Interview: Zakareya Sultan Al Abbasi

Has the SIO adapted its allocation and diversification strategies to account for the economic crisis?

ZAKAREYA SULTAN AL ABBASI: In light of the recent global economic developments, Bahrain has made key changes to the system of managing and investing the state’s pension funds. The organisations responsible for the management of pension funds – namely the Pension Fund Commission and the General Organisation of Social Insurance – were merged to form the SIO. This merger was made to improve and enhance the funds’ performance. More specifically, the SIO established two completely independent companies: SIO Properties Management, which performs real estate business (including buying and selling property, development and management) and SIO Asset Management, which deals in financial instruments trading.

SIO has always been committed to pursuing investment policies that ensure the diversification of its investment profile, both in terms of geography and the various asset classes; deposits, shares and real estate. Although there is always risk associated with any investment, SIO’s diversification and risk control policies have always reduced the extent of such risks.

The SIO will be partnering with a specialised consultancy firm to provide assistance in formulating a new investment strategy, including its make-up and geographic diversification, in light of the current international financial and economic conditions.

There is no doubt that the SIO’s investment return is an essential element to protecting the pension fund’s assets against inflation. It is also essential in order to counteract actuarial deficit, where assets are not sufficient to meet the fund’s long-term liabilities.

What is the extent of regulations governing pension funds and what safeguards are in place?

AL ABBASI: In terms of regulatory oversight, the SIO’s asset management arm is under the supervision of the Central Bank of Bahrain and its rulebook pertaining to dealing in financial instruments. Recent revisions to the rulebook have focused on improving transparency and increasing the independence of directorships.

Solvency of pension funds is an important issue on the national scale, due to its direct impact on a large portion of the population, especially considering the pension system is based on defined benefits. In this system, the fund is expected to provide pension payments based on a predefined benefit calculation factor, regardless of the amount paid by the subscribers or the investment performance of the fund.

The government has paid a lot of attention to pension funds, and is providing continuous support and is helping cover the costs of the pension benefits that were recently introduced. This new support equals approximately 50% of the total governmental obligations as an employer of public service workers.

Many pension funds around the world are suffering from financial difficulties, and are therefore implementing various kinds of reforms. These reforms may be traditional, such as increasing subscription rates, decreasing benefits or setting conditions to limit wasting the fund’s money. Another common reform method is to increase the retirement age in order to account for the changes in average life expectancy that have resulted from improved medical care.

On the other hand, there are some radical reforms to be considered as well, which would seek to alter the traditional framework of pension fund management. One such reform is to move to a system based on defined contributions. This approach would create personal accounts for subscribers, with benefits allocated based on the total amount that the individual contributes to their account over their lifetime.

The pension system in Bahrain is not isolated from global challenges and difficulties. Studies carried out on the financial positions of the funds highlighted that they need reformation to settle the actuarial deficit. The SIO is handling this issue as a priority in order to reduce potential negative effects, as any delay in facing this issue may make the changes more dramatic.