The pension systems of the UAE and Saudi Arabia have improved their score, ranking 25th and 27th out of 44 retirement systems in the 14th annual Mercer CFA Institute Global Pension Index (MCGPI). 

 

Globally, Iceland was top, followed by the Netherlands, while Thailand ranked last. This year’s MCGPI also features Portugal as a new addition.

 

The MCGPI is a comprehensive study of 44 global pension systems, accounting for 65 percent of the world’s population. It benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would help provide more adequate and sustainable retirement benefits. The UAE and Saudi retirement income systems were benchmarked against global peers across three key areas of focus: adequacy, sustainability, and integrity.

 

UAE

UAE’s overall index value improved from 59.6 in 2021 to 61.8 in 2022, jumping from C to C+. This is primarily due to improvement in its scores for adequacy and sustainability. The UAE’s pension adequacy rankings are supported by the country’s generous retirement benefits, which ensure a continued income to sustain a good quality of life with a suitable minimum pension relative to earnings. Its improvement in sustainability can be attributed to the UAE’s high labour force participation rate, especially for individuals over the age of 55. The robust governance structure around the national pension system in the UAE also contributed to its strong ranking in terms of integrity.

 

Overall, the UAE has put in place a sound structure for a funded pension system for Emiratis with both the public and private sectors setting aside mandatory contributions during an employee’s tenure. Progress is being made to implement a new retirement savings scheme targeted at supporting private sector employers and expat employees to plan for their financial future, said the study. 

 

The UAE’s retirement income system comprises a minimum state pension and a national employment-based scheme administered by the Abu Dhabi Pension fund (ADPF), the Sharjah Social Security Fund (SSSF), and the General Pensions and Social Security Authority (GPSSA) for the rest of the Emirates. Emiratis contribute 5 per cent of their salary, and employers contribute 12.5 –15 per cent of an employee’s salary, with benefits guaranteed by the government. 

 

As the country continues to ramp up its effort to attract and retain talent, the UAE also recently announced the launch of a new mandatory unemployment insurance scheme, which is applicable for both public and private sector employees, with the mandate to help both Emirati and foreign employees receive compensation of up to 60 per cent of their previous salary for three months if they lose their jobs. Furthermore, the recently launched ‘Golden Pension’ scheme is aimed at helping private-sector foreign employees invest their end-of-service benefits as well as support employers to fund their end-of-service financial commitments.

 

MCGPI has, however, identified key areas that may be improved to continue to retain and build on UAE’s ranking. Factors include introducing a minimum access age to ensure benefits from pension plans are preserved for retirement purposes. As life expectancy is on the rise, leading to more people in retirement, increasing the state pension age may also help relieving some of the burden on the state pension. Furthermore, increasing investment towards educating and promoting a savings culture in the UAE amongst locals, will help address the lack of planning for a life of retirement.

 

The UAE scored 63.8 (27th globally) in adequacy, driven by the country’s generous retirement benefits with suitable minimum pensions relative to earnings. Positive scores around sustainability are driven by the high labor force participation rate, especially for individuals over the age of 55 and due to the sound structure of a funded pension system with mandatory contributions set aside for the retirement benefit, with a score of 51.9 (25th globally). The country’s highest score was awarded for the integrity of its pension systems, 72.6 (26th globally), supported by the overall high degree of governance structure. 

 

SAUDI ARABIA

 

Saudi Arabia’s overall index value improved from 58.1 in 2021 to 59.2 in 2022, primarily due to an increase in its sustainability score which went from 50.9 to 54.3. The sustainability of the Kingdom’s pension system has been bolstered in recent years due to an increased labour force participation rate, with the number of women with jobs nearly doubling in the last five years, and by the mandatory contributions set aside for retirement benefits as a percentage of annual compensation by both employee and employer. 

 

Despite the improvement, the study suggests further increasing the state pension age over time to strengthen its sustainability.

 

The 2021 merger of the Public Pension Agency (PPA) into the General Organization for Social Insurance (GOSI) has helped consolidate $29 billion of funds. The move has strengthened the position of the pension system in terms of its financial status, investment returns and opportunities for strategic diversification, it said.

 

The adequacy score in Saudi Arabia, which saw a slight dip this year from 61.7 to 61.4, can be improved by increasing the minimum level of support provided to the poorest aged individuals. 

While the Kingdom also recorded a positive integrity score, driven by the overall high degree of governance structure around the pension system in the Kingdom, it could be further elevated by enhancing the level of communication to pensioners from private pension arrangements, and increasing the labor force participation rate at older ages as life expectancies rise. 

 

Robert Ansari, Mercer's Head of Investment and Retirement for IMETA, stated: “Included in the index for a fifth year, Saudi Arabia’s index score has increased for 2022 once again faring better than a number of more established global peers. With two thirds of its population under the age of 30 and continued population growth, the introduction of private pension plans as a complementary retirement program in the Kingdom will reduce the pressure on the existing social security programmes and enhance the overall retirement income. It will also serve as a further mechanism to attract and retain talent in a buoyant job market and deliver overall financial well-being for its citizens.”

 

The study revealed a few key areas that require development in the country’s pension system, including increasing the minimum level of support provided to the poorest aged individuals, further increasing the state pension age over time and increasing the labor force participation rate at older ages. The study called for encouraging higher levels of private saving, both within and beyond the pension system, to reduce the future dependence on the public pension, while also adjusting the expectations of many workers.

 

By the numbers

Saudi Arabia had an overall index score of 59.2, ranking 27th on the list. The Index uses a weighted average of the sub-indices of adequacy, sustainability and integrity. 

 

The country scored 61.4 (30th globally) in adequacy, driven by the Kingdom’s healthy pension replacement ratio and net household savings rate. Strong mandatory contributions set aside for retirement benefits have helped improve the sustainability of the system, with a score of 54.3 (20th globally). The country scored the highest for integrity, 62.5 (36th globally), supported by the overall high degree of governance structure around the pension system in the Kingdom. 

 

Global results

Globally Iceland had the highest overall index value (84.7), closely followed by the Netherlands (84.6) and Denmark (82.0). Thailand had the lowest index value (41.7). For each sub-index, the systems with the highest values were Iceland for adequacy (85.8) and sustainability (83.8), and Finland for integrity (93.3). The systems with the lowest values across the sub-indices were India for adequacy (37.6), Austria for sustainability (22.7), and the Philippines for integrity (30).

 

In comparison to 2021, Mexico showed the most improvement as a result of pension reform, which improved outcomes for individuals and pension regulation. -TradeArabia News Service