Modern investment techniques and retirement solutions needed to avert East-Asian pension crisis, EDHEC-Risk Institute

Beijing, Hong Kong, Singapore, Nice, Paris, London and New York - 9 July 2013

In order to play their role in a sustainable way, Asian pension systems must be deeply reformed. There is a double constrain: a strong ageing population and a fertility below the replacement rate. This constrain represents a high risk of insolvency for these systems.

A formidable demographic challenge

New research conducted by EDHEC-Risk Institute with the support of AXA Investment Managers finds that North-East Asian countries and Greater China are facing a formidable demographic challenge and need to better manage public reserves and help channel private savings into adequate retirement solutions to avert a looming pension crisis.

The paper Investment Solutions for East Asia's Pension Savingsfirst looks at the region’s demographics and the models predicting financial trouble as the population ages quickly and the workforce is depleted; it establishes that this demographic challenge is compounded by the observation that, as countries develop, the combined lifetime consumption needs of the younger and older segments of the population grow roughly three times as fast as the corresponding surplus of the working population.

Asian pension systems must reach a higher level of professionalism by integrating the best practices available in the market

It then reviews retirement provision in the region and finds both public and private solutions inadequate.

It suggests that pension reserve funds, by far the largest dedicated pension asset pool, move away from the ‘piggy bank’ model that sees them inefficiently invest funds while waiting to be entirely spent to a model where they would actively manage assets with a view to maximising the likelihood of meeting future public pension obligations. It also draws on academic advances and best practices to suggest reforms to improve the design, management and attractiveness of defined-benefit and defined-contribution plans so as to foster higher accumulation, better investment yields and the offering of retirement income in lieu of lump sums.

The paper observes that the region’s vast private savings have so far failed to make their way into dedicated retirement solutions. It solves this puzzle by showing how intergenerational transfers have allowed the current generation of retirees to continue to save in old-age and stifled the demand for retirement products. It warns that, having to fund these transfers but also to save and invest towards its own retirement, the next generation of retirees is in dire need of investment solutions that would be purposely designed and managed to deliver adequate post-retirement income.

While the long-term cost of population ageing threatens the fiscal and financial balance of nations, the reserves of public pension systems and the savings of East Asia’s households can become powerful tools to help avert the impending crisis provided they are invested to this end. Against this backdrop, EDHEC-Risk Institute calls upon public authorities to require the adoption of state-of-the-art risk and investment management techniques in the retirement provision sector and to incentivise accumulation into adequate retirement solutions before the region’s demographic window of opportunity closes.

This research was supported by AXA Investment Managers as part of the “Regulation and Institutional Investment” research chair at EDHEC-Risk Institute.

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