Challenges for Pension Reform and Public Pension Fund Management in Asia
Speech by
C. Lawrence Greenwood, Jr.
Vice President, Operations 2
Asian Development Bank
At the 2008 Global Pension Summit
28 February 2008
Suzhou, PRC
Your Excellency Mr. Xiang Huicheng, Your Excellency Mr. Dai Xianglong, fellow speakers, distinguished guests, ladies and gentlemen. I am honored to represent the Asian Development Bank today here at the 2008 Global Pension Summit in the beautiful city of Suzhou. Let me join the other speakers in congratulating the National Social Security Fund for the excellent arrangements for this important Forum.
The NSSF should also be congratulated on the timing of this conference, which comes at a critically important juncture for those who are responsible for formulating and administering pension policy. Looking at the region today, you cannot help but come away with a keen appreciation how medium and long-term changes, such as fast growth in Asia, rapid financial integration, and the ageing of our societies, combine with short-term events, such as the current credit crisis, to impact and complicate how we accomplish our goal of creating viable pension systems.
The conference also comes at a time of rapid explosion of pension funds under management. Allianz Global Investors in a recently released report estimates that in 2006 public pension funds in emerging Asia had approximately $350 billion in retirement assets under management and projected that assets would grow by 17.2% every year, reaching about $1.5 trillion in 2015. Effectively managing these sums to ensure sustainable pension systems for the fast-ageing societies is a top priority for all countries in the region.
The fast-changing environment in Asia and the world today presents both challenges and opportunities to achieving to that objective. No trend is more important, of course, than Asia's seismic shifts in demography now underway. The population of emerging Asia has doubled in 50 years while at the same time, due to falling rates of fertility and mortality (especially infant mortality), it is ageing rapidly in nearly all countries in the region. In fact, the share of elderly as part of the total population is expected to almost triple during 2000-2050.
The growth of old-age dependency is particularly pronounced in the People's Republic of China where 8 persons in the active age supported one elderly person in 2000, four working persons will be supporting that elderly person in 2025 and less than two will provide that support by 2050.
If the past relationship between demography and public spending on old-age pensions continues, than expenditure of national income devoted on pensions in Asia, excluding PRC, will increase from 2% in 1990 to 10% in 2050. For PRC, with its more rapidly ageing population, expenditure will increase from 3% in 1990 to 13% in 2050. These estimates are almost certainly too conservative given the relatively narrow coverage of current pension systems.
Who will finance this expenditure? Certainly not the Asian family as has been the case in the past. Rapid social changes, particularly the rise of the nuclear urban family and out-migration of young people to urban areas in search of employment are weakening these filial ties. Obviously public and private pension schemes will need to supplement family savings.
A third challenge to creating an effective pension system is the growing mobility of the workforce, both within countries and across borders. Japan, for example, created individual defined contribution plans in part to accommodate and encourage movement of labor between companies, as part of its efforts to promote corporate restructuring following the bursting of its asset bubble in the early 1990s. China faces a particularly severe problem as its migrant workers increasingly move from rural to urban areas as well as between urban areas, placing strains on its pension system, which is administered largely at the local level. Policy makers will need to devise pension systems that can accommodate this mobility.
The trends are not all negative, however. Improved health means that people can work longer, increasing the years of accumulation of savings needed to generate the income to support retirement. Globalization means the expansion of investment opportunities, which allow Asian pension funds to diversify portfolios, lower risk and take advantage of world class management expertise. Finally, and most importantly, Asia's fast growth has created the largest pool of savings in the history of mankind, which if invested effectively, particularly in its own region which is growing rapidly, can provide the resources needed to support the region's fast-growing elderly population.
ADB has been involved in pension reform since the early 1990s. Its involvement increased substantially as a result of the 1997 Asian financial crisis.
ADB also had the privilege to support the PRC government in the reform of its public pension system. The ADB worked closely together with the National Social Security Fund through a series of technical assistance projects to strengthen the Fund's overall governance, investment, and risk management capabilities; and to establish methodologies for outsourcing its overseas investment management.
Drawing on this experience, let me outline briefly some of the steps that we in the ADB see as needed to address these challenges in creating effective pension systems. Most countries are using the World Bank's well-known multi-pillar approach to pension reform, but applying that model pragmatically on the ground taking into account the unique features of each country is the hard part. While there are no one-size-fits-all solutions, lets look at some of the main reform measures that emerging Asia needs to address in pension reform.
First, expanding coverage is a top priority. Currently, coverage of public pensions in Asia and the Pacific is mostly limited to public sector workers and private sector workers in the formal sector, varying between 10-60% of the working population, depending on the state of industrialization of the country. One of the main challenges towards the future is to extend coverage of public pensions to a larger part of the population.
Finding ways to ensure that pension payments are adequate is another priority. Pension schemes should deliver on their promises and provide adequate pension payments, sufficient to prevent old-age poverty and to smooth lifetime consumption for those who are able to save. A good example is China's four-part approach which ensures support for the poorest through the Dibao, support for the large majority through a combination of a public fund and mandatory individual defined benefit accounts, and supplemental support through voluntary enterprise accounts and family savings. No single source is likely to be sufficient, but a combination of a number of sources is likely to be effective.
A separate but related priority is getting better returns from managing public pension funds. Governments are making impressive efforts to deregulate pension fund management, removing restrictions that have directed investment by the funds into low return domestic assets, freeing funds from policy-based investment, opening up investment in equity and foreign assets, and outsourcing funds to external private sector professional asset managers.
For example, in November 2006, the National Social Security Fund outsourced US$1 billion of its approximately $40 billion fund to 10 asset management companies. The Government Service Insurance System of the Philippines appointed global firms as custodians for the overseas investment program, totaling US$1.6 billion, out of its $9.5 billion fund.
At the same time, pension reforms should be designed and implemented in a way that supports growth and accommodates capital and labor markets. For China, for example, that will mean finding a way of including migrant workers in urban pension programs and finding ways to coordinate pension programs among local governments to facilitate portability.
Finally, the countries in the region must put in place the infrastructure, regulation and policies needed to operate pension system efficiently and transparently. Governments will need to provide sufficient resources to ensure efficient administration, better accounting, more rigorous governance and financial controls, increased computerization, and training to further develop the capacity of the staff. Ensuring transparency and accountability by providing full and complete disclosure to its stakeholders is also key to better monitor performance by managers and to establish credibility with the citizens, without which evasion will be a recurring problem.
Today many of the existing pension schemes in the Asia and Pacific region are poorly equipped to address these challenges. Coverage is often limited to the formal sector in urban areas, funds are underfunded, returns are often quite poor, human capacity is limited, and evasion and underreporting are rampant. We cannot underestimate the difficulty Governments will face as they work through pension reform. The ADB will continue to actively support policy makers and practitioners in our developing member countries to advance pension reform and strengthen fund management through our technical assistance and financial sector development programs.
I would like to thank the National Social Security Fund once again for organizing this important Summit, and for gathering such an excellent field of participants to discuss an issue that is critical to the future prosperity of every country in the region.
Thank you for your attention.
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