Bahrain’s Social Insurance – Part 3: Complete Overhaul
In our previous articles, we listed the main reasons behind the deficit being faced by Bahrain’s Social Insurance Organization and we also reviewed the solutions being discussed by the Shura Council and Parliament. In this article, we are going to propose alternatives that could potentially resolve the issues faced by the Pension Fund once and for all.
The alternatives we are going to propose are inspired by experiences of other pension funds from different parts of the world, however, it is important to highlight that these are merely ideas that need to be validated by a detailed actuarial study.
Alternative 1: Contribution Brackets
Currently, contributions are fixed at 18% regardless of the salary, 12% coming from the employer and 8% from the employee. What if contributions were set at different rates according to the employee’s salary? In other words, the higher the salary, the higher the contribution that will have to be paid.
Alternative 2: Copy the Chinese
In China, there is no such thing as a fixed contribution rate for their pension fund. Instead, each year, the pension fund calculates the amount of pension salaries that will have to be paid and a pension contribution rate is calculated accordingly. This ensures that contributions will always cover the pension obligations that the fund has to meet.
Alternative 3: The Benefits Menu
The pension benefits in Bahrain, and indeed in the GCC, are very generous. Pension salaries do not cease by the passing away of the pensioner. In fact, pension payments are still made to widows and widowers, children up to the age of 21, children in full time education to the age of 26, children unable to earn a living, daughters that are unwed, fathers that were dependant on their deceased child, mothers that are divorced or widowed, brothers to the age of 21, sisters if unwed, and even grandchildren if their father is deceased. This adds multiple new dimensions to the pension plan which would make it difficult to forecast a viable contribution rate.
On the other hand, in case the employee was given the option of selecting the benefits that he wishes to extend to his family and in return set a contribution rate for himself according to these benefits, this would take the load off the pension fund and possible even the employee. A participant who is an only child for instance would not need to have the benefit of pension payments made to his brother or sister and conversely, would not need to pay the additional percentage of contribution affiliated with extending such a benefit.
Bahrain’s SIO is in a difficult predicament, however, it is one that can be resolved with a strong will and sound actuarial advice. We find that both the Parliament and the Shura Council are acting with haste, probably too quickly if their intention is to resolve the issues faced by the pension fund from the root cause. Perhaps the best advise that can be extended to the respectable MPs and Shura Council members is to hire actuaries to conduct multiple independent studies and come up with recommendations to help them wade through the difficult decisions that they will need to make. Until then, we can be sure that any recommendation made regarding this matter will only postpone an inevitable crisis or even worse, create a new one in a different segment of the economy.
Munther Al-Arayedh, MBA, CPA
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