Asia in the ageing century: A new boom in retirement planning

Age and experience generally complement each other, as is the case with Australia’s large and relatively advanced retirement savings system. It is little more than two decades since the Labor government of the day introduced a compulsory superannuation guarantee for workers, resulting in one of the world’s largest retirement savings pools at more than $1.4 trillion.

Employers are required to pay a proportion of an employee’s salary and wages (which rose from 9% to 9.25% from July 1, with the aim of getting to 12% by 2020) into a superannuation fund. Individuals get tax benefits if they put additional funds into their superannuation accounts.

According to the ARC Centre of Excellence in Population Ageing Research (CEPAR) at the Australian School of Business, large parts of Asia could benefit from learning more about the size and structure of Australia’s retirement income system which, after considerable change since it was introduced in 1992, aims to encourage a self-funded retirement for a growing and ageing population.

In part two of CEPAR’s three-part Asia in the Ageing Century report, released last month, the centre identifies the provision of retirement income to a rapidly ageing population across much of East and Southeast Asia as both a challenge and an opportunity of considerable pertinence and scale.

“Australia has been looking at the issue of an ageing population for some time. It also has experience with policy design and the regulatory systems around a retirement income system which could help Asia,” says CEPAR senior research fellow and co-author of the report, Rafal Chomik.

“Given the significant social and demographic shifts taking place in the region, getting a retirement income system right could result in favourable macro-economic rebalancing of growth – where individuals can pool risks rather than save excessive precautionary amounts themselves,” he says.

Chomik notes that the ageing of the Asian population is happening much faster than in Western countries but the development of a retirement income system is in many ways still deficient compared with the West. At the same time, there is a weakening of family networks, which have traditionally provided support.

Financial services market

The CEPAR report highlights what parts of the Australian finance industry have known for some time – that the potential for leveraging off its financial services skills and expertise in the region is potentially enormous. The financial and insurance services industry in Australia sits alongside mining as the equal largest industry by gross value added, at about 10% of GDP, yet the proportion of output that is exported is a low 2%.

As the Australian Financial Centre Forum highlighted in 2009, this doesn’t take account of the thousands of Australians working in finance in the region, many of whom may one day return to Australia and add to the further development of ties with the region.

And excluded from the low export figures is the large number of Australian finance companies employing different strategies, such as the establishment of small offices offering specific services rather than risky, capital-intensive ventures. For example, AMP is helping institutional investors and pension funds while ANZ is expanding its retail presence in Asia.

In leveraging the opportunities provided by the Asian century with an investment of $7.5 billion, ANZ says its strategy is to become a ‘super regional’ bank in the Asia Pacific – that is, a bank that allows for seamless cross-border financial services and solutions for its customer base.

Wealth solutions for customers saving for, or approaching, retirement is one service on offer in the region, according to ANZ’s managing director wealth Asia, Bret Packard. In its submission to the government’s Asian century White Paper in 2012, ANZ noted that the Australian market for financial services provided limited opportunities for growth but that the opportunities for growth in Asia were large due to the region’s rising population and rapid development.

Ageing and pensions

The current estimate is for the population in Asia to increase from more than 4.2 billion people in 2010 to 5.4 billion in 2050. During the same period the median age across the continent will move from around 30 now, to 41 in 2050. This is only slightly lower than the expected median age in Australia of 42 in 2050, from 37 today.

Very different across the region are the ages at which people can access the age pension. According to CEPAR, official pension access ages in Asia average 59 for men and 57 for women. In Australia, men can access the age pension at 65 and women at 64.5, although from 2014 the pension age will be 65 for both sexes. By 2023, however, the pension age for Australians will be 67.

Few Asian countries have legislated such increases. Recent debates in China have resulted in popular condemnation of rumoured pension age increases. While no two systems in the region are the same, several countries across Asia, including China, India, Japan, Korea, The Philippines, Thailand and Vietnam, have a retirement income structure that revolves around defined benefit schemes, which pay earnings-related pensions.

They are similar to the schemes that were popular in Europe but are now being reconsidered due to large unfunded liabilities, with the situation worsening as the numbers of pension recipients outnumber contributors.

“Europe is now back-pedalling and Asian countries should start looking at a functional, sustainable design for retirement systems which take into account the demographic changes,” says Chomik.

CEPAR suggests that increasing the pension eligibility age throughout Asia – after making adjustments for life expectancy – is one possible area of reform, along with changes to the defined benefit schemes. Another option is for countries to look at the proportion of earnings that would be necessary to fund the intended level of pensions to help determine the fiscal sustainability of their existing schemes.

One example would be China, which promises to pay relatively generous replacement rates in its main, urban workers’ scheme. Its indexation is based on a combination of wages and prices, and benefits are available relatively early (age 55 for women and 60 for men).

Estimates made by the OECD show that an individual making contributions between age 20 and normal pension age would need to put away 40% of earnings to obtain the replacement rate offered by the system. It is a situation that some countries, including Korea and Japan, have already found to be unsustainable.

According to the CEPAR report, in the 1980s the Korean government set up a generous public pension plan for the elderly only to cut benefits once the realities of population ageing set in. The statutory replacement rate was reduced from 70% to 40% in two reforms. The expectation is that more benefit cuts in Korea will need to take place or contributions into the scheme will need to increase. Cuts to the rate at which pension entitlements accrue for each year of contributions have also taken place in Japan.

The development of the Australian retirement income system has not been without its own series of reforms, but it can provide lessons for the pension and insurance markets in Asia.

“A viable private pension sector requires the right set of preconditions. Experts from countries such as Australia have an opportunity to contribute to developing the region’s pension and insurance infrastructure thanks to local experience in population ageing research and policy implementation,” Chomik says.