A new study by Allianz Global Investors says the Asian private pensions market today is E1.1 trillion ($1.36 trillion) but, driven by demographic changes and government reform, should grow to E2.9 trillion ($3.59 trillion) over the next four decades.

Comparing Asia with the European Union's 15 members (not including the 10 Eastern newcomers), GDP per capita rates don't differ widely compared to Japan, Australia, Hong Kong or Singapore. Taiwan and South Korean per capita GDP remains in shooting distance. Only the giants of China and India, and to an extent Thailand, have per capita GDP rates that are far below Europe's.

But this is almost inverse to the expected real growth rates in GDP for the next 10 years, with China, Thailand, Korea and Taiwan set to outpace Europe.

More worrisome for Asia, however, is that along with fast economic growth, it is also going to be subject to an unprecedented decay in its demographics. Old-age dependency ratios (that is, the ratio of 65 year-olds and older to people aged 15 to 64) are going to skyrocket in Asia.

Europe is already rather 'old', with around 1 elderly person for every 4 people of working age in countries such as Italy, Spain, Germany, France and the UK, and nearly 1 oldie for every 3 workers in Japan. Today Asia looks young, with Korea, China and Taiwan reporting only one retiree for every 10 workers. But by 2050, those numbers are expected to change dramatically. While Europe will see two elderly for every 5 workers, so will China, with its much lower per capital GDP, while Taiwan and Korea will have six or seven elderly for every 10 workers - a staggering thought.

These aging societies need pension reform, Asian and European alike, with Allianz identifying India, China and Thailand's cases as 'urgent' (along with Greece, Spain and Italy). Japan, Korea and Taiwan (and France, Germany and Sweden) will continue to face considerable pressure to reform, while the strains on Singapore, Hong Kong and Australia (and on Switzerland, Britain and Ireland) will be manageable.

Whereas Europe's main issue is curbing the generosity of its state pension systems and increasing coverage from private, funded schemes, Asian governments need to go the other way and increase pension coverage. While Japan and Australia have established classic three-pillar pension systems, others such as Hong Kong, Singapore, Korea and Taiwan are in the process of building reasonably comprehensive systems for their working populations.
This includes introducing funded systems, sometimes including mandatory occupational schemes or via defined contribution plans with fund choice. The main challenges for governments will be to improve governance and financial education, and to ensure that state pension funds enhance their investment yields and avoid shortfall risks. If successful, new systems such as Taiwan's incoming Labour Pension Act scheme could raise up to E77 billion of funded assets by 2015.

China, India and Thailand, however, have patchy systems at best, Allianz has found. India's various systems cover only about 11% of the working population, for example. The reform measures needed in these markets are more radical. China's supplementary enterprise annuities should help by putting an estimated E104 billion of assets under management by 2015, while the total AUM at the National Social Security Fund should grow from E16.5 billion today to E1 trillion by 2010.

Moreover, Japan and Australia now account for 88% of the region's E1.1 trillion of funded pension assets.

Allianz estimates that pension AUM will rise by more than 250% until 2015, with compound annual growth rates of 17% for markets other than Japan and Australia. The most exciting growth potential is in India and China, although in absolute terms Australia's share will become the biggest.

For fund managers, the government pension funds offer a major opportunity, as many of these institutions have begun outsourcing mandates. Japan's government funds have E253.7 billion of assets, while Korea, Taiwan, China and Thailand offer another E8.1 billion.