Saudi Arabia pension system shows positive signs in 2020 Global Pension Index

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Mercer released the results of its 2020 Mercer CFA Institute Global Pension Index survey (MCGPI) that benchmarks retirement income systems around the World. According to the survey, Saudi Arabia had an overall index value of 57.5 among the countries analyzed; scoring slightly higher than the previous year.

The slight increase in value from 57.1 to 57.5 is mainly attributed to a recent amendment in the retirement age for women; increasing from age 55 to age 60, which is now equivalent to men. This measure implemented by the General Organization for Social Insurance (GOSI) increased the sustainability score of the overall pension system in the Kingdom

Tarek Zouiten, Mercer’s retirement business leader for the Middle East; said: “We are pleased to see Saudi Arabia maintaining consistent results for a third consecutive year. Saudi Arabia’s system has a variety of good features and there are strong indications that the government is taking practical measures. This is to ensure a sustainable system for the future generations.

Fast demographic shifts

“However, with the fast demographic shifts in the Kingdom; where elderly population are to rise considerably in the next decade and combined with a decline in birth rates. It is extremely important to recognize the imperative of implementing the necessary policy changes. This is to respond to the challenges raised by this ageing population.”

The index highlights key strengths of retirement pension systems around three sub-indexes – adequacy, integrity and sustainability; where Saudi Arabia scored 59.6, 51.6 and 62.4, respectively. The Kingdom demonstrated positive results in adequacy due to the country’s generous retirement benefits; with high minimum pensions relative to earnings and a tax-free income.

Positive scores around sustainability also noted due to a sound structure with a funded pension system and a compulsory participation; from employees and employers with mandatory contributions set aside for retirement benefits.

However, overall reduction in sustainability sub-index was primarily due to a decline in the level of real economic growth; in 2020 around the world by the COVID-19 pandemic. The report also acknowledges Saudi’s efforts in integrity with regards to the regulated pension systems; continuously monitored by the government and audited by external auditors, in addition to the established sound governance.

Retirement savings culture

The report also underlines areas of improvement for the pension system surveyed. In the Kingdom of Saudi Arabia, the report suggests expanding the retirement savings culture in the country. This is by increasing the level of voluntary savings into a pension fund; which, due to the lack of taxation incentives, can be challenging to implement.

“To ensure sustainability, allow the aging population to gradually phase into retirement by reducing their reliance on earned income; whilst at the same time enabling them to access part of their accrued retirement benefit through an income stream. Finally, the integrity index could be further elevated by enhancing the required level of communication; with pensioners and building awareness among employees on the need to save toward retirement.

“This year’s index edition added two retirement systems; to compare a total of 39 retirement systems across the globe and covering almost two-thirds of the world’s population.

“In the wake of the financial pressures brought on by the pandemic, supporting financial security in retirement and providing guidance to modernize the pension landscape becomes an even greater challenge,” said William Tohme, CFA, senior regional head – MENA at CFA Institute.

Tohme added: “In Saudi Arabia, the government needs to continue educating the young nationals and providing them with the right tools to secure and protect their future. We look forward to working with business leaders and policymakers to strengthen the pension system in the GCC region.”

COVID-19’s impact to the future of pension systems

The impact of COVID-19 is much broader than solely the health implications; there are long term economic effects impacting industries, interest rates, investment returns and community confidence in the future. As a result, the provision of adequate and sustainable retirement incomes over the longer term has also changed.

The level of government debt has increased in many countries following COVID-19. This increased debt is likely to restrict the ability of future governments to support their older populations, either through pensions or through the provision of other services such as health or aged care.

To help alleviate the impact of COVID-19, governments deployed a diverse range of responses to support their citizens and pension systems.

It should be recognized that these 2020 index values do not yet fully recognize the longer term effects of the COVID-19 pandemic on future pension payments, although reduced economic growth has already led to lower scores in the sustainability sub-index.

By the numbers

The Netherlands had also the highest index value (82.6) and has consistently held first or second position for 10 out of the past 12 MCGPI reports. Thailand had the lowest index value (40.8).

For each sub-index, the highest scores were Netherlands for adequacy (81.5) and sustainability (79.3) and Finland for integrity (93.5). The lowest scores were Mexico for adequacy (36.5), Austria for sustainability (22.1) as well as Philippines for integrity (34.8).

About the Mercer CFA Institute Global Pension Index

Formerly known as the Melbourne Mercer Global Pension Index, the Global Pension Index benchmarks retirement income systems around the world highlighting some shortcomings in each system and suggests possible areas of reform that would provide more adequate and sustainable retirement benefits.

The Global Pension Index is a collaborative research project sponsored by CFA Institute, the global association of investment professionals; in collaboration with the Monash Center for Financial Studies (MCFS). Besides, Mercer, a global leader in redefining the world of work and reshaping retirement and investment outcomes.

This year, the Global Pension Index compares 39 retirement income systems; across the globe and covers almost two-thirds of the world’s population. The 2020 Global Pension Index also includes two new systems — Belgium and Israel.

The Global Pension Index uses the weighted average of the sub-indices of adequacy; sustainability; and integrity to measure each retirement system against more than 50 indicators. The 2020 Global Pension Index introduces new questions relating to public expenditure on pensions; ESG (environmental, social and governance) investing and support for caregivers.

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