Retirement schemes in Asia could face funding shortfalls after pension systems in Australia, South Korea and Malaysia have allowed early withdrawals, while others in the region are under pressure to follow suit.
The ongoing Covid-19 pandemic is causing as yet untold damage to businesses across the Asia Pacific region. One immediate detrimental effect is that companies and their employees cannot afford to pay their pension contributions, which in many cases are mandatory.
The Australian and Malaysian governments are allowing investors to withdraw from their pension accounts, tax free, to help cushion the financial impact of the coronavirus.
In South Korea, one trillion won has already been withdrawn from personal pension plans, as investors utilise the money for emergency funding.
In February this year, China's premier, Li Keqiang, announced exemptions for certain enterprises from the social insurance premium, which includes the basic state pension contribution of employers.
These examples are typical of the challenges confronting governments, who are seeing their social security-based pension systems facing acute funding shortfalls. In each country, there is a tug-of-war between the needs of today and the less tangible needs of tomorrow.
JP Morgan Asset Management’s Hong Kong-based retirement strategist Wina Appleton told AsianInvestor the pandemic's effects would bring changes to retirement systems and pensions.
"We’ve seen some unprecedented situations. It’s the first time we’ve heard of Australian super scheme members being able to take out a proportion of the super fund and not have to pay tax."
The Australian early access scheme came into force on Monday (April 20) and allows people to withdraw A$10,000 from their super before June 30 and another A$10,000 from July 1 to September 24. It is intended only for the unemployed and anyone who has had a 20% drop in income or turnover as a sole trader. The government estimated that 1.5 million people would apply for the early access scheme.
"Under normal circumstances, withdrawals prior to pensionable age would face a tax liability of 22%, but now ... people can take out up to A$20,000 free of tax," Appleton explained.
The same is happening in Malaysia, where the chief executive of Malaysia’s Employees Provident Fund, Tunku Alizakri Alias, announced in late March that members could take out RM500 ($114.71) per month from their pension account. Also, the mandatory EPF contribution was originally 11% of monthly salary, but has been slashed to 7% from this month and will be cut again to 4% towards the end of this year, said Alizakri.
In Hong Kong and Singapore, governments have not resorted to changing pension contributions but have handed out cash to support people and businesses who are affected by the lockdowns.
A spokesperson for the Mandatory Provident Fund Schemes Authority (MPFA) told AsianInvestor that allowing members to make early withdrawals from their MPF on the grounds of financial difficulties, or suspension of MPF contributions, does not align with the scheme’s objective. Besides, it would involve legislation to change the rules, which would take time.
A spokesperson for the Central Provident Fund in Singapore told AsianInvestor that there were no plans to change CPF withdrawal rules at this time, "to safeguard members’ retirement".
However, pressure remains on the governments of Hong Kong and Singapore, said Appleton. "If we look to Singapore’s history, in past crises, in 2003 for example, they reduced employers’ mandatory contributions to ease business costs and save jobs,” said Appleton.
"One of the most unfortunate things is that people may not be aware that if they take out that A$20,000 today, in Australia for example, because the market has dropped 30%, they are actually withdrawing more than that by realising the loss. After 20 to 30 years that amounts to considerably less in your pension pot,” he said.
There are no figures available on current default levels on these contributory schemes. The MPFA said they had noticed an increase of non-payment notices issued, but said this was likely due to the impact on postal services amid the Covid-19 outbreak, as the majority of employers are still posting paper cheques to trustees.
"We have been reminding employers to act early and reserve sufficient time to handle MPF contributions and make use of the e-services provided by trustees to avoid delay in making contributions," said the regulator.
China has its unique challenges, because its pension market, outside the first pillar, is relatively undeveloped. The mainland’s three-pillar system reform has centred on developments for its state, occupational and private pensions.
In China, as well as contribution cuts, additional measures such as voucher schemes and a two-and-half-day weekend have been introduced to help boost private consumption. In Hubei, at the epicentre of the virus, all state-owned enterprises, irrespective of size, were exempted from making the 16% social insurance contribution, from February until June this year.
Outside of Hubei, SMEs are exempted on the same basis, while larger companies outside of Hubei, have had their payments halved.
These reductions in funding to the central system will put pressure on China's pay-as-you-go social security system, according to Zhang Howhow, partner of the global strategy group at KPMG in China.
Efforts to combat the underfunding problem in China have seen more provinces outsourcing their social security assets to the National Social Security Fund (NSSF). As of March 2019, 19 of the 31 Chinese provinces had outsourced their assets, totalling RMB 960 billion - all of it domestically invested.
The pandemic may now force the government to accelerate reforms in the second and third pillars, say industry observers.
Zhang told AsianInvestor: "Pension is a key area where there is a very clear regulatory push to develop further."
Two key and widely anticipated developments are an extension of tax subsidies of pillar two and three products that would boost participation at the employer and individual level and broaden the investment scope, said Zhang.
Look out for a second article soon, which explains how these withdrawals could impact pension fund investment portfolios and plans.