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November 2005

Pension reform: Cracking Asia's wall of money


In the first of a series of articles, Euromoney examines the status of pension reform in two countries at the extremes of Asia’s pensions revolution, Taiwan and the Philippines. We ask the authorities charged with pension reform in these economies about plans and progress, challenges and expectations.




Philippines pensions face up to default threat | Taiwan turns back the sands of time

ASIA FACES A serious demographic challenge. According to the UN, by 2050 approximately 750 million people in key Asian economies will be older than 65.

In most Asian countries, the age dependency ratio, the ratio of those over 65 to those of working age (15 to 65), is already high and forecast to increase rapidly over the next 20 years. Conversely, replacement ratios in the region, the amount of retirement benefit to pre-retirement income, are generally too low, just at the time when they should be rising. Coverage ratios, a measure of the proportion of the population that benefits form state pension schemes, are also generally low.

Asia’s pensions crisis is especially acute in Japan, Korea, Hong Kong and Singapore, but all of the region’s main economies face challenges in reforming their pensions systems. Fortunately, governments now recognize the problems they face and most are restructuring their pensions systems, in different ways and at varying rates.

Whatever the nature and speed of the reforms, the effects on Asia’s domestic capital markets and the global fund management and banking industries will be profound.

Asia’s reformed pension schemes will mobilize many billions of dollars, all of which need to be managed. Governments are increasingly contracting out fund management to third-party professionals. Although the trend has started, it is still in its infancy and global asset managers are faced with an immense business opportunity.

Asia’s wall of money needs to be managed, but it also needs to be invested. Much of it will end up back in domestic capital markets. The effects on these markets will be significant. Given the pressing need for Asia’s pension schemes to generate above-average returns, much of this money will be invested in the region’s equity markets. Significant equity reweightings beckon, another challenge and opportunity for fund managers. Demand for new investment products will also grow, offering global investment banks additional revenue streams from the vast new sources of domestic capital for capital raising in both traditional and hybrid products.

The restructuring of Asia’s pensions schemes will also presage the development of sophisticated domestic financial institutions that will wield considerable investment power and influence. With that power will come responsibility and the opportunities for improving corporate governance and business standards will be immense, should these institutions embrace the challenge.

In the first of a series of articles over the coming months, Euromoney examines the status of pension reform in two countries at the extremes of Asia’s pensions revolution, Taiwan and the Philippines. We ask the authorities charged with pension reform in these economies about plans and progress, challenges and expectations. In future articles, Euromoney will report on pensions reforms in other key economies in Asia, examine themes common to all countries and how they will effect the global fund management and banking industries.







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