Asian pension systems slip versus global peers

Asia’s pension schemes have slightly lagged their global peers in terms of overall development performance this year, and many will face a tough time ahead as the market impact of Covid-19 looks set to delay urgently needed reforms.

Pension reform has become more challenging for Asia’s retirement fund systems with an even broader range of pressure points caused by the Covid-19 pandemic, as noted by US-based consultancy firm Mercer in the latest Mercer CFA Institute Global Pension Index 2020 report,  published today (October 20).

Global pension systems have suffered pressure from both operations and reform implementation, senior partner David Knox said in a media briefing. “Changes in capital markets with near-zero or negative interest rates raise significant questions about the most appropriate investment strategies for pension funds,” he said in the report, which surveyed 39 pension systems globally.

David Knox, Mercer

In Asia, many countries are continuing to face longstanding and wide-ranging changes and challenges in pension system reforms, added Janet Li, Mercer’s wealth business leader for Asia. 

“As the [Asian] region continues to see rapid shifts in demographics, with longer life expectancies and declining birth rates, retirement systems need to adapt or face growing pressure,” she told AsianInvestor.

The region’s pension funds’ index value, which measures the adequacy, sustainability, and integrity of retirement systems, averaged 52, against a global average of 59.7. Asian overall average index value in 2020 has fallen marginally to 52 compared with 2019’s 52.1, according to the report.

Among those that have seen lower values include Hong Kong and Malaysia. The report's Asian average excludes Australia. But the country has seen its index decrease too, from 75.3 in 2019 to 74.2 in 2020. That has resulted in a cut in the grading of the superannuation system from B+ to B.

The governments in Australia and Malaysia were among those that have allowed members to withdraw from their retirement funds to help cope with the financial impact of Covid-19.

“The economic recession caused by the global health crisis has led to reduced pension contributions, lower investment returns and higher government debt in most countries. Inevitably, this will impact future pensions, meaning some people will have to work longer while others will have to settle for a lower standard of living in retirement,” Knox said.

Asian systems that have shown improvements include Singapore, Japan, South Korea and Thailand. Singapore was the highest ranked Asian country, in seventh place out of 39 retirement systems globally.

JAPAN, KOREA ADAPTING QUICKLY

Janet Li, Mercer

For South Korea, the report said retirement schemes in the country “could improve portfolio diversification and thereby increase the level of growth assets".

Some of the country's more progressive pension funds are attempting to do just that. Korea’s Public Officials Benefit Association, for instance, told AsianInvestor in September that it is planning to team up with more overseas asset owners to invest in alternative assets.

The Japanese index value increased slightly from 48.3 in 2019 to 48.5 in 2020. “An improvement in the sustainability sub-index was largely offset by a reduction in the net replacement rates published by the OECD,” said the report.

As for China, an ageing society and a deep deficit have continued to slow its three-pillar pension reform. The report noted that its system could be strengthened by increasing the minimum level of support for the poorest old-aged individuals and offering more investment options to members, as this would permit them to have more exposure to growth assets.

For most Asian countries, pension system development remains at an early stage, Li said. "These governments, including Japan, have taken some active measures, and we are expecting improvements in the future.” 

NETHERLANDS FIRST; THAILAND LAST

Globally, the Netherlands and Denmark retain first and second place respectively among other countries. Meanwhile Thailand had the lowest ranking of the included countries, even though it registered an improvement in its index value.

“The Thai index value increased from 39.4 in 2019 to 40.8 in 2020 primarily due to an increase in the mandatory contributions set aside for retirement benefits,” said the report.

Formerly known as the Melbourne Mercer Global Pension Index, the Global Pension Index benchmarks retirement income systems around the world.

The overall pension index value for each system represents the weighted average of three sub-indices. The weightings used are 40% for the adequacy sub-index, 35% for the sustainability sub-index and 25% for the integrity sub-index.