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Pensions > Saudi Arabia’s unique pension equation

Saudi Arabia’s unique pension equation

Saudi Arabia 🇸🇦 has a unique pension equation: around 63% of its population are under the age of 30, while life expectancy has increased in the last two years to 78.
In other words, it means the young will have more pension benefits as they are expected to live longer.

Adding to the uniqueness of this pension equation, some of the kingdom’s assets provide good investment opportunities for pension fund overseas which seek handsome returns for ageing populations in countries like China and the United Kingdom

As Saudi Arabia 🇸🇦 adapts to meet the demands of a younger, longer-living population, securing a sustainable retirement income is more important than ever.

At The Family Office, we leverage private market investments to tailor resilient retirement portfolios that align with our clients’ retirement goals and financial needs.

مؤسس شركة The Family Office ورئيسها التنفيذي

Abdulmohsin AlOmran

Founder and CEO of The Family Office

The kingdom’s pension scheme has been reformed in recent years with retirement age of public and private sector currently standing at 65 for men and women, while contribution period for early retirement increased from 25 to 30 years.

Both the employer and the employee contribute a total of 21.5%, with the employee bearing 9.75% and the employer 11.75%. This encourages a culture of saving to prepare for future expenses.

Total employees subject to civil service rules and regulations

Source: Argaam Macro - Social Security Page

What are the two main widely used pension schemes?
Which one is riskier than the other if the subscriber doesn't seek the help of a financial or investment advisor? and why?
What’s the proper safe asset in long-term pension investment then?
(PS: Argaam doesn't provide an investment advice, but it rather offers a mind-expanding financial and investment discussion. If in doubt, you have to seek the advice of an independent financial advisor)

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What are the two common pension schemes worldwide?

1- In a defined-contribution scheme, each member pays into an account a fixed fraction of his or her earnings. These contributions are used to purchase assets, which are accumulated in the account as are the returns earned by those assets. When the pension starts, the assets in the account finance post-retirement consumption through an annuity.

2- In a defined-benefit (DB) scheme, a worker’s pension is based not on his accumulation, but on his wage history, possibly including length of services.
In a final-salary scheme, pensions are based on a person’s wage in his or her final year, or few years. The worker’s contribution is generally a fraction of his or her wage; thus the sponsor’s contribution is conceptually the endogenous variable in ensuring the scheme’s financial balance.

As the gap widens between retirement income and the cost of maintaining a desired lifestyle, independent retirement planning is now more important than ever. Discover how private market investments can help close that gap.

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Why’s the defined contribution scheme risky?

There is accumulated evidence in academic research that pension and investment risks are not properly managed within defined contributions funds.

For example, the strategies followed by the widespread target date funds start out with a portfolio that includes riskier investments, like stocks.

Each TDF has a target retirement year, like 2040. As the target date approaches, the fund gradually shifts your money into lower-risk investments, like bonds, to help you consolidate gains and avoid losses.

But this in theory. In practice, the approach reflects might lead to substantial levels of retirement income risk.

While investment in short-term bonds commands low volatility in terms of asset value, the level of pension benefits that such investment can yield is as volatile as an investment in an equity index.

In other words, investment strategies in defined contributions funds with an asset-only focus, leave beneficiaries exposed to the main investment risk in the retirement problem, which is interest rate risk.

Consequently, pension benefits remain very uncertain even towards the end of the accumulation period. This mismatch between the duration of DC funds' bond portfolios and the terms of the pension cash-flows is referred to as the duration puzzle in life-cycle investment.

What is the importance of early retirement planning, and what role do alternative assets play in a retirement portfolio? Watch Hamad Alnawyran, Head of Digital Family Office, in an exclusive interview with Argaam.

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The proper safe investment asset
(This's not a financial or investment advice. If you are in doubt, you have to seek the advice of an independent financial or investment advisor)

In accumulation, the proper safe asset is well-known to be an inflation-linked deferred annuity, designed to deliver a lifetime replacement income stream in retirement that guarantees a fixed purchasing power in terms of consumption goods (as we aren’t interested in money when we retire, but in consumption, i.e. medical services, food, clothes).

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⚠️ Why’s the defined contribution scheme risky?

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Why’s the defined contribution scheme risky?