role. Economic factors, such as the general standard of living of the population, estimates about minimum consumption needs, the existence of other formal and informal social assistance programs, and, of course, the costs have to be considered.
Established in 2010, Marmore is a research subsidiary of Markaz, an Investment Bank and Asset Management Company with more than 40 years of experience. Marmore caters to the growing research and information needs of organizations in the MENA region.