With 2000 private pension funds in MENA, Change is Happening, and Fintech Robos Wants to Enable it

The Global Pension Assets Study (thinkingaheadinstitute.org 2022) estimates global pension fund assets across 22 major pensions at record US$56.6 trillion. This is a major market that’s equivalent to 76% of the GDP of these economies. These assets dominate in these countries – they are the single largest source of investments in stock markets, capital markets and infrastructure. It’s not just a large market, its one that is evolving and providing new opportunities. Total assets in personal pension funds in the USA rose from 12.2% in 2010 to 26.6% in 2020 – as the ongoing trend to move away from legacy employer sponsored defined benefit plans to individual funded defined contribution plans accelerates. It’s not just the USA, this trend is prevalent in all economies with developed pension systems. In a race to gain as much market share as possible of this rapidly growing sector, the large established players have set a race to the bottom. Vanguard, Fidelity, and others have slashed fees in the personal pension product space. Regulators have demanded clearer, fairer more consumer oriented products. This has all combined to spell the end for costly financial advice and complicated individual personal pension products. In their place, simpler, friendlier products and providers have emerged. Betterment in the USA has over $33 billion in assets under management in 401k wrappers and other products. Nutmeg in the UK is gaining traction with $4.2 billion under management. These may represent small drops in the pension assets ocean but this market is growing quickly as consumers prefer the ease of digital interaction.

 

Pensions systems in the GCC are another story. Developed in more recent times, the GCC pension systems recognized several key features of the underlying population demographics at the time of their introduction. GCC citizens were taken care of by their governments with generous benefits, which were easily affordable given the vast reserves and high price of oil and shorter expected lifespans than that seen elsewhere in the world. The expatriate workforce brought in to fill the labor gap was provided with an End of Service Benefit; akin to a Cash balance defined benefit scheme to be paid by their sponsoring employer. Fast forward to today and the GCC pension systems are creaking. Whilst oil reserves are still plentiful, prices have dropped and remain volatile. As short back as April 2020 during the Covid outbreak, oil futures dropped below zero value meaning that you had to pay investors to take your oil. Today as we see the events of eastern Europe unfold, oil has recently hit record highs before dropping back down to typical levels. One thing is for certain and that is that the world is moving to a post fossil fuel future, and that means that the GCC cannot rely just on oil to fund its citizens pension promises. The provision of first-rate healthcare services across the GCC which has seen life expectancy improve to match that of the western nations further compounds the pension funding problem.  The story is similar in the private expatriate sector where a lack of regulation and difficulty around the funding of end of service benefits means that in times of stress when companies need to reduce headcount, they cannot afford to for fear of having to pay out large cash sums that they can ill afford. Staff wage increases are reduced for fear of creating balance sheet shortfalls. The defined end of service benefit restricts a company’s ability to operate.

 

These issues have long been recognized in the region, and change is happening. We saw in Dubai International Financial Centre in the early 2020 the introduction of the “Dubai Employee Workplace Savings Plan” – a defined contribution scheme which mimics the defined contribution plans dominating world pension savings. The introduction removed the balance sheet obligation of the end of service benefits for companies, whilst giving individuals greater flexibility over their personal savings. In March of this year the Dubai government expanded the DEWS system to all private companies for its expatriate workers on a voluntary basis, and why wouldn’t any company choose to do this? Removal of balance sheet obligations, certainty of funding levels, more flexibility in times of stress, more freedom to retain key staff. For sure we will see these continued pension and savings reforms spread throughout the GCC. These are changes that allow these economies to compete more evenly on a global basis.

 

Throughout the Arab world, there are more than 2000 supplementary private pension funds that companies provide to their employees; these are well regulated and established at least in Egypt and Morocco. It’s a trend that will only increase over the coming two decades as longevity risks put pressure on the national finances and public pension funds.

 

At Fintech Robos, we recognize that these changes are happening, and we want to be an enabler of the change. We place ourself at the forefront of the discussion on pensions reforms whilst building the technology to support the changes.