Pension funds could do small business space some favours
The old certainties of assured returns no longer hold true, and this was quite evident in the decade after the global financial crisis. The COVID-19 hit has only made it even worse for a creaking pension regime as states has to prioritize job creation and other policies. Image Credit: Gulf News Archive

Retirement should be a time to kick back, relax and enjoy the financial fruits of a lifetime of hard work.. at least that is how many of us imagine our golden years.

Yet the reality is that we are increasingly likely to outlive our money — by between eight and 20 years according to World Economic Forum data. By the time we reach the half-way point of this century, more than one in five of us will be over the age of 60, which is double the 2015 figure.

The Gulf states face a more acute challenge in providing for future retirees than many other nations because of a pension model that is becoming increasingly unsustainable as the population increases and ages and at a time of shrinking hydrocarbon revenues.

The era of oil has allowed the region’s crude-exporting nations to offer till-death benefits for citizens that often kick in from early retirement ages. Expatriates meanwhile receive a gratuity based on years of service that has discouraged separate pension planning and provided a false sense of financial security.

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A decade’s burden

Even before the emergence of the coronavirus pandemic, the pensions industry was struggling to deliver returns to savers as a decade of low interest rates weighed on fund performance. The situation has deteriorated further in recent months as government debt spiralled and more people have found themselves out of work, all of which has hit the global pensions pot.

The basic mathematical problem the industry faces worldwide is now clear to see, and yet still has not been fully absorbed by us, as the latest Mercer CFA Institute Pensions Index highlights. It shows that nearly half of defined pension plans expect to reduce benefits over the next decade. Yet, 70 per cent of beneficiaries expect benefits to be paid out as promised. Therein lies the rub.

Evolution has helped us as human beings to respond to immediate threats, but less responsive to even bigger threats in the future.

Wake up call

Yet COVID-19 has shown that many things we take for granted are no longer assured, including our very livelihoods. In that sense the pandemic may at least have made us more willing to look beyond our own cognitive bias that prioritizes the immediate and prevaricates over the longer-term.

But that still only gets us part of the way toward adequately planning for our retirement. Research has shown that the complexities and financial jargon of the pensions sector can be a turn off for people, especially when there are more immediate financial priorities to handle for many whose employment has been negatively impacted by this year of lockdown.

Time for a new one

Better financial literacy is especially urgent across the Gulf states to ensure that the public is educated about their own need to plan for the future in an age which will see the financial burden of retirement increasingly transition to the individual from the state. Sustainability is also a key factor to consider.

The changing economic base of the Gulf, where oil revenues will become a diminishing source of government income and where the private sector will need to generate more employment, means that the benefits model of old is no longer sustainable.

Today we are at an inflection point that demands a new pensions model, tailored to the specific needs of this region as it transitions to a future less reliant on oil.

The good news is that the uniquely youthful demographic profile of the Gulf states means they have more time to develop such a system than in many other countries with older populations. But that should not distract us from the urgent need for reform.

If we want the reality of our retirement to match our own vision of it, we need to act now.

- William Tohmé is Senior Regional Head, CFA Institute, Middle East and North Africa.