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Providing for Asia’s ageing population
For Asia, an ageing population poses challenges
Bayani S Cruz 20 Sep 2017
The Asian Development Bank (ADB) forecasts Asia’s elderly population will reach 923 million in just 33 years. The region is facing a rapidly ageing populace that can adversely impact economic growth as well as social and political stability.
 
China, in particular, is facing a big wave of retirees in the next 15 years, says Mark O’Reilly, senior advisor at Deloitte China at The Asset forum, “Providing for Asia’s ageing population”. “That’s going to have a profound effect on economics and financial management.”
 
Pension schemes in Asia are partly the solution, but the challenge is becoming increasingly complicated. “What we have are systems throughout the region that are relatively generous, first-pillar social security pension schemes by historical local standards,” says Michael Falcon, CEO Asia-Pacific, J.P. Morgan Asset Management.
 
 “In the past 20 years, these first-pillar pension schemes may have been suitable for countries with young populations who are generally poor. But what’s happened across the region for the last 20-30 years is something that we have never experienced before. We have rapidly ageing populations and at the same time we have rapidly increasing standards of living,” says Falcon.
 
Given Asia’s diverse population, taking a cookie-cutter approach to the ageing problem can only compound the challenge. Asia represents different demographics. Asia’s largest economies – Japan and China – are home to a huge population of old people compared to the youth that dominate Indonesia and the Philippines.
 
Current pension systems are weighed down by the reality that they are unable to cope with rising living standards as the population ages.
 
In the past, the traditional practice had been for employers to pony up the cash with the promise of a set payout for when an employee retires. This is also known as a defined benefit (DB) scheme.
 
More corporates are realizing that such a scheme is unsustainable and insufficient to address people’s needs as they age. Thus, the trend now is toward defined contribution (DC) plans that require employees to also put in their own money.
 
Increasingly, governments and corporations are recognizing the need to empower individuals to take control of their future and retirement.
 
Asia has a long way to go as far as making individuals realize the big responsibility of taking care of one’s  own future.
 
“In recent years, we’ve seen a trend that is definitely a move toward defined contribution. The government is also trying to encourage individuals to take more responsibility to take care of saving for their own retirement,” says Billy Wong, country business leader, wealth, Hong Kong, China, Korea, for Mercer.
 
Asia is facing serious challenges in providing for its ageing people. But the solution requires education and a change of mindset in societies in the region.
 
“There is a serious lack of knowledge among the population in Asia about the need for individual workers and employees to plan for their own retirement,” says David Shaw, founder and managing director, Indigo Global Ltd.
 
“If you’re an employee on a DC scheme, it (saving for retirement) is up to you. That’s your responsibility. I don’t think the government and the private sector have really brought that message down to employees. People need to understand what the outcome will be if they don’t save for their own retirement,” says Shaw.
 
As people live longer and better lives in Asia, much is demanded of them. Many of them may work beyond their retiring ages of 55 or 60 and saving up for retirement comes early in their work lives.
 
Meanwhile, businesses will need to adapt to an evolving workforce where more employees will be working past their retirement age, and others, to be employable, will need flexible work arrangements.
 
In China, diversification and internationalization of its capital markets should help in beefing up funds for retirement. “The capital markets have run into big problems during the global financial crisis (GFC). But after the GFC all these asset classes’ returns are really low because of the market environment. The shortage of investment expertise in Asia will make good pension fund returns harder to achieve,” says Heman Wong, former executive director, Hospital Authority Provident Fund.
 
Experts agree that Asian markets need structurally sound investment platforms and a variety of solid investment products to enhance the region’s savings. The market requires default options, portfolio diversification and rebalancing, risk management, as well as enhanced transparency, they note. To maximize efficiencies of investments amid volatile markets, funds should also consider outcome-oriented investing, active and passive management, and the use of smart beta.
 
“On pensions, we have to see two sides of the coin. There is the design and there is the financing. We have to look at these things, do them separately and then combine them. Then of course, there are government benefits, there are client sector benefits, and there might be very big differences as to the relative importance of these things,” says Stuart Leckie, chairman at Stirling Finance Ltd and founding chairman of Hong Kong Retirement Schemes Association.
 
Asia also needs a strong investor education programme that will build people’s skills for enhancing retirement savings. “I think there is a huge gap in awareness on the seriousness of the issue and the two groups of people who are responsible for making the decision – the government and the people. The government has been passing it to the pension fund industry, saying it’s your responsibility now. But the people are quite unaware of the challenge that they are facing. As with those with DCs, there are all sorts of choices now,” says Heman Wong.
 
The big shift
There is an ongoing discussion among experts on the benefits of annuities, which involve spreading out the payment of retirement benefits over the lifetime of the retiree, versus a lump sum payment. The lump sum payment is currently favoured by Hong Kong’s Mandatory Provident Fund (MPF), while Singapore’s Central Provident Fund (CPF) contains a compulsory element of annuity.
 
Among Asian investors, there is heavy reliance on real estate in boosting their investment portfolio. Their investments are sometimes limited to just property.
 
“In the case of property, it is a short-term mindset. Capital gains are easier to achieve and makes them more money than using their own efforts or skills to build their savings. Of course with the low returns or the higher fees that we see in this part of the world, it is a challenge for them or turns them off to really make an effort in saving for their retirement,” says Philip Tso, head of investment, Willis Towers Watson.
 
Essentially there is a need to educate prospective retirees on the investment options available and wean them off of traditional single-asset investments like real estate.
 
Moreover, pension reforms are needed in Asia. While most Asian countries have Pillar 1 or a state-run pension system that offers basic coverage, countries like Hong Kong and Singapore have Pillar 2 –  a funded system that employers and members pay into including private DB and DC schemes. There is also scope for Pillar 3, which refers to voluntary private funded schemes, including individual savings plans, annuities, and insurance.   
 
Experts agree that the last two schemes require both government and private sector support. While there are certain limits as to what investor education can do in terms of changing people’s mindsets, mandatory measures from the government can be effective in forcing individuals to face the realities of retirement.
 
Re-orienting portfolios from product pushing to providing good investment advice and achieving a more focused outcome are what’s needed from the investment community, say experts.
 
“Right now we see very little modern portfolio construction or risk analysis overall in terms of volatility sequence of return and management of an outcome relative to inflation and income generation for people within retirement. I think that’s probably the biggest shift we’re going to see over the coming 10 years,” says Falcon.
 
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