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Last week, the US Federal Reserve set interest rates at near zero, or 0.25 per cent to be precise, and which will add further complications to the Gulf’s financial services industry. This includes pension funds given their reliance on deposits, whose returns do not cover inflation rates and which translates into a decline in real values.
Three years ago, we indicated this might happen and warned about the need to diversify the investment portfolios of pension funds so as not to be exposed to such crises. In fact, this approach has been adopted since 2017 by Kuwait’s Public Institution for Social Security, which helped it achieve great success in the recent past.
However, the fund management strategies vary between institutions in the GCC, including in the calculation of retirement benefits and the extent of their connect with inflation movements.
Recently, the pension regime was amended in some GCC countries by abolishing the stipulated 3 per cent annual increase, which was a unique feature. In most pension funding regimes, those who receive 300 units get an annual increase of 9 units, while those receiving a pension salary of 3,000 receive an annual increase of 90 units, which constitutes a major imbalance and leading to unfair distribution.
Meanwhile, the Gulf system estimates a fixed increase of 30 units every three years equally for all, regardless of the pension amount, which is a fairer system. In addition, there is a third pension system that makes provisions for annual increases over many years after calculating the inflation based on an official decree.
Away from cash
The investment scenario within the Gulf’s pension management institutions will deteriorate as new deposits drop off. This requires accelerating the process of taking on a more diversified investment policy while moving as far away as possible from cash-based assets, as the experience by Kuwait’s Public Institution for Social Security has proved in the past three years.
After being subjected to costly frauds, a new management adopted a new policy of diversifying assets and reduced cash available for investments to 11.5 per cent by the end of June 2020, from 37.2 per cent at the end of March 2017. The target is to reduce that to 4 per cent by the end of March 2021.
This policy led to achieving profits of $7.34 billion from April to June, thereby raising the institution’s total assets to $113 billion despite the repercussions of the COVID-19 pandemic and the decline in oil prices.
This fruitful experience must be transferred to other Gulf pension and social insurance institutions. Utilising this experience will contribute to solving many difficulties as well as avoiding problems resulting from asset value fluctuations. This is also because cash deposits are no longer feasible with their returns almost zero, leading to permanent deficits and possibly to bankruptcies.
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