Asia’s pensions sector is set to lead the region's institutional asset growth over the next few years as governments pick up the pace on reforms to bolster retirement savings.

With the viability of current pension systems threatened by huge demographic shifts to older populations across much of Asia, governments in the region are also likely to hasten the development of a robust three-pillar pension system -- comprising private pensions as well as state handouts and company schemes.

They will also throw up more outsourcing opportunities for asset managers as pension funds look around for more cost-effective and diversified investment portfolios.

Those are the main conclusions from two industry reports published in the past week.

Overall investable institutional assets in Asia ex-Japan rose 9% year-on-year to $14.8 trillion in 2017, more than twice the growth rate seen in 2016, said a report by fund industry consultancy Cerulli titled Institutional Asset Management in Asia 2018.

But pension assets alone, which totalled $3.5 trillion at the end of 2017, led the way as they expanded by 14.1%, the report noted, anticipating further strong gains.

"We expect investable pension assets to grow by an annualised rate of 12.6% over the next four years,” Genesis Kok, lead author of the report, told AsianInvestor.

Yoon Ng, Broadridge

And a lot of that growth could come in the form of private voluntary pensions, the so-called third pillar, fintech solutions provider Broadridge said in a release last week.

“While personal retirement multi-asset funds such as lifecycle and target date funds are still relatively new to Asia, active regulatory measures to promote individual defined contribution (DC) savings have encouraged growth in recent years,” it said.

Growth in third-pillar pension savings is likely to further benefit external fund managers as new and more effective investment products are sought, Yoon Ng, director of Asia-Pacific insights at Broadridge, told AsianInvestor.

As of 2017, about 44% of pension assets in Asia  were estimated to be outsourced to third-party managers, she said. 

TRENDS TO WATCH

Ng highlighted a few other trends she expects to see in Asia: for a start, she believes Asian pension funds will slowly gravitate towards cash flow-driven investments and away from liability-driven investments, similar to what is happening in Europe currently.

“Asia is not quite there yet but, over the coming years, contributions [to pension funds] are expected to slow down relative to their payouts. It makes sense for them to adopt a more cash-driven model,” she said, noting that it will affect the way fund products and schemes are designed and managed.

Another trend to watch among pension funds, she said, are growing efforts to reduce volatility in their investments while enhancing risk management.

How costly it is to manage investments will also become more important for pension funds as returns are expected to trend lower over the next decade, Yoon added.

The search for lower-cost investments, along with the need for international diversification is already driving demand for products such as exchange-traded funds (ETFs), for instance.

BlackRock, one of the world's largest ETF providers, drew in net new capital inflows of $2.5 billion from Asia-Pacific pension funds in the year to September, Geir Espeskog, Apac head of distribution for ishares at BlackRock told AsianInvestor.

"A majority of the inflows went to global, European and US equities highlighting the fact that pension funds are adopting ETFs for international diversification," he said.

Espeskog added that Thailand, Taiwan, Korea, Australia, Japan and Singapore were among the region's biggest sources of institutional ETF demand. 

MARKET POTENTIAL

Broadridge’s Ng identified China and Korea as the fastest growing markets for outsourcing to both local and foreign managers as pension funds there seek to cast a wider net for their investments.

In China, for instance, a pilot scheme that offers tax incentives for insurance endowment products in Shanghai, Fujian and Suzhou, is a step toward developing the private pensions space; authorities have also given the nod for a number of asset managers to launch target-date funds.

Geir Espeskog, BlackRock

Korean institutions such as Korea Teachers' Pension Fund and Public Officials Benefit Association are also increasingly eyeing overseas and alt investments as they face poor investment returns in local equity and bond markets. 

But other markets offer considerable potential too.

In Japan, for instance, a favourable regulatory regime to foster individual DC schemes has prompted fund managers to launch more funds.

Diversification away from bonds by institutions in Japan, led by the $1.3 trillion Government Pension Investment Fund (GPIF), the world's largest pension fund, is making the market more accessible for foreign managers, noted the Cerulli report. 

Taiwan’s retirement space also offers several opportunities to managers, Cerulli said, with the Bureau of Labour Funds being the main source of mandates.

Consultants at Cerulli also expect more activity in Hong Kong’s retirement segment, particularly by the Mandatory Provident Fund, as the government considers new initiatives to prepare an ageing population for retirement.

“A relatively large proportion of assets under the new public annuity scheme is likely to be invested in alternatives, for higher and more stable returns,” it said in its report.