Asia’s pension systems are slowly closing the gap in quality gap versus their global peers, but they have a lot more work to do – and asset owners can play their part in driving the process, says Janet Li, Asia wealth business leader at Mercer.

Governments should focus on adequacy of provision above all, judging by Hong Kong’s improvement this year in terms of retirement provision. The Chinese territory jumped up the ranking to 61.9 in the 2019 Melbourne Mercer Global Pension Index (MMGPI) from 56.0 last year, entering the C+ grade category, when it was C last year (see table below for this year's full rankings).

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

Hong Kong’s adequacy rating leapt to 54.5 from 39.4 last year, proving the major driver of its ranking rise, according to the data published last week.

The adequacy ratings for Malaysia and Singapore also rose substantially, to 50.5 from 45.2 and to 73.8 from 64.4, pushing up their overall index rankings (to 60.6 from 58.5 for Malaysia and to 70.8 from 70.4 for Singapore).

The adequacy rating improvements were largely down to the higher net replacement rates published by the OECD, Li told AsianInvestor. The adequacy rating incorporates factors such as benefits, system design, savings, tax support, home ownership and growth assets.

The biggest improvements in Asia’s retirement systems will probably relate to adequacy, Li noted, as various countries build out their multi-pillar pension systems and encourage more individual savings.  

For their part, state pension funds should be looking to diversify their portfolios, especially amid the current volatile markets, she said. They should conduct longer-term projections of liabilities, Li added, so they do not lose track of the big decisions affecting their long-term financial sustainability.

STAGNATING SYSTEMS

However, while Asia Pacific as a whole is narrowing the gap to the highest rated systems globally, some of the big markets seem to be making little or no progress.

Of all the improvements among schemes in the MMGPI this year, half took place in Asia Pacific, Li said. Against the 2019 global average of 59.3 out of a potentially perfect 100, Asia’s average index value was 52.1.

Yet heavyweights China, Japan and India are below the regional average, with scores of 48.7, 48.3 and 45.8. And while China – which is building out a new pension system – has posted a small improvement from 46.2 last year, Japan was flat and India was down 1.2 points.

There are things that countries can do to improve outcomes for Asia’s retirees, Hong Kong-based Li said.

One is to increase the minimum level of support for the poorest retirees, ensuring that a portion of benefits is taken as an income stream, and raising the age at older people can access their savings in line with increasing life expectancy.

Meanwhile, Li pointed to another big economy, Indonesia, as one where adequacy could still be improved greatly. The national pension scheme is less than five years old, so employees do not have much visibility or input over how their assets are allocated.

“Many employers are adopting more passive strategies for their employees with future severance-funding needs in mind,” Li said. “However, Indonesia performs strongly in the integrity sub-index, meaning those covered by the system have a good level of confidence in the system’s governance and operations.”

Indeed, Indonesia (52.2) achieved a C grade, ranking it higher than a number of D-graded systems in Asia, such as China, India, Japan and Korea.

Close to the bottom of the ranking are two newcomers to the index: the Philippines (43.7) and Thailand (39.4).

These countries’ retirement systems are still at the developing stage, Li said. “Both systems need to look at how they can better provide a higher level of support for the poorest older individuals and increase the coverage of employees in occupational pension schemes to boost the level of contributions and assets.”

VALUE OF SYSTEM IN MERCER'S GLOBAL PENSION INDEX 
(Click for full view)