Asia’s lower social spending by governments and individuals’ declining financial dependency on their families, among other things, mean the region’s fast-ageing populations often face income insecurity when they enter retirement.
This is despite Asian pensioners entering retirement relatively cash-rich. Most pointedly, the financial wealth of all Taiwanese households is equivalent to 4.7 times its GDP, far exceeding the ratio of three times in markets such as Hong Kong, Japan and the US, according to a new report from Manulife Asset Management.
Koreans, meanwhile, enter retirement as the poorest retirees in the markets surveyed (Hong Kong, Japan, Taiwan, Singapore and South Korea), with aggregate financial wealth equal to 1.9 times GDP.
On top of this, Korean government social spending is low, at 3% of GDP, shifting the burden for retirement funding onto individual households. This may explain why labour participation among those over 65 is already one of the highest in Asia at 31%, well above Japan’s 22%.
In contrast, Hong Kong and Singapore are seen as relatively well prepared to service their future retirees, thanks in part to their pensions systems, which have coverage ratios of 56% and 68%, respectively.
However, Manulife sees risks in both markets, with each government spending 5% or less of GDP on social security. Added to this, Singapore has the most swiftly ageing population in Asia, while Hong Kong is suffering from particularly low interest rates.
But the lack of investment and planning will mean Asian pensioners as a group tend to enter retirement without a stable income to fund their future.
By contrast, US pensioners are relatively well ahead of the game, with some 50% of household financial wealth already invested in debentures, bonds, certificates of deposits and equities. Bank deposits account for less than 20% of average US household wealth.
This contrasts with the lack of diversification in Asia. More than 70% of Hong Kong and Japan household wealth is held in property and bank deposits, estimates Manulife. This means Asians will face challenges on two fronts, says the report: their monetary value eroding due to inflation and low deposit rates, and relatively lower yields from Asian property investments.
Another form of retirement income is therefore needed, says the report, pointing to the need to divest large cash holdings into equity, fixed income or asset allocation products.
Manulife says it hopes to take advantage of this trend through its multi-asset allocation products, having hired Sarah Lu in the newly created role of asset allocation for Asia last May, as reported.
Separately, Michael Dommermuth, president of Manulife Asset Management for Asia, tells AsianInvestor that since winning a cross-border investment advisory licence in Korea in August, the firm has won mandates from institutional investors there, most notably pension funds. He declined to comment in more detail, as the firm is in its quiet period.
“There is a clear interest [from Koreans] in areas such as RMB internationalisation,” says Dommermuth. “There is also a clear interest in asset allocation and our Asia fixed-income [products].”