Middle East interest rises in corporate pensions

The pensions industry in the Middle East is relatively immature, but in the past six months or so a growing number of companies in the region have been considering launching retirement schemes as incentives for employees*.  

This is partly down to an improved economic outlook and faster-rising wages. Consultancy Hay Group forecasts salary increases across the Middle East of around 5% for 2013.

Another driver of this renewed interest – in the United Arab Emirates at least – are government plans to introduce compulsory pension provisions for expatriate employees. For instance, almost 90% of the population in Qatar and the UAE are foreign workers.

As a result, corporates in places such as Kuwait, Qatar and the UAE are looking again at hiring and at retention strategies. This had become less important in the years after the financial crisis in 2008.

Corporate pensions as a benefit had been more prevalent in Saudi Arabia, because it’s considered more of a hardship posting, notes Simon Stirzaker, senior manager for development and strategy at RBC Corporate Employee and Executive Services (RBC CEES) in Dubai.

The most widespread reward schemes in the Middle East are the very limited end-of-service benefit (ESB) in the GCC, and there are also state-backed retirement schemes – with the latter only provided for local nationals.

Companies in the GCC must pay ESB to all employees regardless of nationality: it comprises one month’s pay per year of service, with a cap at 24 months. “That’s not a big enough sum to keep you happily retired,” says Nigel Sillitoe, founder and CEO of Dubai-based research house Insight Discovery. Nor is it an incentive for employees to stay loyal.

Moreover, GCC governments won’t be able to fund the very generous state pensions they offer forever. Some 90% of men and effectively all women in the GCC have retired by the age of 60 on state pensions, paying on average 80% of what they were earning previously, notes consultancy Booz & Company. Gulf state pensions will be unable to meet these obligations in the next 25 to 40 years unless there are changes to their current structure, it adds.

So private schemes are needed to fill the gap. Companies are starting to realise this, as well as the need to offer international-standard and portable plans if they are to attract and retain foreign employees. More employers are looking at offering local or offshore saving schemes either as an alternative or in addition to the ESB, says Sillitoe.

And in places such as Qatar and the UAE, foreigners are tending to stay longer – say five or 10 years rather than three – so they’re growing more interested in long-term schemes, says Michael Brough, London-based senior international consultant at Towers Watson.

All this is a great opportunity for asset managers and other service providers, such as Old Mutual, RBC, Russell Investments, Standard Life and Zurich.

In February, the National Bank of Abu Dhabi (NBAD) became the first local firm to set up an offshore savings platform in the region, its Wealth Builder Plan. NBAD Asset Management is putting in-house and external funds on the platform, NBAD acts as the trust company, and RBC is the administrator. Various local providers are expected to follow suit.

*An extended feature on this topic appears in the June issue of AsianInvestor.