“The Biggest Risk is not to Take Risks” –could that ever be true? In Pensions?!

“The Biggest Risk is not to Take Risks” –could that ever be true? In Pensions?!

The 2nd MENA Pensions Conference was held just few weeks back in Manama, the capital of Bahrain. The event, that’s well attended by global, regional and local industry specialists, produced a strong image of a way forward for pension reforms in the region. It began with some idea of the challenges facing the sector, gradually zooming into the scope and nature of those challenges and underlying trends, and finally we heard strong messages about what can be done, and what needs to happen. Ironically, the title chosen for this article was part of several bold and unconventional views expressed by speaking experts – coming mostly from the pension sector that has for long been conspicuously perceived to be extremely conservative.

As we are right at the outset of the New Year, I thought this could be a good time to share the key messages from the conference and inspire the region’s pension industry with these ‘potential themes for action’.

In Session 1, on the Global Pension Outlook, we learned that while Europe is dealing with a ratio of working-age adults to pensioners of 4: 1, the MENA region has a comfortable level of 33: 1. But then we fast forward to 2050—just 33 years ahead, or a single generation from now—and while Europe is a potentially catastrophic 2: 1, we in the MENA region will be dealing with a ratio of payers to receivers of just 5: 1. That is our children, paying for us. And, as we will live 3 months longer, we learned, for every year we grow older, we see that the pension levels in this region are simply unsustainable. What is the solution? “The future is DC, defined-contribution pension schemes,” we heard. The old DB (defined benefits) schemes have increasingly been abandoned due to non-sustainability.

In Session 2, on the Public-Private Partnership, we learned that the generous pension schemes in the GCC particularly but across MENA, are covering less than 40% of the working population. We have a large young population but our generosity is compromising the sustainability of pensions for our young. In addition, our pension systems are mandatory only for citizens and not for expats. What’s the way forward? Two points: 1. Create a mandatory pension system for expatriate workers to expand coverage and create scale especially in the GCC; 2. Engage the private sector (the financial industry) so that they collaborate with government in their responsibility and competence for pension risks. There is already a high degree of implicit and explicit privatization of pensions around the world happening right now.

In Session 3, on Helping Your Employees Love their Benefits, we learned that employees are worried about their financial future and that this represents a real cost to business. Women worry more than men, but men worry more about retirement, and younger workers are more worried than Baby Boomers. So, on average employees spend 13 hours a month on the job worrying about their finances. The solution? Conference experts said it’s through developing financial courage and financial literacy based on life stages and worker attributes. The payoff? We learned that 16% of job seekers are looking for financial wellness assistance as part of the corporate offering.

In Session 4, on the Landscape for Pension Investments, we learned that the greatest risk is not to take risks! Instead, risks must be managed. Pension investors need to ask themselves the question, “Am I willing to own this asset, with its inherent risks?” Investors need to ask questions, challenge investments, engage people who will ask the tough questions, and not accept projected returns of 10% but seek the solid 5% or more that can be sustained over years. The way forward – for pension investments, take informed risks and own the consequences. “The biggest risk is not to take risks.”

In Session 5, on Pension Technology and Disruptive FinTech Models, we learned that, for the younger generation, change cannot come fast enough. And we also learned the surprising lesson that fintech can lower costs. How? By empowering users. Fintech as an industry needs to start with the questions, “What kind of experience do we want to create? What is the customer journey?” What we know is that people, especially young people, want lower prices and more control. Fintech is actually the key to these possibilities. The best risk management is knowing where you stand and being able to take action. Everyone needs information on where they stand, communicated clearly, in ways they can understand, in one space, on one platform, accessible wherever they are, whenever they want. They need to be able to picture their retirement goal so they can do what is necessary to achieve their own personal retirement dream. The way forward – FinTech solutions need to provide clear information on the experience that people want, enabling lower prices and more control.

In Workshop 1, on “Whether Expat Pensions can be introduced”, we learned that large pools of pension assets are powerful economic forces that can create jobs. The World Bank estimates that there are currently over 600 million retirees in the world. Future estimations predict that this number will increase to 2.1 billion by 2050. Only an alarming 15% of the world population are covered by pensions: 85% of the world’s population will not receive an income after retirement. In some developing and industrialized countries, pensions are the only source of income for 3 generations within a household. Their very survival is dependent on these pension schemes. The lack of pension income for millions of people is a direct threat to not only regional, but global social peace.

For the MENA region, if these issues are left ignored, by 2050, much of the projected 70 million geriatric population might have no income. For the GCC, 70% of the workforce is comprised of expatriates: 17 million foreign employees. We need to recognise expatriates’ contribution to the economic development of their host countries. The inclusion of expatriates in pension schemes could have significant dividends. Providing pension security for the millions of expatriates in the region will positively impact their family life and working relations, and the relations between expatriates and host countries. The solution – Creating expat pensions could have significant dividends for local capital market and labour environment.

In Workshop 2, on the Governance of Employee Savings Schemes (ESSs), we learned that ESSs are an embryonic industry in the region, typically provided by larger companies and seen as something that is “nice to have.” Smaller companies usually do not provide ESSs, generally because of the expense. Technological change is reducing costs and improving transparency, which should improve ESS cost-effectiveness. Seldom viewed as a critical competitive advantage or a necessity, the systemic significance of ESSs is currently minimal.

Governance standards across the region are either altogether absent, voluntary or rudimentary at best. This is far from being a regulated segment. There are no formal performance standards, typically not even formal reporting to beneficiaries. The new fiscal and economic realities in the region are putting a premium on productivity. ESSs can promote employee retention. In addition, as government pension structures are facing big challenges to cope with the current economic and demographic trends, ESSs can be seen as additional mechanisms needed for retirement saving, strengthening the case for ESS regulation. The way forward – Introduce or strengthen the governance of Employee Savings Schemes as mechanisms for retirement saving, to improve productivity and employee retention.

In Workshop 3 and last part of the conference, on Employee Benefits in SMEs, we learned that it is more than achievable for SMEs to offer employee benefits close to the levels of larger companies; indeed it is a competitive necessity as employees seek greater security for themselves and their families in an increasingly competitive employment marketplace. We heard that government agencies are supportive of this spirit and looking for mechanisms and partners to enable these improvements.

Private sector partnerships can be a solution, to control cost (through economies of scale) and adapt the solution to the specific needs of SMEs and restrictions they face. Administration must be simplified and the competitive advantages of introducing benefits such as ESSs and health insurance needs to be emphasized. Education is a key. Information programs are needed to help make this sector aware of the possibilities and the accessibility of existing benefit schemes. The way forward – Government and the private sector should partner to inform SMEs about cost-effective benefits and their competitive advantages.

Pension Researcher & Chairman of the Annual MENA Pensions Conference