Pension reform in Asia will benefit more than just its greying population
Andrew Sheng says such funds can help stabilise capital markets with a focus on the long term
The relaxation of China's one-child policy accepts that demographics play a major role in a country's economic fortunes. Asia's fast growth was built on favourable demographics, a growing labour supply at relatively cheap rates, and open economies. But in many parts of Asia, as the population begins to age rapidly, there is genuine concern that Asians may grow old before they become rich.
Last year, nearly 450 million people or 11 per cent of Asia's population were 60 years and over. By 2050, these numbers will more than double to 1.2 billion, or 24 per cent of the population, not far behind projections of 27 per cent in North America and 34 per cent in Europe. The old-age dependency ratio will rise rapidly in Japan, Greater China, Singapore and India.
Pension funds can take long term equity positions that invest in future green growth
There is, however, a major difference between being old in Asia and being old in the advanced countries. In 2011, private pension funds in nine Asian economies had assets of US$663 billion, or only 5.3 per cent of gross domestic product in 2011, way below the OECD average of 70 per cent of GDP.
In the past, when families were large, the young were the "pensions" of the old, because it was taken for granted that the young would care for the old. Today, when many families have only one or two children, this is no longer possible.
In fact, the reverse is happening. In Japan, single children in their 20s still living with their parents are called parasite singles. A single Chinese child today is showered with gifts and love from six adults (four grandparents and two parents). But when he or she becomes an adult, one cannot take care of four to six old ones.
The lack of pension coverage or under-funding of pensions is a serious problem in Asia. Even in rich countries like Japan, low interest rates mean many pensioners face a lack of income from their financial assets for adequate retirement purposes. There are several good reasons why governments should reform pensions as a priority. First, there is a question of adequacy of retirement income. Second, to be fair, more people should have pension coverage. Third, pension funding should be sustainable.
There is a further reason why pension funds play a major role. They can contribute significantly to capital market development, more efficient long-term resource allocation and national financial stability. It is no coincidence that during the May/June market shocks, due to the fear of reversal of US quantitative easing, the markets that had the least exchange rate and interest rate volatility were those with deep pension or provident funds.