Saudi Arabia pension reform increases Global Pension Index score through retirement age extension and enhanced sustainability

Saudi Arabia pension reform efforts are making significant progress globally, with its score on the Mercer CFA Institute Global Pension Index rising to 60.5 in 2024, up from 59.5 last year. This improvement, fueled by comprehensive reforms under the Vision 2030 initiative, has led to an upgraded rating of C+, positioning the Kingdom alongside leading nations such as the United States, Spain, and the UAE.

A key component of this surge was the government’s decision in July to raise the retirement age for both public and private sector employees from 60 to 65. This change, part of a larger effort to fortify the nation’s financial infrastructure, is designed to prolong workforce participation and ensure the pension system’s long-term sustainability. Additionally, the required contribution period for early retirement was extended from 25 to 30 years, further encouraging Saudis to remain active in the workforce for longer.

Encouraging Workforce Longevity

Tarek Lotfy, president of Mercer’s Middle East, India, and Africa divisions, underscored the importance of these reforms in maintaining the Kingdom’s growing talent pool. “Saudi Arabia’s pension system is moving in the right direction,” Lotfy said. “By raising the retirement age and extending early retirement contribution requirements, the Kingdom is setting a precedent in the region for how nations can balance fiscal sustainability with the well-being of their retirees. These changes also position the country as a top destination for talent retention.”

The reforms are not just about shoring up finances; they are also about providing Saudi workers with better retirement conditions. By extending their years of service, employees have more time to build stronger pensions, allowing for a more comfortable retirement.

The Kingdom’s pension system includes both an earnings-based pension and a lump-sum award for retirees who do not qualify for monthly payouts. These new measures will likely help ensure that more Saudis enjoy greater financial security in their post-work years, reinforcing the goals of the Vision 2030 blueprint.

Rising Rankings, Room for Growth

Although Saudi Arabia’s pension system saw an overall boost, it remains ranked 28th out of the 48 pension systems reviewed worldwide. The Kingdom’s sustainability score saw the most significant rise, increasing from 54.9 to 58, largely thanks to improved female workforce participation, updated demographic information, and clearer retirement arrangements. Sustainability is now ranked 20th globally, positioning the Kingdom as a leader in this category.

However, despite the overall positive progress, Saudi Arabia ranks lower in other critical areas. Its score for adequacy, which measures how well a pension system meets the needs of the population, is ranked 32nd. Meanwhile, integrity—covering regulatory oversight, governance, and communication with retirees—sits at 42nd.

Experts say there are still clear opportunities for improvement, especially in terms of supporting low-income retirees and increasing the workforce participation rate of older employees. As life expectancy in the Kingdom continues to rise, providing robust support for seniors will be crucial.

Vision 2030 in Action

Saudi Arabia’s Vision 2030 has always been ambitious, aiming to transform the nation’s economy and societal structures. Pension reform plays a pivotal role in this transformation, ensuring that the nation can support its rapidly expanding population.

Mercer’s recommendations for further enhancing the system include offering greater financial assistance to low-income seniors and improving communication with the public regarding available pension options. This would give retirees and employees a clearer picture of their future financial stability and help the Kingdom move up the index’s adequacy and integrity rankings. Additionally, encouraging older individuals to stay in the workforce for longer will ease the strain on the pension system.

The reforms go beyond just the numbers. They reflect the government’s broader commitment to creating a balanced, sustainable social security system that can withstand future demographic and economic changes. The rise in female workforce participation, for instance, signals positive shifts in societal norms, while also contributing to the pension system’s sustainability.

Claudia Maldonado, head of savings and pensions at Mercer Middle East, believes Saudi Arabia is in a prime position to learn from the struggles of other nations. “With a young population and increasing labour force participation, Saudi Arabia has the opportunity to take a proactive approach, ensuring its pension system evolves to meet future challenges,” she said.

Regional Impact and Future Growth

Saudi Arabia’s pension reforms have not gone unnoticed beyond its borders. In a July report, the World Bank praised the Kingdom’s changes as a “groundbreaking development” for the Middle East and North Africa (MENA) region. The report highlighted Saudi Arabia as a regional leader in pension reform, offering valuable lessons for other countries looking to stabilise their social security frameworks.

According to the World Bank, to build a truly robust system, Saudi Arabia will need to diversify pension funds, introduce mechanisms for adjusting contributions and benefits, and encourage more private savings options. Such strategies would provide additional flexibility and security for a broader section of the population, better addressing the needs of an increasingly diverse society.

The Kingdom’s efforts are setting a new benchmark for forward-thinking pension policies in the region, with the potential to shape future discussions on social security. The success of these initiatives will not only protect against financial and demographic risks but also create a solid foundation for future generations.

Saudi Arabia’s ongoing reforms demonstrate its dedication to modernising its pension system and adapting to evolving workforce dynamics. While challenges remain, the Kingdom’s journey toward a sustainable, equitable pension structure is well underway, offering a model for other nations in the MENA region and beyond.