Profitability in Asia ex-Japan's $747 billion pension sector is poor, compared with the region's retail sector, and will take some time to improve. But reform is gradually gaining pace, and North Asian markets in particular present a significant long-term asset-gathering opportunity.

Thus concludes a report published Friday by US research firm Cerulli Associates, Asia Pensions: An Emerging Opportunity. Nonetheless, it also advises firms to evaluate carefully the state of their business in Asia before committing further resources to the sector, given its developmental stage. (Other entities, such as the OECD and World Bank, have noted the challenges facing the region in this area.) 

Much of Asia will age dramatically in the next few decades. In Asia ex-Japan, nearly one-fifth of the population will be over 65 by 2050, up from 6.3% in 2005. That means governments must boost retirement-savings and pension-fund performance, indicating a growing role for professional fund management and overseas exposure, says Cerulli. Indeed, Investment consultant Mercer last year launched a pilot index  judging pension systems' ability to support ageing populations.

North Asia accounted for 58% of Asia ex-Japan's investable pension assets in 2008. The report forecasts that investable Asia ex-Japan pension assets will grow by 55% between 2009 and 2013, to around $1.15 trillion, with North Asia retaining its dominant position. Asia's outlook compares favourably with 28% estimated growth in investable assets in the US between 2009 and 2013, and 30% growth in Europe.

Moreover, the pool of 'addressable assets' in Asia ex-Japan is forecast to increase by nearly 75% between 2009 and 2013 to $370.3 billion, with China accounting for $130 billion, over a third of the total, followed by Hong Kong, South Korea and Taiwan.

Some 88% of addressable assets will be in North Asia over the forecast period. About 40% of investable North Asian assets were addressable in 2009, compared with a figure of just 8.4% for Southeast Asia.

Mandates from state-pension reserve funds with individual member accounts represent most of the current opportunities, says Cerulli. Total investable assets in South Korea's dominant retirement fund, the National Pension Service, amounted to $225.6 billion as of June 30, equivalent to 93% of the country's total investable pension assets.

Wholly privately managed, defined-contribution-based pillar-two occupational pension schemes using individual accounts and mutual funds are developing, but have some way to go to achieve Western levels of coverage, assets and profitability.

Nevertheless, managers must invest time and money now, and accept low profitability, if they want to make the most of the Asia ex-Japan pension opportunity as it matures over the long term, says the report.

Pension-sector asset gathering, focused on North Asia, must be one element of a wider institutional book, as the region's retirement marketplace is too immature to sustain a stand-alone strategy, adds Cerulli.

Although North Asia provides the biggest and most obvious opportunity for asset managers, South Asia also offers interesting possibilities.

Assets of the Central Provident Fund (CPF), which dominates Singapore's retirement sector, have grown steadily at 8% annually from 2004 to $114 billion as of June 30. Mutual funds are permissible investments for a portion of CPF assets, but accessing the platform is difficult, says the report.

Outside Singapore, Malaysia's Employees Provident Fund was worth $103 billion in June, Thailand's overall investable pension assets amounted to $45 billion, Indonesia's amounted to $22 billion in 2008, and in the Philippines, overall retirement assets were worth $15.5 billion in 2008, up 27% from 2005.