Asian pension funds are lagging behind global peers in alternative asset allocations and should ramp these exposures up, even as they struggle to cope with the pension challenge aggravated by Covid-19, say retirement experts.

The pandemic is dealing a blow to the public pension systems globally. It triggered a shockwave in the capital markets, and tumbling stock markets and new rounds of interest rate cuts have diminished pension fund assets and private savings.

Pension funds are already under increasing pressure in the persisting low interest rate environment. The Covid-19 pandemic has further exacerbated this trend by further pushing down yields. Raising alternative investments can be part of the solutions, said Cameron Jovanovic, head of global retirement proposition at Allianz.

“The low yield environment has forced both pension funds and life insurers to explore alternative asset classes. This push into alternatives enables benefit providers to capture the illiquidity premium that matches well with their portfolio duration,” he said.

In Asia ex-Japan, pension funds invest 52.8% of their assets in fixed income, followed by 33.8% in equity and 7.6% into alternatives, according to the latest study by Mercer that identifies pension allocation trends in emerging markets in Latin America, the Middle East, Africa and Asia in 2019.

“Anything that is less than 10% is considered not that significant in the whole portfolio. In the more developed countries, the US, UK, Australia, they generally have an allocation of close of between 20% to 30% to alternatives. I think the allocation in Asia is having room to improve," Janet Li, wealth business leader for Asia at Mercer, told AsianInvestor.

The good news is most pension funds already realise the need to add more alternatives to their portfolios. For instance, Thailand's Government Pension Fund (GPF) portioning 5% of its assets to private equity, infrastructure and real estate. That portion had almost tripled to 13% by the end of September 2019. It is now seeking overseas pension partners for its alternative investments.

But many pension funds are finding it difficult to invest more into alternative amid Covid-19. The pandemic has curtailed investment teams from travelling abroad and prevented specialists from preforming due diligence practices.

“South Korean pensions have been increasing their overseas exposure during the past four to five years, especially in the alternative investment area. However, because of the pandemic, due diligence, meeting between GPs (general partners) and LPs (limited partners) have been postponed or stopped," said Jang Dong-hun, the chief investment officer of the Public Officials Benefit Association (Poba).

LAGGING GLOBAL PEERS

Asia's pension systems also have more work to do in order to meet the needs of their retiree populations. None of the pension systems included from the region were ranked among the top 10 in the world and more work remains to be done in terms of pension reforms, according to the Allianz global pension report 2020, which was released last week.

In the study, 70 countries across the world scored on their demographic and fiscal prerequisites, and the sustainability and adequacy of their pension systems. Sweden, Belgium, and Denmark came out as the relatively best pension systems worldwide.

The study considered pension systems' demographic factors, such as life expectancy and dependency ratios. It noted that four markets, China, Japan, South Korea and Taiwan, incorporated demographic factors in the pension formulas to make their pension systems more robust. Overall, Indonesia, China and South Korea were ranked among the top-10 pension systems from a sustainability score.

Singapore and Japan, on the other hand, boast a wide coverage in their first pillar and built a strong second pillar, so both markets ranked among the top-5 in the adequacy ranking.

Most countries divide their retirement systems into three pillars, as defined by World Bank guidelines. The first pillar, based on social security that is funded and run by the government, is dominant. A less developed second pillar that is mainly made up of corporate annuity schemes, while a nascent third pillar that is comprised of personal savings and voluntary individual contributions. 

Source: Allianz

The study found China’s pension system was the best ranked overall pension system in Asia in terms of preparation for upcoming demographic change; it ranked 11th in the global list.

There is no single advice that applies to all countries in the region. In most emerging economies in Asia the coverage of the pension is still relatively low, thus further reforms are needed in this respect, Michaela Grimm, senior economist at Allianz, told AsianInvestor.

Generally speaking, measures that take into account demographic developments, like the adjustment of the statutory retirement age in accordance with the gains in life expectancy, will gain in importance, he added. This is important as baby boomers retire en masse over the next decade or two, putting countries' social security systems under severe stress.