Pension fund assets in the Middle East and North Africa could be worth $5trn by 2020, and financial analysts forecast that if institutional pension fund investors in the GCC divert just 20% of their current assets under management to the Islamic asset management sector, it could represent a $36bn boost for the industry. With its strong track record of developing new sharia-compliant financial models and its position at the heart of the GCC, Bahrain is well placed to benefit.
Research from PwC for its report titled “Asset Management 2020”, published in 2014, found that public sector pension funds in GCC countries experienced year-on-year growth of 9% to 16% from 2011 to 2012. PwC researchers expect Gulf pension fund assets will grow by 8.8% annually to reach $5trn in 2020 from a 2012 total of $2.4trn. This compares to its forecast of global growth of pension fund assets of 6.6%, reaching $56.5trn in 2020 from $39.9trn in 2012.
The report also notes that GCC asset managers control over half of the global sharia-compliant fund assets. The report’s authors noted that “Saudi Arabia and Bahrain were the main sharia fund management centres along with Malaysia. Since Islamic investors have a limited scope of portfolio products they can invest in, they look for access to other products such as mutual funds to diversify their portfolio.”
Thomson Reuters produced its first “Global Islamic Asset Management Report” in 2014. It estimates that current Islamic assets under management total $62bn, with Islamic mutual funds accounting for $46bn. It suggests that the biggest challenge for the sector is to attract more institutional investors. While conventional funds receive 70% of contributions from institutions, institutional investors account for just 20% of Islamic funds under management. The report also suggests Islamic funds could be attractive to some of those investing in socially responsible portfolios, a subsector that has grown by 500% since 1995 to total $33trn.
The Thomson Reuters report, published jointly with Lipper EMEA Research, shows that Bahrain has some catching up to do if it is to leverage its expertise in sharia-compliant finance in this segment of the industry. The report explains that 71% of total Islamic funds are concentrated in Saudi Arabia, Malaysia and Luxembourg. It estimates that pension assets in the GCC are worth $180bn, or 6% of GDP, which is significantly lower than the pension assets of developed markets, which represent over 100% of GDP.
According to the report, there are 1065 Islamic funds globally with $56bn in Islamic management assets, representing 4.7% of global Islamic assets. The distribution of these funds shows that $10.1bn are in 263 funds in Malaysia, $6.06bn are in 163 funds in Saudi Arabia and $3.4bn are in 111 funds in Luxembourg. Bahrain is one of 19 countries that together have just 91 funds worth $248m. That is equivalent to the value of Islamic assets under management in the UK or Canada. Elsewhere in the GCC, Kuwait has 26 funds with $705m in assets under management, while UAE has 12 funds with $331m in assets under management. There is scope for growth as Indonesia has shown by growing its total share of all assets under management from 6% of the total in 2010 to 18% of the total in 2013.
Pension Schemes Boost
The Thomson Reuters report suggests that while sovereign wealth funds and family offices control significant assets in GCC countries, local asset managers are not seeing the benefit, whether their focus is conventional or Islamic. It suggests private and publicly funded pension schemes could step into this space and direct some of their cash to Islamic pension products. It points out that there are well-established privately funded Islamic pension funds in Pakistan, Malaysia and Turkey, as well as newer versions in the UK and Australia.
The report suggests that a much more significant input could come from state-funded pensions schemes – should the political will be there. In GCC countries state pensions paid to national pensioners and beneficiaries are financed from the contributions made by expatriates and nationals currently in the workforce. However, as pensioners live longer this model is likely to place an increasing strain on reserves and government funds and so put more pressure on the pension funds to seek higher returns on their investments.
Planning For Retirement
In 2013, 569,999 workers in the kingdom made pension contributions, according to Social Insurance Organisation (SIO) figures. Among those paying in were 431,469 expatriate workers, 84,473 Bahraini private sector workers and 54,057 nationals in the civil sector. Funds were being paid out to 32,776 Bahraini pensioners and a further 15,258 dependants. Nationals can retire after 25 years of continuous service for the government and can also negotiate early retirement based on years of service with private sector employers. The biggest group of private sector pensioners are in the 50- to 54-year age range (2933 people), and the largest demographic group among former civil servants are aged 55-59 (3801 people). Only 6% of state employees work beyond 55 years of age. According to World Health Organisation figures, life expectancy has gone up from 73.67 years in 1999 to 75.16 years in 2011, suggesting that pensioners can expect to live longer. In fact, SIO figures show there has been a 42.15% increase in the number of pensioners living in Bahrain in the last four years, from 23,057 in 2010 to 32,776 in fourth-quarter 2013.
A survey of shareholders with more than a 5% stake in any of the equities listed on the Bahrain Bourse shows the state pension funds are among the biggest institutional investors on the exchange. Based on market capitalisation figures for April 2014, the state pension funds own shares worth BD596.68m ($1.58bn). The government’s commitment to investments in Islamic finance in the kingdom was shown by the purchase of 51% of the shares in Bahrain Islamic Bank by the SIO together with National Bank of Bahrain, which is itself majority-owned by government entities. In January 2013 the Bahrain Pension Fund Authority told Gulf Daily News its net assets were BD2.99bn ($7.89bn) in 2011, including an investment volume of BD2.7bn ($7.16bn). In April 2013 the government in Bahrain announced investments on behalf of the state’s pension funds were to be managed by Osool Asset Management, set up for this purpose. In its 2013 report on the economy, the Bahrain Economic Development Board described the move as “an investment strategy to diversify assets managed away from low-return bank deposits while minimising risks”.
One way for asset managers operating from a smaller economy such as Bahrain’s to profit from GCC funds is to use the technique described by Thomson Reuters as “passporting” to expand their potential customer base. It points out that in Europe, companies that coordinate the management of unit trusts within the EU Undertakings for Collective Investments in Transferable Securities (UCITS) have helped funds achieve scale. UCITS funds are now valued at €6.5trn versus €2.7trn in non-UCITS funds. The report notes, “The establishment of a GCC funds passport is a challenging step, but it could significantly improve the development of the Islamic funds industry.” Luxembourg has become the world’s cross-border distribution hub for investment funds, with a market share of 75%, according to the report.
Takaud Savings & Pensions
When the Kuwait Projects Company (KIPCO) decided to launch a pensions and savings company to target the MENA region in 2011, it saw opportunities in the region’s demographics and an ideal base in Bahrain. The company was looking to tap into unmet demand for low-risk, long-term pension products in the region with its new business Takaud Savings and Pensions. It cited UN estimates suggesting that the number of people over 65 in the MENA region would grow from 10.6m in 2000 to 32m in 2030 and to 70m by 2050. Takaud Savings and Pensions was licensed by the central bank. The central bank’s governor, Rasheed Mohammed Al Maraj, said he welcomed the provision of pension and long-terms savings products for the MENA region provided by a locally licensed firm. “The Central Bank of Bahrain [CBB] is supporting efforts in this area by providing a suitable environment for the growth and prosperity of these companies,” he said in a statement released by KIPCO.
Takaud Savings and Pensions began operating in Bahrain in 2013 and offers its customers both conventional and Islamic investment opportunities. Luc Mé tivier, the CEO of investment service, told OBG, “Bahrain is a fantastic base for our business; it is a well-regulated and globally respected market, and provides easy access to the GCC, as well as the wider MENA region. The CBB and the Bahrain Economic Development Board have created a conducive environment with a talented pool of financial services professionals and superb financial training facilities. Headquartering financial businesses in Bahrain is therefore a logical choice.”
Métivier also emphasised local savings. He told OBG, “Innovative solutions will have to drive GCC citizens to save. Company incentive programmes which empower their employees to save will lessen the over-reliance on the state by involving the private sector so employees can begin with only small contribution amounts.”
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