Working Paper: Time for Asian Pension Systems to Take Center Stage
Posted on Tuesday 20th May 2014
Pension reform is critical to strengthening Asia's social safety nets for an ageing population while providing stable long-term finance for Asia's development.
In many parts of Asia, the population is ageing rapidly without sufficient pension protection.
In 2012, nearly 450 million people, or 11 per cent of Asia's population, were 60 years and over. By 2050, these numbers will more than double to 1.2 billion people, or 24 per cent of the population, not far behind projections of 27 per cent in North America and 34 per cent in Europe. Old-age dependency ratios will rise rapidly in Japan, South Korea, Greater China, Singapore and India.
Private pension funds in nine Asian economies amounted to US$663 billion or only 5.3 per cent of GDP in 2011, far below the OECD average of 70 per cent (US$30 trillion). By comparison, banking assets for these nine countries amounted to 112 per cent of GDP.
Partly because of lower interest rates, pensioners face a problem of lack of income from their financial assets (predominantly bank deposits) for adequate retirement purposes and in an aging economy, this will have long term repercussions on policies to raise domestic demand to support economic growth. For social protection and income equality reasons, developing pension and social security funds within Asia is top priority.
Pension reforms should enhance the adequacy of retirement income to widen coverage, reduce disparities between public and private sector pension schemes and ensure the long term sustainability of pension funds through sound investment strategies and good governance.
At the same time, pension funds can also significantly contribute to capital market development and also more efficient long-term resource allocation that adds to systemic financial stability. Assuming that the GDP of emerging Asian economies reaches US$29 trillion in 2030 (Sheng 2013), an increase in pension assets to 30 per cent of GDP would mean that nearly US$9 trillion of pension funds are available in the region for investment.
Because pension funds take the long view, they can contribute to long term investments in growth sectors such as infrastructure, green technology, SME financing and social enterprises. This will reduce over-reliance on bank financing that is inherently subject to the risks of maturity mismatch. Effective pension management also improves corporate governance of the enterprise sector since institutional investors will take the long view and exercise discipline against short-termism.
To enable pension funds to play an active role in financial and capital market development, Asian governments should give priority to promoting pension funds by adopting the following five major strategies in their reforms:
Maximize the coverage and the funded component of their pension systems (i.e., the defined contribution schemes) in order to supply the economy with a large pool of funds with committed long term horizons;
Deepen capital markets to provide pension fund managers with a wide range of investment options that ensure high returns on their long term investments;
Provide proactive regulatory support in terms of tax incentives for pension contributions and liberalize current restrictions on asset allocation by pension fund managers by allowing them to invest in alternative growth assets apart from bonds and equity;
Raise the level of professionalism and administrative expertise in pension fund management to maintain the trust of contributors and other stakeholders in the governance of the industry;
Foster connectivity between pension fund management and stakeholders through data availability and transparency.
The views expressed in this report are those of the author and do not necessarily reflect those of the Fung Global Institute. The author is solely responsible for any errors or omissions.