East Asia needs new pension products, finds CSIS

As today’s working generation in East Asia grows increasingly market-orientated, financial services firms should offer products and services to enable workers to assume responsibility for their own retirement, argues a recent study.

The Centre for Strategic and International Studies (CSIS) report* is based on a survey of individuals in mainland China, Hong Kong, Malaysia, Singapore, South Korea and Taiwan.

There is strong support for individuals taking greater responsibility for financing their own retirement, says Richard Jackson, director at CSIS and co-author of the report. In most countries, except mainland China and Malaysia, people prefer personal savings-based retirement provision to government provision.

In Hong Kong, for instance, 40% of respondents think retirees should be mostly responsible for providing their own retirement income through their own savings.

Jackson also finds that the traditional Confucian expectation that families themselves will provide for their elderly members is under unprecedented pressure. Only small minorities, ranging from 4% in China to 22% in Singapore, believe grown children should be responsible for the retirement income of their parents.

The implication for financial services providers is that younger, more educated and more market-orientated generations will demand greater control over investment choice, and will pay much more attention to whether they are receiving a market rate of return on their savings.

In Hong Kong, young workers are much more financially literate than older generations. Three-quarters of young workers (those aged 20-39) receive or expect to receive income from insurance and annuity policies and 66% say the same of stocks and bonds. But the percentages drop to 61% and 41% among older workers (aged 40-59) and to 21% and 31% among current retirees.

However, the average annual real rate of return of Hong Kong’s Mandatory Provident Fund (for 2000-2010), at 4.5%, means it offers a market rate of return. That is unlike Singapore’s Central Provident Fund, which returns 1.3% on average (1987-2009) and Malaysia’s Employees Provident Fund (2.8% on average from 1999-2009).

But the MPF’s targeted replacement rate of 30-40% is too low to support an adequate standard of living in retirement, the study finds, and today’s workers are not saving enough to make up the difference. Indeed, 59% of Hong Kong retirees have a lot less income after retirement, compared to a mere 7% enjoying more income than while they were working, finds the survey.

Hence, in East Asia, “expanding savings-based retirement provision makes compelling economic sense”, says Jackson.

In periods of rapid workforce and productivity growth, the returns from a pay-as-you-go retirement system exceed those from a funded retirement system, he adds. But while such benefits may have been recognised in some East Asian countries such as Korea, other emerging countries are slow to catch on.

*Balancing Tradition and Modernity: The Future of Retirement in East Asia was sponsored by Prudential PLC.