Guest Comment: DC around the globe

The 3rd Middle East & North Africa (MENA) Pensions Conference was held on 31 October 2018 in Bahrain.

This year it was focusing on defined contribution (DC). This might not seem like anything radical in the UK. But in this region defined benefit (DB) reigns. I was asked to come along to talk from PASA’s perspective on how DC operations (administration) is just as vital to a good outcome as high-quality investments. And so, my very swift journey to Bahrain began.

It seems no matter what part of the globe we come from, we have the same issues. An ageing population and fewer young people who can fund a DB PAYG system. There’s no OECD data on the Middle East region, but it’s accepted the countries’ demographics are younger than in the west – so they have more time to make the change. . . if they can find the will.

In Bahrain people contribute 6 per cent of their pay to a pension, which they can draw after 20 years at age 45 and receive 50 per cent of their final pay. That’s on top of no tax whilst they are working. Here we have adequacy, but sustainability is in question. Plus, not everyone is registered because they aren’t eligible. This end of service promise is governed by civil codes and applicable law – with caveats of course.

The other disadvantage for the region is state pensions only cover citizens, ex-pats get nothing. If you’re like me you think of ex-pats as high earners in senior positions, think again. Many of the countless shop workers are ex-pats, as are the construction workers who build the fabulous iconic buildings. Their tenure in the region averages four years. Citizenship is granted after 25.

There may be a need to make the move to DC, but there doesn’t seem to be much desire to give this up from the citizens. Neither does there seem to be the desire from the Central Bank of Bahrain (CBB) to introduce the kind of regulatory support that DC needs. Overall the view was you can’t replace a DB state pension with DC, but you can have DC as a complementary arrangement – a top up to a smaller state DB pension. The regulatory infrastructure is in its infancy. If you think late 80s early 90s in the UK, then maybe you’d be close - just. It needs a mature private sector to motivate the change. There were also some very familiar global names at the conference looking to help with this development.

We discussed the same issues there as we do at home – what does ‘pensions’ mean? Does retirement matter to the young? What is sustainable? What is adequate? Something I’d not thought of before was the impact of retirement age on the poorest in society. Whilst state pensions generally deliver a better replacement ratio for the lower paid, I’d not really thought about higher retirement ages. Of course, it’s obvious when you do think about it. The poor and those with low educational achievements tend to have lower life expectancies. So, raising the retirement age actually punishes these sections of society.

There is an opportunity for the emerging DC pensions arenas in the fourth industrial revolution – technology, the gig economy and platforms. They don’t need to start as we did with paper, mainframes and then spreadsheets before we had the technology to enable good pensions administration. There was talk of the Facebook generation, people want more of a say in how their pensions are invested and want to feel good about how they invest. Technology can support this. Financial literacy issues are the same the world over, but technology can help. The view was every pension must be operationally efficient and rely on technology to enable the multi-channel engagement, such a diverse workforce needs – does that sound familiar? It did to me!

I was fascinated by the experience of PinBox, an organisation which has created the first pension solution for non-salaried people in India, which has now reached out to Rwanda and Ghana. Through working with government, PinBox has created a system where people can on-board to a pension scheme in 1 ½ minutes. Something that would have taken six weeks before. There is talk of FinTech bringing pension systems together, building the middleware that allows a person to engage with a pension regardless of where they are. And the potential for BlockChain to support the cybersecurity issues that such a complex system could entail.

It seems that no matter where we are in the world, we are all trying to solve the puzzle of how to deliver an income to people when they are no longer working by the most efficient means possible.

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