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Sep 2019

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Going grey

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Source: Asia Insurance Review | Aug 2019

Asia’s ageing population is not only growing, but it is doing so at an unprecedented speed. Over the last few decades, immense economic growth has raised the standard of living, improved medical care, enabled healthier lifestyles and lengthened life expectancies. According to figures from the Society of Actuaries (SOA) and LIMRA, Asia will see a 19% rise in population by 2050, and a staggering 148% growth in its elderly population at the same time. 
By Ahmad Zaki
 
 
Over the past 40 years, Asia has seen much improvement in its infrastructure, economy and quality of life. Most importantly, life expectancy at birth within the region increased by seven to 14 years – the increase in life expectancy of a 65-year-old over the last 40 years has ranged from 1.7 years in Indonesia to 8.1 years in Singapore, according to figures from Mercer.
 
As most of Asia’s economic growth occurred at about the same time as its demographic shift towards an older population, it did not allow much time for the various financial systems to develop, mature and create a sustainable pension system. The current scenario places existing pension systems in most markets under heavy pressure for reform and to ensure long-term health. As most citizens do not know exactly how their nation’s pension systems will change, the onus is on them to take personal responsibility for their retirement plans.
 
According to a survey published by SOA and LIMRA last year, 70% of respondents stated that they were willing to convert a portion of their assets to annuities to generate retirement income. Consumers showed strong preferences for guaranteed income for life, protection of principal investment, and fixed returns. 
 
Respondents also expressed an interest in having more control over their investments and the flexibility to adjust their portfolios to their changing needs. Banks emerged as the most popular channel from which to buy retirement income products and were selected as the top distribution channel across all markets, according to the report.
 
It is also important to note that while much of the discussion on the ageing populations is based on the current demographics of Singapore, Hong Kong, Japan and Korea, the ‘new’ elderly population will be based mostly in China, India and Indonesia.
 
Asia Pacific economies have seen rapid growth in pension assets in the past several years. The assets of regional pension funds rose 20% in 2017 to almost $5tn, outpacing the global rate of 15%. Four Asia Pacific funds – from Japan, South Korea, China, and Singapore – are among the 10 largest in the world, while 2017 saw the first India-based retirement fund make its way into the top 20.
 
According to figures from the Asian Development Bank, the current global pension deficit is around $70tn – compared to a global gross domestic product of just over $80tn – and is expected to rise to $400tn by 2050. Much of this comes from Asia: China’s and Japan’s pension funding gaps are about $11tn each.
 
Percentage of population covered by mandatory pension schemes
 
Shifting population increases need for long-term care
While pension schemes differ across all Asian markets, none of them have a long-term care insurance market for the elderly. Traditionally, Asian markets have borne the expenses and care for the elderly through families and individuals, driven mainly by cultural expectations and traditions. 
 
However, as the economy boomed and employment opportunities manifested in city centres, many of Asia’s young workers relocated away from their families, leaving much of the elderly population separated from their extended families and their traditional ‘retirement’ sources.
 
Even if more institutional care is introduced to Asia, there is a cultural preference for home and community-based care provided by informal caregivers such as family. That is if the region manages to resolve the supply issue – there is a pronounced lack of qualified professional caregivers, most likely due to a lack of demand.
 
Adopting responsibility
Coverage for Asian populations – the proportion of citizens covered by mandatory pension schemes – range from 55% in Hong Kong to 3.1% in Pakistan for non-OECD economies. In contrast, OECD economies have an average coverage of 64.7%, with Japan having a 70.5% coverage.
 
With little certainty over how the mandatory pension schemes might be reformed, many elderly are taking matters into their own hands – or at least intend to. According to LIMRA’s survey, more than two thirds of respondents across Asia consider it their own responsibility to plan for retirement and do not want to depend on government or family members. 
 
“On a relative basis, the only exception is Hong Kong where some of the respondents state that the primary responsibility of retirement security belongs to family members or government entities. However, there is still a significant proportion who would accept responsibility for funding their own retirements,” the report said.
 
However, the report also noted that 66% of the respondents do not have a formal written plan to manage income, assets, and expenses during retirement, and a similar proportion do not reach out to financial professionals for retirement planning. Respondents, especially from Japan, South Korea, China and Singapore, stated that they do not have formal written plans. 
 
“Some of the respondents across other regions may be willing to plan retirement by themselves, but the question remains if they are capable of understanding the complex challenges of retirement planning and taking the necessary actions to secure their retirement.”
 
Respondents to the survey also showed a preference for more conservative product features, such as guaranteed income for life, protection of principal investment and fixed returns. “They also showed a keen interest in having greater control over their investments and having the ability to adjust their portfolios as their needs changed over time,” said the report.
 
The survey also revealed a large preference for banks as the distribution channel of choice, with digital channels also showing a growing popularity. Insurers should capitalise on their bancassurance channels in Asia.
 
The biggest contributor to the pensions gap is likely to be how much people are underestimating their life expectancy. Countries with a higher life expectancy had the widest gap in their underestimation, indicating that the retirement gap is probably wider than anticipated. A 
 
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