Sunday, Aug 20, 2017

Dubai: Pension schemes in most countries of the Middle East and North Africa (Mena) set up their current national pension schemes in the 1970s and, given that no major changes or reforms have been introduced since then, they are in urgent need of sustainable reforms, according to the World Bank and Arab Monetary Fund (AMF).

A recent World Bank report ‘Pension systems in the Arab region: Trends, challenges and options for reforms’ shows why pension reform is needed and why it is urgent. The report is the result of consultation with Arab countries, including a high-level policy workshop that took place on January 25, and 26, 2017, in Abu Dhabi, aimed at linking global insights with regional know-how to discuss and suggest pension policy reforms relevant for the region.

The authors of the report have highlighted six general problems with pension systems in the region: The pension promise is large and unaffordable; schemes are financially unsustainable; badly designed rules introduce unnecessary distortions in labour supply and savings decisions; the schemes are fragmented and administration is weak and costly; coverage rates are modest, with important gaps among the self-employed and in rural areas; and governance structures are not designed to ensure that the funds are managed in the best interests of plan members.

“This is a stark prognosis, but there is some room for optimism. Middle East and North African countries do have time to act before the financial problems bite, but the window for action will not last long. It is, indeed, time for change,” said David A. Robalino, a senior economist at the World Bank in the Middle East and North Africa Region and the lead author of the report.

Lofty promises

Pension systems in the Middle East and North Africa target, on average, a pension for full-career workers of nearly 80 per cent of earnings before retirement. This is much higher than the pension promise in 24 high-income Organisation for Economic Co-operation and Development (OECD) countries, in 10 countries in Eastern Europe and Central Asia, and 9 countries in Latin America and the Caribbean, where pension replacement rates average 57 per cent.

Because pension schemes in the Mena countries are “young,” they are still running cash flow surpluses, meaning that contribution revenues exceed benefit expenditures. Analysts say this this happy position cannot and will not last for long.

The financial projections in this report show that the future flow of pensions already promised (that is, the implicit pension debt) adds up to, on average, 80-90 per cent of gross domestic product (GDP). This is often larger than conventional government debt. Even where there are pension reserves, these probably will be depleted in 10 years or so.

The financial problem is basically explained by the fact that promised benefits are not in line with retirement rules and contribution rates. Adjusting these parameters — for instance, by increasing the contribution rate — could improve financial sustainability, but the necessary adjustments are unlikely to be feasible.

“Even if favourable demographic conditions persisted, pension systems in the Middle East and North Africa would run into trouble eventually. The reason is simple: the benefit promises are not in line with the contribution rates and their retirement ages. The fact is, however, that as in other regions, the populations in Middle East and North African countries will grow older and aggravate the financial problem,” said Christiaan J. Poortman, World Bank vice-president for the Mena region.

Governance and administration of pension schemes are weak. In particular, pension reserves are not managed in the best interests of their members. Tripartite boards, with representatives of government, employers, and trade unions, are common. Nominated members often lack the expertise necessary to manage large and complex financial institutions, and responsibilities are blurred. Although no survey of administrative capacity has been conducted across countries, the study points out that the quality of management raises issues regarding the administration of collection and record keeping, identification of plan members, payment of benefits, information technology infrastructure, and administrative costs.

In particular, information technology systems are either outmoded or non-existent. This makes it impossible for workers to check the accuracy of records and to know the pension entitlement that they have earned. Finally, pensions involve a long-term commitment: today’s policies have implications for years and decades to come. Middle East and North African countries are making pension promises that will be difficult or impossible to keep. With serious financial problems impending, the time for a change in pensions is now.

By Babu Das Augustine Banking Editor

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