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RIYADH: Saudi Arabia’s Global Pension Index score improved to 60.5 in 2024, up from 59.5 last year, driven by ongoing reforms, a new analysis showed.
According to the latest Mercer CFA Institute Global Pension Index, the Kingdom’s pension system rating upgraded to C+ from C, placing it alongside the US, the UAE, and Spain.
The index defines C+ as a system with good features but significant risks that need addressing.
Saudi Arabia’s retirement system includes an earnings-based pension and lump-sum award – while those who do not qualify for monthly payouts receive just the one-off benefit.
In July, the Kingdom raised the retirement age from 60 to 65 for both public and private sector employees, as part of a key Vision 2030 reform aimed at ensuring sustainability and improving retirees’ living conditions.
The reform also raised the required contribution period for early retirement from 25 to 30 years, a move aimed at encouraging longer workforce participation, thereby reducing the financial strain on the pension system.
Tarek Lofty, president of Mercer in India, the Middle East and Africa, said: “Saudi Arabia continues to make steady progress in reforming and enhancing its pension system and stands to benefit as more private pension options are provided to complement existing retirement programs.”
He added: “As these reforms are rolled-out, they will provide an important tool to retain talent in the Kingdom’s buoyant job market and support the wider aims of the Vision 2030 strategy by contributing to the financial well-being of its citizens.”
Saudi Arabia held its position at 28th in the index, which compares 48 pension systems globally. Its sustainability score rose to 58 from 54.9, driven by factors like increased female workforce participation, updated demographic data, and clarity on retirement arrangements.
The Kingdom ranked 20th in the sustainability sub-index but was lower in adequacy at 32nd and integrity at 42nd. Mercer highlighted that the Kingdom could improve its score by increasing support for low-income retirees and boosting labor participation among older workers.
Mercer’s ranking analyzes factors such as system design, government support, and home ownership to calculate scores in the adequacy sub-index, while the sustainability index considers elements like pension coverage, government debt, and economic growth.
The integrity sub-index evaluates regulation, governance, protection, along with communication and operating costs.
“With a youthful population and increasing labor force participation, Saudi Arabia is in an ideal position to observe the challenges that many of its global peers are facing and guide the development of its pension system accordingly,” said Claudia Maldonado, head of savings and pensions at Mercer Middle East.
Mercer also outlined several measures the Kingdom could implement to improve its overall index score, including increasing the minimum support provided to low-income seniors and raising the labor force participation rate among older individuals as life expectancies rise.
The report further noted that enhancing communication with members regarding private pension arrangements could also play a crucial role in boosting the Kingdom’s overall index score in the coming years.
A report released by the World Bank in July also lauded Saudi Arabia’s pension reforms and called it a groundbreaking development for the Middle East and North Africa region.
The international financial institution added that achieving a robust system also requires further measures including diversifying pension funds, designing adjustment mechanisms, and enhancing private savings options.
“These measures can offer greater flexibility and security, addressing the diverse needs of the population. By adopting a holistic approach that balances fiscal sustainability with social equity, countries can better protect against economic, demographic, and political risks,” said the World Bank’s blog.
It added: “Such initiatives set a precedent for forward-thinking policies that other nations can follow to enhance their social security frameworks, and Saudi Arabia, with its most recent reform, sets a great example for the rest of the region.”
Emerging trends
The Mercer report revealed that most retirement systems worldwide are increasingly moving away from defined benefit plans and shifting toward defined contribution arrangements.
“The ongoing shift to defined contribution pension plans introduces many financial planning challenges, which are falling squarely on the shoulders of tomorrow’s retirees,” said Margaret Franklin, president and CEO of CFA Institute.
She added: “DC plans require individuals to make complex financial planning decisions that may significantly impact their financial circumstances, and yet many individuals are not well prepared to manage the required decisions.”
Despite these challenges, the report noted that as people live longer, the increased flexibility and personalization offered by DC programs will be critical.
Mercer also highlighted that the concept of retirement is evolving, with many individuals gradually transitioning into retirement or rejoining the workforce in different capacities after their initial retirement.
The report pointed out that these plans also offer essential benefits to gig and contract workers, who are often excluded from traditional DB schemes.
“Significant retirement income system reforms are needed to meet the financial needs of retirees and their evolving work expectations. There is no single solution to getting retirement systems onto more solid ground,” said David Knox, lead author of the study and senior partner at Mercer.
He added: “Now is the time for governments, policymakers, the pension industry and employers to work together to ensure that older populations are treated with dignity and can maintain a lifestyle similar to what they experienced through their working years.”
The analysis noted that increasing longevity, high interest rates, and rising costs of care have placed additional pressure on government budgets to support pension programs, leading to slightly lower overall scores this year.
Global outlook
According to Mercer, the Netherlands retained the top spot in the index with an overall score of 84.8 and a grade of A, followed by Iceland and Denmark in second and third place, with scores of 83.4 and 81.6, respectively.
“The Netherlands’ pension system has continued to be the best system, as it moves from a DB structure to a more individual DC approach. The system also features strong regulations and offers participants guidance regarding their pensions,” said Mercer.
Israel secured the fourth position, while Singapore, Australia, and Finland ranked fifth, sixth, and seventh, respectively.
Norway placed eighth, followed by Chile in ninth and Sweden in tenth.
China ranked 31st on the list, while India and Japan were positioned at 48th and 36th, respectively.