The role of private pension in Homo-Hundred era Many a little makes a mickle many a pixel makes a picture by Yvonne Sin Towers Watson 26 September 2013
Outline The retirement gap challenge The emerging role of public/private partnership Need to overcome inertia De-risking and innovation to complement retirement planning 2
Aging and pensions making headlines... New Zealand: Four in 5 Kiwis worry about insufficient retirement savings Source: Headlines from AIR edaily, AIR 2010-2013 3
Retirement security comes from multiple sources Can or will governments fund more? Will governments force more savings? Will employers help or encourage savings? Will families provide for each other? Will consumers choose to save more? Government / State Pension Property Mandatory / Voluntary Occupational Pensions Personal Savings Family Support SECURITY? 4
Global Aging Preparedness (GAP) Index country rankings show there is no perfect system Note: Countries are ranked from best to worst Source: CSIS (2010) Fiscal Sustainability Index Income Adequacy Index 1 India 1 Netherlands 2 Mexico 2 Brazil 3 Chile 3 US 4 China 4 Germany 5 Russia 5 UK 6 Poland 6 Australia 7 Australia 7 Sweden 8 Japan 8 Chile 9 Canada 9 Spain 10 Sweden 10 India 11 US 11 Canada 12 Korea 12 Japan 13 Switzerland 13 Poland 14 Germany 14 Switzerland 15 UK 15 Russia 16 Italy 16 France 17 France 17 Italy 18 Brazil 18 China 19 Netherlands 19 Korea 20 Spain 20 Mexico 5
There seems to be a growing pensions gap in all regions East Asia/Pacific China Philippines Vietnam Thailand Hong Kong Malaysia Indonesia Singapore Men Women Both South Asia India Pakistan Sri Lanka OECD Asia/Pacific Australia Canada Korea United States New Zealand Japan 0 20 40 60 80 Source: OECD Pensions at a Glance (2011) 6
Will private pensions be the emerging policy option for closing the pensions gap? Pace of pension reform has accelerated over past decade Governments have been lowering public pensions for future generations of retirees Increasing pensionable ages, automatic adjustment mechanisms, strengthening work incentives, and extending the coverage of private pensions including compulsory private pension systems Coverage rates for private pensions in many countries remain low despite relatively low public pension benefits Young, low income, part-time and temporary workers most unlikely to participate in private pensions Clearly, individuals need to learn to do more themselves, but Do they know they have a problem? Do they know what solutions can be put in place? Do they know how to get solutions in place and from whom? 7
Although saving rates in Asia have been high and will likely continue to rise Source: NBER Working Paper No. 17581 8
Population over 65 years old in the world Least developed countries Least developed countries Less developed minus least developed Less developed minus least developed More developed region More developed region The world is aging rapidly but at different rates. 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 2010 2050 2010 Median age 8.2% 7.3% 7.6% 6.5% 2050 6.8% 5.2% 5.2% 5.3% 5.3% 5.5% 5.7% 5.9% 5.9% 6.1% 10.4% 28 9.3% 39.7 13.0% 45.6 11.7% 39.4 % of population (age 15-64) 16.2% 15.2% 14.2% 58.4 67.52010 2050 66.5 2010 64.9 2050 % of population (age Median 65+) age 15.9 6.2 28 16.6 39.7 26.245.6 39.4 4.0% 2010 19.9 56.8 2010 3.3 19.9 2.0% 2050 29 65.6 2050 7.4 29 0.0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: UN World Population (2012 revision) 9
A bigger challenge is the gap between retirement age and average life expectancy 35.0 Expected retirement duration, years Men 35.0 Sri Lanka Women 30.0 25.0 Sri Lanka Malaysia Indonesia Singapore Thailand Japan India Vietnam France China Canada Hong Kong 20.0 Italy NZ Average: Pakistan Australia Korea 20.8 years OECD Germany US UK 15.0 Philippines 50.0 55.0 60.0 65.0 70.0 Normal pension eligibility age, men 30.0 25.0 20.0 Malaysia Thailand Average: 25.8 years Vietnam China Indonesia Pakistan India Italy Singapore France Japan Hong Kong Korea Canada NZ Australia OECD Germany Philippines 15.0 50.0 55.0 60.0 65.0 70.0 Normal pension eligibility age, women US UK Source: OECD Pensions at a Glance (2011) 10
Even more detrimental to any pension system, the number of centenarians will increase exponentially Number in thousands 1990 2050 1000 686 100 10 13 4 187 3 139 2 79 77 46 45 32 24 7 6 4 2 1 1 1 India China Japan Viet Nam Australia Thailand Brunei China, Hong Darussalam Kong SAR Indonesia New Zealand Philippines Republic of Korea Singapore Source: UN World Population (2012 revision) 11
In short, a socio-economic-demographic storm is building up Ageing populations and higher dependency ratios Higher quality of life expectations with greater wealth accumulation Increasing longevity Workforce mobility Growing demand for and increasing yearly and total costs of medical care in retirement Breakdown of the extended family support system 12
While most recognise the shortfall issue, few seem prepared to act in order to close the gap Currently offer Plan to offer in the next 12 months Plan to offer beyond 12 months No plans to offer Annual leave 97% 1% * 2% Medical inpatient 91% 1% 1% 7% Medical outpatient 84% 1% 2% 13% Medical screening 82% 5% 3% 10% Life and AD&D insurance 82% 2% 3% 13% Critical illness and/or disability insurance 74% 2% 4% 20% Dental 57% 2% 4% 37% Pension benefits 55% 3% 4% 38% Education allowance 35% 4% 7% 54% Optical 33% 5% 5% 57% Childcare benefits 32% 4% 7% 57% Source: Towers Watson Asia Pacific Benefit Trends (2013) 13
Private pensions are generally available in Asian countries Thailand 91% provide a plan Hong Kong 60% provide a plan Taiwan 37% provide a plan China 24% provide a plan Korea 53% provide a plan Japan All provide a plan India 22% provide a plan Philippines 85% provide a plan Malaysia 55% provide a plan DB DC Hybrid Combination Singapore 6% provide a plan Indonesia 64% provide a plan Vietnam 13% provide a plan Australia 25% provide an executive plan Source: Towers Watson BDS and TRS (2012) 14
Many initiatives seem to be emerging Regulator drive for fund simplicity, competition and lower fees MPF earnings cap has been raised twice in the past 3 years Draw-down phase? Possible National Pension Scheme Possible enhancement of Provident Fund scheme Thailand Hong Kong Shanghai Pension Pilot may include foreigners China South Korea Japan Funding for severance pay and retirement benefits using blended DB and DC plans EPFs to be abolished following investment scandal Limited tax advantages Recent life insurance regulation on unit-linked Recent opening of Private Retirement Scheme - 8 licensed providers, mostly asset management companies Simplification of annuity options under CPF Life Source: Towers Watson (2013) Malaysia Singapore India Indonesia Government encourages DPLK funds Some relaxation of tax penalties on cash at retirement Possible funding of severance benefits Philippines Vietnam Myanmar Taiwan Trusts gaining prevalence Early days for PERA schemes Increase in social security contributions on the agenda Move to DC funding for leaving service benefit 2013 opening of private retirement scheme market (simple scope) Banking and insurance now privatizing. Will pensions be next? 15
Individuals still face many unanswered questions as to how best to prepare for the retirement challenge How do I ensure I will have a comfortable life in retirement?? How much will I need when I retire?? Where will my retirement income come from?? How much do I need to put away now and in the future to get there?? How should I manage my money to get there and stay there? 16
A more effective approach to savings is needed Traditional Approach Members focus on the here and now Saving what they can, when they can Hoping it will deliver a good outcome Little thought given to what they need or their ability to take investment risk or how their circumstances will change over time Decisions made at joining are rarely changed A low engagement environment More Focused Approach Members set their objectives (using some simple tools) and focus on how they are going to achieve it Recognising what they want to achieve their ability to take investment risk and how their circumstances are likely to change over time Progress against target can be monitored Buying a retirement income and then paying the loan off (like a mortgage) A higher engagement environment 17
What are the real risks in the quest for retirement security? Will I have enough when I retire? Will my retirement savings outlive me or will I outlive them? Will I have to cash out investments at a bad time? What if my plans change or something goes wrong? What if I become disabled or chronically ill? Retirement security is a function of Cash / Income / Growth 50% 40% 30% 20% 10% 0% -10% -20% -30% Source: Towers Watson Asset Model (2013) Annualised return projection RISK VOLATILITY EQ 95th percentile EQ 5th percentile EQ median at year 20 FI 95th percentile FI 5th percentile FI median at year 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Year 8.6% 4.8% 18
Need to protect the known risks of growing old Longevity Long-term care Investment returns Inflation 19
Examples of solutions to address risks inherent in retirement planning Risk to retirement income Longevity Outlive your assets Financial hardship due to chronic illness Loss of income due to disability during working age Inflation Poor asset performance Insurance solution Pros Cons Life annuity or longevity insurance Long term care insurance Insurance for disability income Unit- and inflation-linked annuities Variable annuities with riders Guaranteed income for lifetime Provides income supplement to help pay for large expenses (e.g. medical bills) Guaranteed income replacement Protects income stream from rising cost of living Allows systematic withdrawals even if assets lose value No death benefit or inflation protection The riders for medical inflation and cost of care can be expensive A version with inflation protection not yet available in the market Products not readily available in all markets The riders can be expensive 20
The Retirement-Investment Link Generates investment returns that match/exceed wage growth Robust Investment Environment Economic Development Sustainable Pension System Provides capital and creates demand for the development of innovative financial products Source: Sin (2009) 21
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