The largest retirement funds in the Netherlands and South Korea have formed a landmark partnership to focus on real asset mega-deals. Their investment heads tell AsianInvestor why.
As part of its 20th anniversary edition, AsianInvestor has targeted five key areas that investors will need to prioritise over the coming decade. Below, we offer an analysis on the impact of demographic change on the region's asset owners in the years to 2030.
The impact of the Covid-19 pandemic virus have been broad. When it comes to Asia's institutional investors, it's sharply curtailed their ability to secure high rates of fixed income return, courtesy of countries conducting emergency bouts of interest rate cuts.
With retirement-affiliated asset owners facing diminished returns, they have little choice but to turn to alternative assets to try and secure better returns.
“The low yield environment has forced both pension funds and life insurers to explore alternative asset classes,” said Cameron Jovanovic, head of global retirement propositions at Allianz.
The region’s pension funds already invest in some private equity and real estate, but Paul Sandhu, head of Asia multi-asset solutions for BNP Paribas Asset Management, predicted that they will also weigh more possibilities in a variety of private or alternative assets. These include: infrastructure debt, multi-asset solutions that balance liquid assets and illiquid assets, alpha strategies (strategies that focus on taking out the beta risks and controlling the alpha components) and quant-driven strategies.
“At times the riskiest thing you can do is not take any investment risk … And most of the global markets have seen that using traditional strategies only is not going to get you [to your desired rate of return],” he said.
Indeed, Taiwan’s Bureau of Labor Funds (BLF) is mulling two global investment mandates respectively targeting infrastructure and multi-asset by the end of this year. Alternatives now make up 11% of its biggest fund under management, while the target level should be 13%, Liu Li-ju, BLF’s deputy director general, told AsianInvestor.
Another development that would help would be deeper domestic capital markets, with a wider range of instruments and assets. Healthy pension funds need some financial market reforms to support their investing, Sandhu noted.
LONGER WORK LIFE
Alternative investing alone will not solve the pension funding gap. Governments around Asia have to face an unpleasant reality: if they don’t raise the retirement age they will run out of money.
The simple truth is that people are set to keep on living longer. The life expectancy of men and women in Asia are predicted to respectively increase to 82.5 and 84.9 by 2050, versus 80.2 and 82.8 today, according to a recent Allianz report. People aged 65 or above constitute 8.59% of the Asian population in 2019; this is set to rise to 18.05% by 2050, according to United Nations data shows (see chart).
That means the ratio of working life (in which payments are made) versus retirement (in which they are withdrawn) will keep dropping. Raising the retirement age would help offset that and extend the sustainability of pension systems.
“It’s not possible to spend the last-third of your adult life in retirement in societies with demographics and economics that we have now. People should be productively engaged longer, and this is a big part of the solution,” Jackson said.
“Our birth rate is declining. Our population is ageing rapidly. People are living longer lives. When we face these three situations at the same time, it’s impossible that we don’t change anything,” Liu of BLF said.
The very idea of postponing retirement is a political taboo in many countries, but politicians will have to start talking about it if governments are to avoid serious social and financial problems.
“If retirees do not have enough pension savings, they will need government support. And ultimately where the money comes from? They will be from the working population, through taxation. There are no other magic ways of paying those debts. The working population will shoulder more and more of the burden,” said Li of Mercer.
The exact means of tackling this problem will vary by country. But measures such as linking the statutory retirement age to gains in life expectancy are likely to rise in importance, said Michaela Grimm, a senior economist at Allianz.
Asia’s pension funds should improve their own investing habits, while governments will need to bite the bullet and gradually raise retirement ages.
That will lead to some difficult conversations, but it’s not a catastrophe – yet. Delay another decade, however, disaster will loom large.
This article was adapted from a feature that looked at the need of asset owners to raise returns, given aging populations and diminishing returns. It featured in the 20th anniversary, Summer 2020 edition of AsianInvestor.
Gam loses Asia intermediary sales head; Schroders hires in private bank sales; Somerset Capital poaches China duo from Dymon; RBC Wealth hires two fixed income experts; HSBC PB raids Citi for Apac credit advisory head; ESR adds investment manager in Shanghai; Omfif names new Apac head; TMF names China/Taiwan fund services head and more.
Amid global growth in fixed income ETFs, RMB bond index funds have shown rapid growth in the past three years. By the end of June 2020, there were 133 domestic bond index funds with a total value of ¥455.5 bn in China - 23 times greater than in 2018 - and 27 overseas-listed RMB bond ETFs with a total value of ¥53.6 bn, 99% of which comprised Chinese government bonds and policy bank bond ETFs.
Korea's sovereign wealth fund is working to balance out risk factors in its portfolio and taking a flexible approach in ESG investments, it revealed in a webinar hosted by AsianInvestor.
Regional investors were more bullish than their global counterparts in October, although they remain overall cautious, according to the State Street Investor Confidence index.