* Old-age dependency ratios in most Asia-Pacific markets will worsen between now and 2050, due to falling fertility rates and increasing longevity. In response governments have introduced defined contribution (DC) pension plans – or are planning to do so in the near future. In many cases these national DC plans are mandatory.
* Pension assets in the region are expected to increase by a 9.2% compound annual growth rate (CAGR), raising assets under management to EUR 3,116 billion by 2015, from EUR 1,407.5 billion in 2006. Strongest growth will occur in the emerging markets, at a 17.2% average CAGR.
* By 2015 Australia will see the biggest absolute increase in pension assets from EUR 606.7 billion to EUR 1,466.4 billion according to the study. The highest relative growth will occur in Taiwan, at 28.9% CAGR, China at 23.1%, and South Korea, at 22.9%.
* The dramatic trend towards funded DC plans presents major opportunities to domestic and global financial institutions active across the region. Outsourcing of asset management on the part of public pension funds is on the increase. Taken together these trends indicate that the expertise of professional asset managers will be decisive in delivering financial security to many of Asia’s future pensioners.
* With the rapid growth of DC plans across the region, individual investors are directly exposed to the financial markets, in many cases for the first time. This places a responsibility on governments and financial institutions to improve governance and financial literacy, so that individuals can make informed decisions within a secure framework. Default and lifecycle funds will play a crucial role in DC plans for individuals who are not able to make active investment decisions.
Asia-Pacific has not been spared from the near-global trend of ageing populations but inevitably the picture for this vast region is far from homogenous. Japan and Korea are among the markets with the most rapidly ageing populations in the world. Moreover Japan’s working population – the proportion of the population aged 15 to 64 – will shrink by 15% between 2005 and 2025. Hong Kong has the lowest fertility rate in the region, while China (the fourth largest global economy and third largest trading nation) faces a rapid ageing of its population in a single generation. In addition to falling fertility rates and increasing longevity there is a trend in emerging markets, for example China and India, towards urbanization due to increasing industrialization. This is weakening the historically important role of the family in the provision of informal financial security to the elderly population.
In response, the governments of the emerging markets are seeking to formalize and extend pensions coverage through reformed state schemes and new private plans.
Growth of DC pension plans essential for emerging and developing markets alike
Asia-Pacific Pensions 2007: Systems and Markets analyses trends in nine pension markets. Clearly, the dynamics of reform vary considerably between the wealthier markets with developed pensions systems (Australia, Japan, and Singapore) and the developing markets of China, India, Hong Kong, South Korea, Taiwan and Thailand.
One major trend which is evident across the region, however, is the growth of DC pension plans. Since 2000, new mandatory DC plans have been introduced for various target groups in Hong Kong, India, and Taiwan. Thailand plans to introduce a new DC plan in 2008. China, Japan and South Korea have introduced voluntary DC pension plans. In Australia and Singapore there is a long tradition of mandatory DC.
Joachim Faber, Member of the Board of Management of Allianz SE and CEO of Allianz Global Investors, says, “There are tremendous opportunities in this region for financial institutions that can deliver a wide range of services, including asset management, life and health insurance, and banking. However, institutions must recognize that with opportunity comes responsibility and governments and employers must choose providers wisely. Key issues to consider include the financial strength of the institution, as demonstrated for example by its credit rating, and its ability and capacity to engage in major national undertakings. Global expertise is essential if the Asia-Pacific region is to develop effective pension strategies for all relevant pillars – that is, state, occupational and private individual plans.
“It is also essential that financial institutions have the expertise to support government initiatives to raise awareness of the need to save more for retirement and to improve financial literacy, so that individuals can make informed choices,” Joachim Faber stresses. “The move to DC places a considerable burden on individuals, who are directly exposed to financial markets and who will rely increasingly on financial institutions to help them achieve financial security during their working lives and for their retirement or old age.”
Individual choice in DC funds is gaining in popularity in the region, he added, with options available to a greater or lesser extent in Australia, Hong Kong, India, Japan, Singapore and South Korea. “Where fund choice is offered, appropriate default and lifecycle funds will be essential for individuals who feel unable to make investment decisions,” Joachim Faber says.
Pension Reform Pressure Gauge shows Australia and Hong Kong in pole position
The report includes the Allianz Global Investors’ Pension Reform Pressure Gauge, which illustrates the ability of pension systems across Asia-Pacific to cope with demographic change. Brigitte Miksa, Head of International Pensions at Allianz Global Investors AG, observes, “The economies that have implemented reform and are best placed to cope with demographic changes are Australia and Hong Kong. Overall, India is under the most pressure to reform, and while Japan, South Korea and China have already introduced reform, they still have some way to go in order to achieve sustainable pensions for their ageing populations.”
The establishment of a pension reserve fund in China and the presence of funded or partially-funded state systems in Japan, Singapore, South Korea, Taiwan and Thailand may help to cope with the demographic challenges, she says. “Total assets in these funds were EUR 858 billion in 2006. With EUR 560 billion in assets under management, the Japanese Government Pension Investment Fund is the largest pension fund in the world and is expected to grow to EUR 1.1 trillion in 2008. The Chinese National Social Security Fund is in the accumulation phase and is likely to increase assets to EUR 97 billion over the next two decades from EUR 27.5 billion in 2006.”
Brigitte Miksa stresses, “Importantly, if these reserve funds are to succeed, they will require professional asset management and it is encouraging to see a trend towards this type of outsourcing in China, Japan, South Korea and Taiwan. Governments will increasingly look to capital market investments managed by external asset managers to achieve the returns they need.”
Harnessing global and local expertise to meet the needs of the region
“Many parts of Asia Pacific, which are facing the demographic challenges, are undergoing reforms of different phases,” Douglas Eu, CEO Asia Pacific of Allianz Global Investors, says. “In view of the demographic situation and the current pension development in Asia Pacific, Australia and Hong Kong have implemented reforms that have addressed their demographic issues.”
Douglas continues, “Markets such as Japan, South Korea and China have much room to providing sufficient pension systems for their ageing population. The professional asset management could extend more comprehensive pension options for these economies. Synergy of the global experience with the local expertise could be the resolution to the challenges in the region.”
