Retirement savings gap stands at US$3.8tn a year

Emerging Asia has a pension savings gap of $3.8tn per year or $50,000 per worker on average, Swiss Re Institute estimates.

In comparison, emerging markets as a whole face a $5.4tn pension savings shortfall for every year of their workers' retirement, or about $40,000 for every worker on average, says Swiss Re Institute in its latest sigma report released yesterday.

The report warns that the costs of underfunded pensions may return to governments through higher risk of poverty, ill-health and strain on younger generations, but adds that facilitating sustainable retirements can unlock numerous opportunities to strengthen resilience in families and societies. There is an imminent need for action.

Individuals in emerging markets will increasingly need to make their own funding arrangements for retirement. Pension reforms are shifting onto individuals both the responsibility for saving for a pension and the management of lifetime risks such as mortality, morbidity, longevity and investment performance. These risks inhibit a person's ability to provide for their retirement, since a period out of work due to sickness, family care or even death will impact a household's savings.

This challenge is acute in emerging markets, where personal resources tend to be lower and social safety nets weaker. Individuals will need more tailored insurance protection, in the form of life, medical, disability and critical illness covers, to manage these risks.

Swiss Re Institute estimates that to protect the global population fully against mortality and health risks would require an extra $1.2tn in premium equivalent terms, 60% of which would be in emerging markets.

Solutions

Mr Russell Higginbotham, president and CEO Asia, Swiss Re, said, "Putting in place the right assurance and protection support can enable a person to safely accumulate pension assets and generate steady pension income, helping to secure sustainable retirements in emerging markets."

Integrating protection insurance into mandatory pension systems is one proven solution. In Australia, mandatory life protection embedded in the employment-based pension scheme has achieved strong protection against mortality risk. Other insurance solutions could include bundling biometric covers such as mortality, morbidity and long-term care with a savings component, to provide flexible, responsive life-long coverage. Insurers can work with trusted retirement savings platforms to make distribution easier.

Situation in Asia

In Asia, Malaysia has the highest pension savings gap per worker in the region, at about $87,000 per worker, as it has a relatively low retirement age and longer post-retirement years, which increase the pension need. Thailand has the next-highest pension savings gap per worker, at about $79,000, primarily from higher life expectancy and so longer retirement periods for its workers than other markets.

In emerging Asia, 58% of the pension funding need is yet to be covered by current assets and savings, a slightly larger gap than the emerging market average, indicating that pension system adequacy is low. Indonesia, Thailand and Vietnam are among those with the lowest protection.

Pension coverage, the proportion of the working population covered by pension provision, is low in emerging Asia, partly reflecting large informal sectors in these economies. In India and Indonesia, more than 80% of total employment including agriculture is informal, and pension coverage is only 8%. More formalisation of work would help to increase pension coverage.

"The shortfall in saving for adequate and sustainable retirements cannot be bridged solely by government resources. Strong partnership between the state, the private sector and individuals will be key," Jerome Jean Haegeli, group chief economist, Swiss Re, said. "Protecting people throughout their saving lifecycle has the potential to reduce poverty, ill health and even social unrest, and should form a core building block of emerging markets' long-term economic growth.

Source: Asia Insurance Review