Emerging-market stocks and bonds are already an important asset class for fund managers. But in Asia especially, emerging markets also represent an important source of potential new business for pension fund managers.
A new report from the Asian Development Bank (ADB), Ageing Well in Asia, paints a picture of a region which, while renowned for its postwar economic miracle, is generally not well prepared for the rapid ageing of the population in a number of countries.
The “coverage of pension programmes in emerging Asia is generally low”, according to the report. “Economic security in old age requires stronger pension systems and financial preparedness.”
In developing Asia, which includes most of the region, the proportion of those aged 60 and older is expected to double to around 1.2 billion in 2050, or one in four of the regional population.
Japan is ageing fastest, followed quite closely by South Korea and Thailand. China and others are not far behind. India, by contrast, stands out for a relatively young population.
Japan is not formally included as one of the developing Asian nations covered by the report but it leads the region in terms of pension provision because of its Government Pension Investment Fund, the world’s largest by assets.
Beyond Japan, however, the scale of pension provision, both public and private, shades off quite rapidly, especially in the informal sector such as agriculture and construction, and among women.
The report does not offer judgements on the relative merits of public versus private sector pension provision. But it does warn of a possible taxpayer revolt if too great a burden falls upon contributors to public schemes.
There is relatively high dependence upon “social” or state pensions in China and India compared to other Asian nations although private pension provision is growing. In South Korea and Vietnam, by contrast, pension coverage is low.
The ADB urges Asian nations in general to “achieve higher social pension coverage” for the elderly and to establish contributory pension schemes for workers in the informal sector, including women.
Countries also need to adopt more innovative pension programmes, strengthen financial literacy, encourage regular savings habits, and pay more attention to financial market developments, the report says.
Apart from pension provision, it also calls on Asia to place more emphasis on areas such as health and social care for the aged.
Unless more investment is directed towards people, ageing populations will weigh increasingly on national budgets and the elderly will become more of a burden on society, especially with defined-benefit pension schemes where fixed sums are promised in advance to retirees.
The challenge of ageing is not as far down the road as many believe, Aiko Kikkawa, a senior economist at the ADB and lead author of the report, said at a briefing. She likened the issue to an “elephant in the closet” – something people know is there but whose presence they don’t like to acknowledge.
