A few months ago, rumours were spread on changes that will be introduced to the pension system in the UAE.
There were speculations on an increase in retirement age, higher contribution percentages, and the increase in minimum number of number years served before an employee can retire.
What was the basis for these rumours? The announcement that the pension system is being reviewed… Let me first say this. There is no such thing as an ideal pension system. The Melbourne Mercer Pension Index ranks a number of countries in regard to their pension systems. That does mean that the country at the top of the list - Denmark in 2015 - has the optimal pension system that could be imported as is and implemented in the UAE for instance.
However, among countries topping the list, there are a couple of characteristics that could be adopted for the UAE when considering its new pension system whenever that is introduced.
First of all, pensions cannot go on forever. In other words, it cannot be passed on to dependents or inherited by them up to a given age or up to marriage, etc. Allow me to explain.
Almost all of the super-efficient pension systems do have a limitation on up to what year pension will be paid, which is basically a cut-off date. This is mainly driven by life expectancy that is incorporated into the Notional Defined Contribution System (NCD) for pensions.
The system basically allocates part of the pensioner’s contributions into an individual account that gets accumulated up to retirement age, with a small percentage being allocated to the general pension fund. This could be especially beneficial in deficit cases for the government to not pitch in a lot of cash.
So, you are a male UAE national who is retiring at the age of 60 and with life expectancy now at 77 years. What is the difference between the current system in the UAE and the NCD that is adopted by every country topping the Mercer’s pension index?
In the former, you will receive your pension salary (basic + specified allowances) for an unknown duration. In the latter, your pension contributions accumulate in an individual account that will be paid out to you for x number of years that is equal to the life expectancy age minus the retirement age.
In the UAE, that would be 17 years.
So, assuming that at retirement the individual’s account had Dh3 million, a retiree will receive an approximate pension salary of Dh15,000 per month.
Since this is apparently low given the current pension salaries paid out, a balance will need to be reached between applying the new system and the rule that states that the pension salary should not be below the last three years’ monthly average.
Also, the UAE’s pension review will need to take into account that the NCD system could still be implemented at higher pension salaries without incurring higher future costs by taking into account the current costs of unlimited pension duration – it being passed down to dependents.
The second phase of the fix would have to address contribution percentages and retirement age. These two things cannot be separated from life expectancy when the UAE is constantly improving its health services, meaning that life expectancy will only increase.
The third phase will need to take into account the establishment of compulsory pension contributions into private funds. Once the new pension system is up and running, individuals interested in a higher pension income could have that secured by signing up to private pension funds that could be created and managed by national banks and are overseen by the General Pension and Social Security Authority to incorporate all pension payouts later on.
The last thought that I want to leave you with: how about contributing to the fund from a young age, say 15? (Hint: child allowance is used in calculating an individual’s pension contribution).
The writer is a commercial consultant and a commentator on economic affairs. You can follow him on Twitter at @aj_alshaali