“Towards A Futureproof Regional Pension System”

Preamble

In their fifth decade now, pension systems of the MENA countries are still exclusively reliant on government funded pay-as-you-go Defined Benefit schemes. These programs tend to be quite generous, but are facing increasingly huge funding deficits, making their long-term viability a mounting concern.

Beyond this, many companies in the region provide employee savings schemes, however these are not formally regulated and do not tend to be professionally managed. Expat workers are paid the mandatory End-of-Service benefits. Nonetheless, such schemes are inadequate as a pension arrangement, and represent unfunded liabilities on the balance sheets of employers. Dubai’s DIFC is the only jurisdiction that has lately introduced a mandatory workplace saving scheme.

Voluntary pension savings is possible but is not formally regulated or incentivised. The range of tailored products available for such savings is minimal and awareness of the importance of long-term savings is limited, albeit gradually growing.

From a global perspective, the pension industry wants more people to have better access to quality pensions products. They also want to increase the supply of institutional assets that can support long-term savings.

By 2050, the global population segment aged 65 and older will have doubled from 10% to 20%. Nearly 1.3 billion (80%) of these elderly people will live in low-income countries. Yet, two thirds of this population are today outside the coverage of formal retirement systems.

Pension systems contribute to providing income in old age, disability and premature death of family wage-earners. In addition, pension systems contribute to promote long-term savings, which in turn boosts economic growth and financial systems.

The Arab Pensions Conference 2020 poses the following questions (Agenda):

Day 1

Opening Remarks

10:45 Bahrain Time

Ebrahim K Ebrahim,

Chairman, the Arab Pensions Conference

First Session

11:00-12:15 Bahrain Time

Can Public Defined Benefit Pension Systems be Saved through Parametric Reforms? 

What do the actuaries say…

The outbreak of Covid-19 has dealt a crippling blow to the global economy. In many countries, savers have decreased or stopped retirement contributions due to the pandemic. The issues governments are facing today are growing faster than many countries anticipated. Using the asset-to-payout ratio, some funds have assets equal to just a few years’ worth of benefits.

As the retirement funding challenge exacerbates, can public pay-as-you-go pension funds be rescued and made sustainable? How much can parametric reforms (increasing contributions and lowering benefits) and so-called behaviourial conditioning - delaying retirement, designing extra benefits for those extending their working life, and decreasing benefits for early retirees - save in the funding crisis of these funds? 

Second Session

15:00-16:15 Bahrain Time

Can and should governments in the region finance the current deficits in pension funds?

What do the economists think…

Will the world be ever able to bridge the funding gap in pension systems? Can and should governments in the region finance the current actuarial deficits? The world’s six largest pension systems – the US, UK, Japan, Netherlands, Canada and Australia – are expected to reach a $224 trillion gap by 2050. And by adding China and India, the combined funding gap for the eight countries reaches $400 trillion by 2050, a sum five times the size of the current global economy.

In the GCC, the aggregate funding gap in public pension systems has exceeded 25% of the region’s total GDP. In light of current fiscal pressures due to the new normal of low oil prices, and after governments have generously spent on financial packages to mitigate the negative effects of COVID-19 on local populations and business, can governments actually, and should they, refinance these funds?

Day 2

First Session

10:30-11:45 Bahrain Time

In the face of quantitative easing and increased liabilities,

 How Should Pension Funds Allocate their Assets?

What are the CIOs’ answers…

The world has seen more than10 years of quantitative easing that was supposed to be a central bank’s temporary fix. Bonds, that once provided pension funds a convenient income stream for their retirees, have now become a return-free risk. In the last four years, many government bonds started to look more like return-free risk, than risk-free return, carrying negative yields.

In the face of long-term depressed interest rates and increasing liabilities, where can pension funds look for growth? How much infrastructure and other alternatives should they take? In doing that, to what extent they are expected to adopt modern investment principles such as LT Investment, fiduciary capitalism and Social Inclusion?

Second Session

12:00-13:15 Bahrain Time

Considering Funding Challenges and Changing Labour Market,

What Does it Take to Re-model Regional Pension Systems to Multi-Pillar Structure?

What are the Financial Industry’s views…

Are current pension systems fit for purpose? What does the future retirement look like, and what could be the dynamics? How should the pension industry prepare employees from today? Around the world, labour markets have witnessed fundamental changes, even before COVID-19. The gig economy and economic migration are two examples? Is re-modelling regional pension systems to the global Multi-Pillar structure the solution to a futureproof system? Who should lead on innovation? What is the impact of these changes on financial markets?

 Day-1, 

Opening Keynote Address (to be announced).

 Session 1, Day 1

Economics & Significance of Household Long-term Savings 

What’s household savings, and how is it explained by economists? How important is it to households, and to the economy? What are the right ratios of savings? What are the determinants and motivations of savings?  What are the levels of savings balances in the MENA, and are they growing year after year? Is the savings ratio in the region healthy, or we’re living a savings crisis, and spending like there’s no tomorrow! Is the savings ratio measured, and how’s that done? Is there a relationship between national savings rate and national social security? 

 Session 2, Day 1

Building a Savings Economy:  Creating products, savings culture and behavioral finance

If saving is key to a healthy economy, then it must be reasonably high and sustainable, if any region is to fulfill its potential for higher real income and greater standard of living. Hence, a framework of policy options must be there, helping households to invest in restricted-access savings vehicles and generally overhauling the way in which saving decisions are framed.

Much of the structure of GCC economies should already be motivating personal savings, yet it’s not resulting in an adequate rate of savings today! Why is that?

Could some reforms stimulate additional saving by increasing the reward? Could the introduction of longer-term assets make it possible to obtain fixed long-term real returns? How can financial education and behavioral finance help the socially conditioned behavior of savings?

 Session 1, Day 2

Landscape of Household Long-term Savings: What’s the ideal vehicle? Incumbents vs. Challengers

What’s the landscape of long-term savings vehicles today? How do households currently choose and differentiate between stocks, bank deposits (with attractive raffles), retail bonds, REITs, life policies, mutual funds, ETFs and money market? What are the characteristics of the ideal vehicles for household savings? And how should those vehicles perform in terms of growth, safety and adequacy to the household life journey? 

On the other hand, what’s driving the structure and launch of today’s crowded banking, insurance and investment products? Are institutions trying to find customers to their products, or working diligently to address their clients’ real needs? Where should financial firms focus their efforts to succeed in addressing household savings needs? 

Under the disguise of closing the advice gap and democratising investing, a number of big asset managers have launched their wealth management platforms, directly competing with advisors. How will this move disrupt the ‘rules of the game’ in the product distribution league?

 Session 2, Day 2

What’s next? And what does the future hold for the long-term savings industry?

A wave of Fintech apps is starting to change people’s attitude towards managing their money. Clients are appreciating being able to keep tabs on their money in real time. They can set savings goals, check how they are spending, allocate money to different accounts and monitor their savings.

The landscape will further diversify as new propositions become increasingly popular with customers demanding digital-first and needs-based solutions. Digital challengers have been steadily taking current account customers away from incumbent banks for a few years. The new savings propositions include: Automation, Goals & Pots, Marketplaces and Robo Advisors.

These digital savings tools seem to offer a fresh approach to saving: helping people reach their goals in a more enjoyable and sustainable way. The big question is:  how do these digital propositions generally compare to the incumbent big institutions in terms of safety and sustainability? And how long will it take MENA clients to make a paradigm shift towards these digital challengers?

Conference closing remarks (to be announced soon).