A population bulge of young people about to enter the workforce, supported by oil wealth in many countries, is causing the Middle East state pension sector to expand.
Respondents to a survey commissioned by Invesco said they expected state pension funds in the Middle East to increase their assets by 19% this year, compared with an average forecast of 16% in last year's survey and 9% the year before that.
For the Gulf countries, much of the inflows into these pension pots are likely to come from oil and gas wealth. Respondents estimated that 15% of all new sovereign wealth assets placed in the region are going into pension funds.
This trend may see less money flow into the large investment vehicles, such as the Abu Dhabi Investment Authority, as pensions take a bigger share.
“You can see the rate of flow into the sovereign funds is declining while that going into the state pension funds is increasing,” says Nick Tolchard, head of Invesco Middle East. “The industry, rather than being very top-heavy with sovereign funds, is gradually rebalancing, with the emergence of a second tier of public pension funds.”
The development of the pension sector in the Middle East would be a significant support to the asset management firms in the region, which have so far been sustained by sovereign wealth fund money and family offices. With the exception of Saudi Arabia, the Gulf countries are not home to a large retail investment market, which has meant some asset managers have struggled to develop their businesses.
However, the Middle East countries must overcome the challenge of youth unemployment in a region where the state has tended to be the dominant employer. If the state continues to provide jobs for otherwise unemployed youths, it will put pressure on public finances as the population matures.
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