GCC has an opportunity to change the retirement game

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Every year thousands of professionals relocate from Europe, North America and beyond to the Gulf, attracted by the region’s numerous career and business opportunities, talented colleagues and lifestyle benefits. The downsides of moving over are generally far outnumbered by the positives.

But one relative disadvantage of living and working is the pensions system here, with many expatriates worried about whether the region’s traditional arrangements guarantee them a secure retirement.

And there are even signs that this uncertainty is hampering official efforts to lure consultants, bankers, tech entrepreneurs and other highly-skilled workers.

A survey of more than 1,500 expatriates in Saudi Arabia, the UAE and Qatar reveals a clear appetite for reform in this area and for greater workplace savings options.

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The poll – commissioned by my company Smart – is particularly telling about attitudes towards the end of service gratuity, or EoSG, which has long been a staple in the Gulf.

Three in five of those surveyed said the EoSG system is not meeting their needs.

This one-off payment, made to foreign employees at the end of their work contract, serves as a substitute for the pension benefits that they may miss out on when working in the region. Instead, it provides a one-time monetary benefit as they conclude their contracts.

But there are fears the schemes lack comprehensive benefits, fail to provide predictable payments and are ineffective when it comes to pooling risk and financial safeguarding. An expatriate based in Saudi Arabia told our survey they wished that the EoSG could guarantee a payout “sufficient enough for retirement”.

 A survey respondent based in the UAE meanwhile called on the authorities to “create more awareness to end-beneficiaries about their rights and entitlement”.

Employees find that the system often lacks transparency and feel left in the dark about their post-employment financial health. 

“I think it is crucial to have a transparent system that clearly explains how gratuity is calculated based on years of service and salary,” one Qatar-based respondent told us.

Of those polled, 88% said they are actively prioritising retirement savings over other expenses

The current model is also problematic for many employers. It imposes uneven cashflow requirements, creating financial strain. Underfunded liabilities often lead to rapid financial adjustments that can hurt operational budgets.

The survey results make clear that reform in this area could bolster the region’s competitiveness as a work destination.

Of the expatriates polled, 88 percent said they are actively prioritising retirement savings over other expenses and 82 percent said having enough money for retirement is “very important” to them.

So, what can be done? The survey strongly suggests an appetite for “defined contribution” (DC) workplace savings models, such as those that currently prevail in the UK, Australia, Singapore, Hong Kong and elsewhere.

In DC schemes, both the employer and employee contribute a regular percentage of the employee’s salary to an individual account specifically earmarked for the employee, with the final benefit amount depending on contributions made and investment returns achieved. 

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These funded long-term savings schemes mean that contributions are invested separately from the company’s assets.

Among our poll of respondents, the absence of employee contribution options in the Gulf region was widely regarded as a significant flaw in the current system. In Qatar, several respondents called on the government to “make it compulsory for both employer and employee to contribute towards retirement funds”.

The lack of an employee contribution option was also felt in Saudi Arabia, with one expat saying it would be “very helpful” if employees could deduct a small amount from their monthly salary to be added to their end of service gratuities.

Elsewhere, there was evidence that respondents wanted to see a more professionalised and regulated pensions culture in the GCC countries. More than 90 percent of the expats polled think governments, employers, or both, should play a role in implementing and regulating their pensions.

For policymakers in the region, this isn’t as hard to accomplish as it may sound. Advances in technology, including user-friendly platforms, can simplify pension management for both employers and employees, encouraging long-term saving amongst all workers.

In fact, the GCC has a unique opportunity to leapfrog existing models and set a new global standard in retirement savings – not just to attract skilled workers from overseas, but to deliver enhanced social security across the region’s diverse workforce. 

Tim Phillips is the Middle East and Asia managing director for the global pensions fintech Smart