Bahrain’s parliament is discussing key reforms to the national pension system, including delaying the retirement age and increasing contributions, in a bid to extend its sustainability.
This was revealed by global risk, retirement and health solutions provider AON’s associate partner Simon Herborn during the opening session of the two-day Arab Pensions Conference 2020, hosted virtually in Bahrain.
Addressing concerns on the viability of regional pension systems due to the ‘increasingly huge funding deficits’, Mr Herborn said, “This year Bahrain has announced discussion of a forward-thinking package of ‘parametric’ reforms intended to safeguard the pensions of future generations.
“If implemented, these measures would be a substantive step towards financial sustainability.”
He added their implications could include retirement at later ages – moving over time to a benchmark of 65, change in the benefit formula and conditional indexation (doing away with full inflation-proofing) and higher contribution rates. Mr Herborn said information about the kingdom’s pensions system was based on Social Insurance Organisation (SIO) data.
The pension age is currently 60 for men or 55 for women with at least 10 years of coverage, although there are early retirement options. For example, an early pension is possible at any age with at least 20 years of service for men or 15 years for women and the average retirement age in Bahrain, according to Mr Herborn, is 48, whereas it is 64 in Europe. Explaining the concept of parametric reforms, Mr Herborn said they include increasing contributions and lowering benefits and behavioural conditioning like delaying retirement, designing extra benefits for those extending their working life, and decreasing benefits for early retirees.
Conference chairman Ebrahim K Ebrahim said Bahrain started seriously to address the issue of pension fund sustainability in the last two years.
“His Majesty King Hamad emphasised the need to attach absolute importance to the issue of pension through improving the situation of the funds and enhancing the services they deliver to retirees and affiliates, in a manner that takes the public interests into consideration, ensures the sustainability of pension and social insurance funds, and preserves the rights of contributors and retirees,” said Mr Ebrahim, who is the founder and chief executive of Fintech Robos, the organiser of the conference.
Pension systems of the Arab world are still exclusively reliant on government-run pay-as-you-go ‘Defined Benefit’ schemes, the expert added.
These programmes are facing increasingly huge funding deficits, making their long-term viability a concern. In the GCC, the aggregate funding gap in public pension systems has exceeded 25pc of the region’s total GDP. The challenges for national pension systems are rising, he added, as people live longer and have fewer children.
“Life expectancy is expected to continue increasing. The ratio of retired people to workers is set to double in the next three decades and public finances are going to remain under pressure,” stated Mr Ebrahim. Making matters worse is the Covid-19 outbreak, which 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,” he said.
Also present in the conference was International Peace Institute, Middle East and North Africa (IPI MENA) director Nejib Friji who warned that if the global pension funds crisis is not solved in the immediate future, it will threaten the very fabric of social and global peace.
“Over the past 50 years the region has seen the highest rate of population growth, creating a ‘youth bulge’. In 35-40 years, the youth will climb the population pyramid to create a surge in the geriatric population,” he added.
According to the Milliman Feasibility Report, individuals over 65 in the Mena region will grow from 10 million now to 70 million by 2050.
Citing IMF data, Mr Friji said at 25 per cent unemployment rates in the region are the highest in the world.
“This means that with greater life expectancy and significant unemployment, this will increase the already simmering pressure to generational tensions over limited public resources. Around 90pc of the world’s working-age population is already not covered by pension schemes,” he added.
In August, the GDN reported SIO chief executive Eman Al Murbati as saying that 10 urgent radical reforms to save pension funds have been proposed as pressure mounts due to the increasing number of retirees while contributions remain unchanged.
The reforms include merging the public and private sector funds, halting annual pension increases, unless there is a surplus, and decoupling salaries and pensions.
Retirees are no longer allowed to receive more than one pension under different retirement and insurance systems, except for those entitled to pensions because of disability, work accidents or kinship. Four out of the 10 recommendations have already been enacted as laws.
avinash@gdn.com.bh
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