UAE, Saudi Arabia improve scores in Mercer CFA Institute Global Pension Index
UAE's retirement income system improved its score, ranking 25th globally among countries with robust pension systems such as the United States, Singapore and France in the 14th annual Mercer CFA Institute Global Pension Index (MCGPI). This is the second year UAE has been included in the report. Included in the index for a fifth year, the pension system of Saudi Arabia ranked 27th out of 44 retirement systems in the MCGPI. The Index uses a weighted average of the sub-indices of adequacy, sustainability and integrity.
The UAE had an overall index score of 61.8. Its overall index value improved from 59.6 in 2021 to 61.8 in 2022, jumping from C to C+. The country scored 63.8 (27th globally) in adequacy, driven by the country’s retirement benefits with suitable minimum pensions relative to earnings. Positive scores around sustainability are driven by the high labour force participation rate, especially for individuals over the age of 55 and due to the sound structure of a funded pension system with mandatory contributions set aside for the retirement benefit, with a score of 51.9 (25th globally). The country’s highest score was awarded for the integrity of its pension systems, 72.6 (26th globally), supported by the overall high degree of governance structure.
Overall, the UAE has put in place a sound structure for a funded pension system for Emiratis with both the public and private sectors setting aside mandatory contributions during an employee’s tenure.
The UAE’s retirement income system comprises a minimum state pension and a national employment-based scheme administered by the Abu Dhabi Pension fund (ADPF), the Sharjah Social Security Fund (SSSF), and the General Pensions and Social Security Authority (GPSSA) for the rest of the Emirates. Emiratis contribute 5 per cent of their salary, and employers contribute 12.5 –15 per cent of an employee’s salary, with benefits guaranteed by the government.
As the country continues to ramp up its effort to attract and retain talent, the UAE also recently announced the launch of a new mandatory unemployment insurance scheme, which is applicable for both public and private sector employees, with the mandate to help both Emirati and foreign employees receive compensation of up to 60 per cent of their previous salary for three months if they lose their jobs. Furthermore, the recently launched ‘Golden Pension’ scheme is aimed at helping private-sector foreign employees invest their end-of-service benefits as well as support employers to fund their end-of-service financial commitments
MCGPI has, however, identified key areas that may be improved to continue to retain and build on UAE’s ranking. Factors include introducing a minimum access age to ensure benefits from pension plans are preserved for retirement purposes. As life expectancy is on the rise, leading to more people in retirement, increasing the state pension age may also help relieving some of the burden on the state pension. Furthermore, increasing investment towards educating and promoting a savings culture in the UAE amongst locals, will help address the lack of planning for a life of retirement,
Saudi Arabia had an overall index score of 59.2. Saudi Arabia’s overall index value improved from 58.1 in 2021 to 59.2 in 2022, primarily due to an increase in its sustainability score which went from 50.9 to 54.3. The country scored 61.4 (30th globally) in adequacy, driven by the Kingdom’s healthy pension replacement ratio and net household savings rate. Strong mandatory contributions set aside for retirement benefits have helped improve the sustainability of the system, with a score of 54.3 (20th globally). The country scored the highest for integrity, 62.5 (36th globally), supported by the overall high degree of governance structure around the pension system in the Kingdom.
The sustainability of the Kingdom’s pension system has been bolstered in recent years due to an increased labour force participation rate, with the number of women with jobs nearly doubling in the last five years, and by the mandatory contributions set aside for retirement benefits as a percentage of annual compensation by both employee and employer. Despite the improvement, the study suggests further increasing the state pension age over time to strengthen its sustainability.
The study revealed a few key areas that require development in the country’s pension system, including increasing the minimum level of support provided to the poorest aged individuals, further increasing the state pension age over time and increasing the labour force participation rate at older ages. The study called for encouraging higher levels of private saving, both within and beyond the pension system, to reduce the future dependence on the public pension, while also adjusting the expectations of many workers.
Globally, Iceland was top, followed by the Netherlands, while Thailand ranked last. This year’s MCGPI also features Portugal as a new addition.
The MCGPI is a comprehensive study of 44 global pension systems, accounting for 65 percent of the world’s population. It benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would help provide more adequate and sustainable retirement benefits.