Continued economic growth and a high savings rate have fueled wealth creation in Asia ex-Japan (Asia). However, if the region is to support its aging population, it will need to systematically address the provision of retirement income. With its massive population and strong economic growth, Asia may one day be home to many of the world’s largest pension funds, with all the accompanying opportunity that presents for asset managers and asset servicing companies.
Pensions demographics shift
By 2050, the median age of some of the ASEAN nations will exceed the world average1 and the percentage of retirees will triple2 by then, accompanied by a dramatic increase in the number of people aged over 65.
And by 2100, today’s dominant economies may be struggling to support increasingly aged societies while population numbers decrease. China’s population will be at about one billion3.
Current statistics suggest that Asia will soon face a looming aging crisis if the weak pension systems observed in some emerging countries are not improved.
Growing wealth of middle classes
The Asia Pacific region’s propensity to save is exceptional, ranging from 24% of GDP in the Philippines to 50% in China4, compared with 13% in the U.S. and 19% across Europe.
While Asia’s growing wealth is largely a “feel-good” story, such success does not necessarily translate into providing adequate retirement benefits. Savings rates are expected to decline in the future as the population saves less and consumes more in retirement. With lump-sum payout schemes, retirees lack consistent income and may outlive their savings.
Further, a large percentage of savings is in the form of bank deposits and guaranteed funds, most delivering a return lower than inflation. Such savings alone, without participating in the long-term investment vehicles, simply cannot provide adequate retirement income.
Asia is not immune from crises, economic or otherwise. Over the longer term, however, most see positive future growth in the economies which in turn should translate in an increase in share values across the region.
While the debt to GDP across Europe has topped 100%, it appears considerably lower in Asia. In 2012, China’s export amount was ahead of the U.S. by 32%5 and its GDP is also gradually catching the U.S. and the EU.
Even if the growth rate has slowed, Asia economies can still at least claim that they are moving forward. Economic, population and stock market growth, coupled with a pension reform spells out a winning formula for Asia as it decreases its dependency on the major economic markets, and grows trade flows regionally.
In order to capture the upside of Asia’s expanding economy, pension reform is inevitably the next big thing. Since it began in Australia in 1992, the country’s growth in its fund management industry has been phenomenal. In just over two decades, pension assets per head have grown from around $8,500 to over $68,0006. As a result, assets under management in Australia have grown from $150 billion to $1.61 trillion7.
A close comparison can be made between present-day Taiwan – which is expected to implement a more open pension platform next year, and Australia in 1992. While both countries see similar ratios in the number of the population over 65, pension assets per head are just under $4,0008 in Taiwan today. Assuming pension reforms took place following the Australian reform, and GDP per head grows at consensus rates, Taiwan’s asset management industry could possibly grow from $92 billion today to over $400 billion9 by 2025.
China presents a similar growth trajectory. Pension assets per capita are just under $40010, while GDP per head is over $6,00011. Moving forward to 2025, roughly 20% of the population will be over 6512. Factoring in pension reforms, it is highly likely that the asset management industry could grow to around $8 trillion13 by 2025. With currently around $500 billion of pension assets, China needs to build up this pot to balance the books before it gets too old.
Asia is right at the beginning of the reform process that Europe failed to conduct. Setting appropriate wealth aside now, using modern investment products, and imposing regulations incentivising retirement savings will remove the threat of the “Demographic Timebomb.”
For more information, please contact:
Regional Head, Client Sales Management
Financial Institutions, Asia Pacific
Citi Securities and Fund Services
1. World Population Ageing Report 2009, United Nations
2. Saving up: The changing shape of retirement funding in a greying ASEAN, Manulife Asset Management Aging Asia Series
3. World Population Prospects: The 2012 Revision, United Nations
4. International Monetary Fund, World Economic Outlook Database, October 2012
5. The CIA World Factbook
6-13. Cerulli Associates, Respective Funds Associations, IMF, Population Reference Bureau, The Conference Board, US Census Bureau International Database, SFS Calculations
Asset sizes and % population over 65 are based on 2025 base populations and GDP per Capita of the respective countries. Prospective numbers are illustrative, and not forecasts. Growth in pension assets is subject to a number of factors including but not limited to savings rates, pace of regulation, and market performance, which are not necessarily included in the calculation of pension asset size