Live long and prosper? Retirement and longevity risk

Transcription

1 Live long and prosper? Retirement and longevity risk empowered investment teams strengthened by global resources ManulifeAM.com/agingasia June 2014

2 Table of contents Foreword... 2 Key findings... 3 The three key determinants of retirement duration Retirement age... 4 Life expectancy... 6 Marital status... 8 Retirement duration analysis Retirement duration and longevity risk in Asia... 9 Higher longevity risk: Taiwan, Thailand, Hong Kong, China, Malaysia Lower longevity risk: Indonesia, Vietnam, Singapore, Japan, the Philippines Sensitivity analysis: Retirement age Sensitivity analysis: Marital status Longevity risk and providing for sole survivors Conclusion Appendices Glossary of terms Asia Retirement Duration Model (ARDM) Demographic dividend Financial deficit Longevity risk Retirement income security A forecasting model which combines actuarial mortality analysis, gender-specific longevity trends and retirement ages to produce a full retirement lifecycle forecast for individuals and for married couples as they progress from initial retirement as a pair to the likelihood of there being a sole survivor. A population bulge transitions through working age up to retirement, generating aggregate income levels in excess of aggregate consumption, consequently increasing savings and investment, which results in a generally higher level of economic activity. From a retirement perspective, financial deficit refers to the portion of life during which consumption exceeds labour income. The risk that a retiree will outlive his or her sources of income. Having sufficient income to sustain a comfortable standard of living throughout an individual s retirement years, regardless of how long that period may last. 2

3 Foreword by Michael Dommermuth, President, International Asset Management, Manulife Asset Management In our previous Aging Asia research reports, we ve documented that even the most youthful markets in Asia are aging at historically unprecedented rates and that responsibility for retirement income security in the region is increasingly falling on the shoulders of individuals. In this, the fifth report in the series, we analyse retirement duration for Asian households and examine longevity risk, the risk that a retiree will outlive his or her sources of income. Longevity risk is becoming a pressing concern in Asia as constituent populations are not just aging rapidly, but are doing so in a context of increasing life expectancy. Against this backdrop, our research indicates that households across the region are significantly underestimating the potential duration of their retirements and consequently may not be accumulating sufficient retirement savings. Michael Dommermuth This situation is exacerbated by the fact that most Asian countries and territories are seeing mostly flat or even declining elderly labour force participation rates; generally governments in the region are looking to contain their defined-benefit pension commitments and healthcare expenditures; family financial support is declining; and most households are not efficiently deploying their savings to maximise potential returns. This report provides a detailed assessment of retirement duration and explores key underlying factors: life expectancy, retirement age and marital status. We feel that the latter factor in particular is too often ignored. Thus, we highlight the planning implications of entering retirement as part of a married couple. In doing so, we leverage our affiliate life insurance company s considerable actuarial resources to examine retirement duration and introduce a new forecasting model: the Asia Retirement Duration Model (ARDM). The ARDM combines inputs on actuarial mortality analysis, gender-specific longevity trends and retirement ages to produce full retirement lifecycle forecasts for married couples as they progress from initial retirement as a pair to the likelihood of there being a sole survivor. Our findings are often startling and have significant ramifications for governments, households and financial institutions across the region. They highlight the need to adjust policies, retirement planning strategies and financial service offerings in order to minimise longevity risk by planning for retirement durations that can be significantly longer than most assume. As retirement duration and hence longevity risk can vary dramatically among individuals, we have also developed an online ARDM tool that outputs customised retirement duration estimates that reflect individual circumstances. The output of this tool can serve as a valuable reality check of individual assumptions about retirement duration and, hence, the amount of retirement assets needed to ensure retirement income security. The ARDM tool and the entire Aging Asia series of reports and related resources can be accessed at: 3

4 Key findings In analysing longevity risk in Asia, we identified three key components that determine the duration of retirement: Retirement age; Life expectancy; and Marital status. While marital status may seem incongruous among these three, most individuals in Asia enter retirement as part of a married couple and thus must factor in the likelihood that one partner will outlive the other, potentially by a significant margin. Thus, financial Figure 1: Longevity risk for married couples in Asia at a glance planning for retirement should be based on joint rather than single retirement duration to this end, our analysis of longevity risk reflects the life expectancy of the sole survivor of a married couple. Our research covers the 10 Asian markets where Manulife Asset Management has a presence: China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam. The results of our analysis are startling and the economies that face the greatest longevity risk within Asia are not necessarily those one would initially assume. Longevity risk Manulife Asset Management s assessed average retirement duration (years)* Individuals expected retirement duration (years)** Key contributing factors to longevity risk Taiwan 33.2 # 20.3 Higher-than-expected male-female life expectancy gap and low elderly labour force participation rate Thailand ## Low official retirement age Higher Hong Kong China Lowest level of elderly labour force participation among the 10 complemented by long life expectancy at birth Low official retirement age complemented by significant increase in life expectancy over past 50 years Malaysia Historically low official retirement age Indonesia Relatively short life expectancy Vietnam ## with a significant gap between men and Life expectancy significantly improving, but women Lower Singapore Japan Relatively high and rising elderly labour force participation rate Long life expectancy complemented by high elderly labour force participation Philippines Shortest life expectancy among the 10 * Based on ARDM scenario analysis reflecting actual average retirement ages for married couples and actual husband-wife age gaps by market (see Appendix 1). ** Based on findings of the Manulife Investor Sentiment Index (MISI) in Asia. MISI is a quarterly, proprietary survey measuring and tracking investors views across eight markets in the region on the attitudes towards key asset classes and related issues. Research quoted was conducted in November # ARDM analysis for Taiwan reflects Taiwan life expectancy tables, which only go up to age 85, and projections beyond age 85 based on adjusted China life expectancy tables. All other inputs for Taiwan are specific to that market. ## As Thailand and Vietnam were not included in MISI, individuals expected retirement duration for these markets reflect life expectancy at birth based on United Nations Population Division data minus the relevant official retirement age. ARDM analysis for China reflects Beijing data as a proxy. Source: Manulife Asset Management based on Asia Retirement Duration Model; Manulife Investor Sentiment Index. 4

5 As Figure 1 indicates, average retirement duration for a typical married couple across the 10 countries and territories examined ranges from a low of 20.6 years in the Philippines to a high of 33.2 in Taiwan. However, accumulating retirement assets that are just sufficient for average life expectancy results in a 50/50 chance that a household will outlive its retirement assets and is essentially a roll of the dice in terms of retirement income security. In fact, we find that a household s longevity risk the risk that they will outlive their assets can be decreased from 50% to 25% if another four to six years is factored in when planning for retirement, depending on their country of origin. If they want to further reduce their longevity risk from 50% to 10%, household retirement plans should factor in another seven to ten years. The three key determinants of retirement duration 1 Retirement age Retirement age is one of the three key variables that affects the duration of retirement. With average lifespans across the region increasing and retirement ages remaining flat or creeping up only slowly, an everincreasing portion of an individual s lifespan is being spent in financial deficit (ie, consumption exceeding labour income). While the financial deficit experienced during childhood is largely funded by parents, the elderly must fund that deficit via a combination of the five key components of retirement income we identified in the Aging Asia report Asset rich, income poor: Salary and wages (ie, delaying retirement or holding a full- or part-time job in retirement); Government social spending (eg, public healthcare); Pension benefits; Family financial support; and Income arising from household wealth (eg, investment income or drawing down savings). As the length of time elderly individuals spend in financial deficit extends, the quantum of the deficit is growing thanks to inflation and an increasing strain is being placed on these income sources, often significantly exacerbating longevity risk. Faced with rapidly aging populations, shrinking active labour forces, declining family support for the elderly and growing fiscal strain on pension schemes and healthcare systems, governments in the East and West have developed and implemented a multitude of strategies designed to decrease longevity risk. Raising official retirement ages has been one of the key policies pursued, with almost every country and territory in the region having already increased their official retirement age or considering the possibility. 5

6 Figure 2: Official retirement ages across Asia China Hong Kong Indonesia Japan Malaysia Philippines Singapore Retirement age 60 for men, for women; mandatory No official retirement age 55 minimum 61 mandatory 60 minimum 60 minimum, 65 mandatory 62 statuatory Comments and implications Actively discussing raising mandatory retirement age Mandatory Provident Fund (MPF) allows withdrawals from age 65 (from 60 under certain circumstances) Applies to urban workers, with exceptions for certain professions (medical, civil servants, professors) The Indonesian government has passed a law raising the retirement age for civil servants to 58 for certain grades and 60 for senior officials, but it has yet to be signed off and implemented No mandatory retirement age for rural sector and small and mediumsized enterprises 2013 Law Concerning Stabilisation of Employment of Older Persons raised mandatory retirement age to 61 and prescribes one year increases every three years thereafter until 2025, when the mandatory age will reach 65 Raised from 55 to 60 in 2013 Pension beneficiaries can withdraw Employee Provident Fund (EPF) benefits from 55 Applies to all private sector employees unless their relevant retirement plan or other specific legal provisions stipulate otherwise Mandatory retirement age set at 60 in 1993 and raised to 62 in Employers are now required to offer re-employment up to age 65 Covers all Singapore citizens and permanent residents Central Provident Fund (CPF) members can currently withdraw their CPF savings at the age of 55 if they have set aside the current CPF Minimum Sum* Taiwan 65 mandatory Raised from 60 to 65 in 2008 Thailand Vietnam 60 normal 60 for men, 55 for women Pension age for private sector workers is 55 At least 15 years service required for monthly pension benefits Men can retire at 50 if they have contributed to their pension for at least 30 years Ministry of Labour, War Invalids and Social Affairs has proposed ages should be raised by five years for men and women * For those who turn 55 years old from 1 January 2013 and have accumulated more then SG$40,000 in CPF cash savings, or for those who are born after 1958 and have accumulated more then SG$60,000 in CPF cash savings when reaching their drawdown age (DDA), they must join the CPF Life annuity scheme. For further details please visit: Source: Manulife Asset Management, individual government web resources. 6

7 2 Life expectancy The second core driver of retirement duration is life expectancy, which is rising in much of the world due to improving healthcare, better nutrition and higher standards of living. Longevity in Asia has increased particularly quickly, albeit from a low base. From 1950 to 2010, average life expectancy at birth increased by 22 years on a global basis and by 28 years in Asia. Asymmetrical life expectancy gains While earlier life expectancy gains were driven primarily by declining infant mortality rates, they are increasingly the result of life extension older people are living longer. Based on current life expectancy forecasts, over the next forty years average life expectancy at birth is set to increase a further 6.0 years worldwide and an additional 5.5 years in Asia 1. Thus, absent concurrent and commiserate increases in retirement ages, retirement duration will also continue to rise and the financial burden of preparing for retirement will climb in parallel. However, it is important to note that these longevity improvement forecasts are averages and that individual countries and territories are likely to show widely varying increases. This has certainly been the case in Asia since the 1950s, with Indonesia and China having shown extraordinary increases in average longevity over this period. Japan, of course, currently has among the longest life expectancies in the world, especially for females, and Hong Kong and Singapore are not far behind in fact, longevity in Hong Kong and Singapore is forecast to eclipse that of Japan by In contrast, the Philippines trails the pack, with life expectancy a full 15 years shorter than that of Japan. Figure 3: Global life expectancy at birth (years) Source: United Nations Population Division. World Population Prospects: The 2012 Revision. Figure 4a: Life expectancy at birth in Asia (years) Japan Figure 4b: Life expectancy increase in Asia, 2010 versus 1950 (years) 31.3 Hong Kong Singapore 76.1 Taiwan 75.1 Vietnam World China Malaysia Thailand Asia 69.6 Indonesia Philippines Asia World Indonesia China Thailand Vietnam Singapore Japan Malaysia Hong Kong Taiwan Philippines Asia World Note: Life expectancy is for both genders except in the case of Taiwan, which is for males only due to data limitations numbers reflect data for the period Source: United Nations Population Division, World Population Prospects: The 2012 Revision. National Statistics, Republic of China (Taiwan). 1. United Nations Population Division, World Population Prospects: The 2012 Revision. 7

8 Life expectancy and economic development One factor that helps explain widely diverging life expectancies across Asia is the relatively high correlation between economic attainment and longevity our calculations reveal a 66% positive correlation between per-capita GDP in purchasing power parity (PPP) terms and a country s life expectancy at birth 2. As Figure 5 illustrates, even modest levels of economic progress for developing countries and territories can have an outsize impact on longevity, but in more developed economies further gains in economic attainment have a diminishing effect. This dynamic suggests that Indonesia and the Philippines, which are both relatively early in their demographic dividends and are forecast to show robust economic growth going forward, are likely to see rapid increases in life expectancy. However, it is important to note that improved life expectancy in these two nations will likely come alongside increased longevity risk. Figure 5: Global life expectancy versus economic attainment 90 Life expectancy and gender Longevity improvement has been uneven across gender. While the male-female life expectancy gap has been narrowing in much of the world, this has not been the case in Asia, where life expectancy has generally improved more rapidly for females than males. In the 1950s, Asia s male-female life expectancy gap was less than a year, but by 2010 this had widened to almost four years and about a decade in the case of Vietnam 3. According to the UN, Asia s male-female life expectancy gap is not expected to widen much further in coming decades, suggesting that the challenges posed by divergent life expectancies is likely to be contained. However, the existing gap combined with the fact that husbands are often older than their wives means that female retirement can last an average of a decade longer than male retirement. This poses a potentially significant challenge to governments across the region, as widows are often the least secure from a retirement income perspective and could place significant fiscal stress on government budgets. Figure 6: Change in male-female life expectancy gap (years) Life expectancy at birth (years) ,000 40,000 60,000 80, , ,000 GDP per capita (PPP) by country Vietnam Japan Philippines Thailand Taiwan Hong Kong Singapore Malaysia Indonesia China Asia World Source: International Monetary Fund, World Health Organization; life expectancy gap life expectancy gap Source: United Nations Population Division, National Statistics, Republic of China (Taiwan). Calculations reveal a 66% positive correlation between per-capita GDP in purchasing power parity (PPP) terms and a country s life expectancy at birth. 2. Manulife Asset Management, The International Monetary Fund, World Health Organization. 3. Manulife Asset Management calculation based upon data from the United Nations Population Division, World Population Prospects: The 2012 Revision. 8

9 3 Marital status The third core input to our retirement duration analysis is marital status. The fact that the vast majority of Asians entering retirement do so as part of a married couple influences retirement duration in two key ways. First, and most critically, married couples cannot consider individual longevity when assessing their retirement duration. They must instead consider the very real likelihood that one may outlive the other by a potentially significant margin, meaning that it is the joint life expectancy of husband and wife that is relevant to retirement planning. Second, as mentioned above, because females typically live longer than males and are often younger than their husbands, it is highly likely that they will experience far longer retirements. Thus, while we are mindful that the institution of marriage is changing rapidly in Asia, our analysis of longevity risk focuses on married couples. Marriage the norm, but declining in Asia Family has historically been the bedrock to social stability within Asia. In fact, we believe that many governments in the region do not provide European-style financial support for households as they do not want to undercut this social support network. In developed Western society, the institution of marriage has been diminishing for some time as divorce rates have risen and the number of children born out of wedlock has increased. As populations in Asia have urbanised and female labour participation has increased, the region has begun to see similar changes. Save for China, which has actually seen an increase in marriage, almost every Asian economy has seen marriage levels fall, with the largest declines occurring in the most economically accomplished economies. As these trends are taking root, we expect a growing proportion of the elderly in Asia to enter retirement unmarried. That being said, marriage remains the de-facto standard for retirees in the region and retirement planning must therefore reflect joint life expectancy in almost all cases. Even if marriage rates continue to fall across Asia, the example of the US suggests that the majority of those entering retirement will do so as part of a married couple for the foreseeable future. Male-female life expectancy gap The male-female life expectancy gap has significant implications for retirement duration in the context of married couples basically, the wider this gap, the longer a sole survivor (usually the female) will live in retirement after the death of his or her spouse. Historically speaking, intensively agriculture-based economies have been typified by large differences in marital ages. However, as economies have urbanised, the age gap between husbands and wives has tended to narrow. Thus, from an Asian perspective, it is unsurprising that the largest age gaps are found in developing economies. Figure 8: Average husband-wife age gap for first marriages in Asia (years) 3.5 Vietnam 3.4 Indonesia 3.3 Thailand 2.7 Taiwan 2.6 Philippines Source: United Nations Population Division, National Statistics, Republic of China (Taiwan). Hong Kong Singapore 2.3 Malaysia 1.8 China 1.5 Japan Figure 7: Marital status in Asia at retirement age by gender 100% 80% 60% 40% 20% 0% M F M F M F M F M F M F M F M F M F M F China Hong Kong Indonesia Japan Malaysia Philippines Singapore Taiwan Thailand Vietnam Single Married/Consensual union Widowed Divorced/Separated Note: For ages 55-59, males and females data for Hong Kong, 2010 data for China, Indonesia, Japan, Malaysia, Philippines, Singapore, Taiwan and Thailand and 2009 data for Vietnam. Source: United Nations Statistics Division, 2011, 2012 and Taiwan data from 2010 Population and Housing Census. 9

10 Retirement duration analysis We combined our understanding of retirement ages, life expectancy and differences between male and female life expectancy within married couples with our affiliate life insurance company s actuarial mortality insights to develop a probabilistic analytical tool which forecasts country specific retirement durations for Asia. This tool, called the Asia Retirement Duration Model (ARDM), produces a full lifecycle view of retirement duration from the initial stage as a married couple through the transition toward a sole survivor. ARDM has three key inputs: Retirement age For our base-case scenario, we considered actual average retirement ages for each market to show a realistic picture of how retirement behaviours unique to each market affect retirement duration and, in turn, longevity risk. Life expectancy The base-case scenario reflects country and gender-specific mortality analysis based on life expectancy tables 4, actual average retirement ages for each market and actual average husband-wife age gaps within married couples within those markets 5. Marital status We focused on married couples at the point of retirement, as discussed above, and calculated retirement duration based on the longevity of the sole survivor. Rather than just focusing on mean retirement longevity of the sole survivor households planning for the mean retirement duration face significant longevity risk as they have a 50/50 chance of exhausting their savings before death we also calculated retirement duration to the 75th and 90th percentiles of confidence. Households which base their retirement plans on these longer durations have a substantially lower probability of outliving their assets. Retirement duration and longevity risk in Asia Each country and territory we examined exhibits unique retirement behaviours that are shaped by historical precedence, government policies, pension eligibility ages, stage of development, accumulated household wealth and a wide range of related factors. Our base-case retirement scenario reflects the average age at which the elderly exit the labour force in that market as a proxy for retirement age and also incorporates actual average age gaps between husbands and wives. This provides a useful insight into the actual longevity risk confronting couples in each of the 10 markets. What is perhaps most interesting about our results is the finding that the markets facing the highest levels of longevity risk are not necessarily those with the longest life expectancy at birth. Higher longevity risk: Taiwan, Thailand, Hong Kong, China, Malaysia Our analysis revealed that the market facing the highest degree of longevity risk is Taiwan. Taiwan has the shortest life expectancy among the more developed countries and territories we examine on par with that of less-developed Vietnam. While this reduces longevity risk for Taiwanese retirees, the effect is offset by the territory s larger-thanaverage life expectancy gap between males and females and its low elderly labour force participation rate, the second lowest among the 10. In our view, Taiwan s high level of longevity risk is buffered in part by the Taiwanese government s relatively generous and comprehensive pension regime, strong government social spending in areas such as healthcare and its high level of household savings the highest in the region based on our research. Accordingly, if Taiwan s national pension system proves unsustainable and pension benefits fall, we would expect to see a sharp increase in elderly labour force participation to enhance retirement income security. Longevity risk in Hong Kong, China and Thailand which show average retirement duration of 29.8 years at the 50th percentile of confidence, but 39.0 years at the 90th percentile 6 comes close to that of Taiwan. Hong Kong s significant longevity risk is influenced by its low elderly labour force participation rate the lowest among the countries and territories considered combined with its longer-than-average life expectancy and significant malefemale life expectancy gap. 4. Derived from government sources in the case of Hong Kong, Japan and Singapore; Taiwan life expectancy tables only go up to age 85, and projections beyond age 85 are based on adjusted China life expectancy tables and the World Health Organization Global Health Observatory for all other territories. 5. Based on data from the United Nations Population Division. 6. Data for Beijing is presented as a proxy for China. 10

11 Meanwhile, China s high degree of longevity risk is influenced by low mandatory retirement ages and our findings help explain the Chinese government s on-going efforts to raise these. Thailand is in a similar situation, as a large portion of its private and public sector employees are subject to mandatory retirement at age 60. Malaysia has roughly the same life expectancy at birth as China, but research suggests that Malaysians attach far less importance to retirement as a financial objective. This attitude is influenced by the fact that a high proportion of Malaysians expect to receive financial support from their adult children during their retirement years 7. This, combined with a low official retirement age which was only recently raised from 55 to 60, is no doubt a key reason why Malaysians leave the labour market relatively early. Accordingly, we consider Malaysia to be facing a relatively high degree of longevity risk only time will tell whether the new, higher mandatory retirement age will contribute to changing retirement behaviour and lessen the degree of risk. Lower longevity risk: Indonesia, Vietnam, Singapore, Japan, the Philippines Indonesia s lower level of longevity risk is tied to relatively short life expectancy and its low official retirement age of 55. However, Indonesia is relatively early in its demographic dividend a population bulge which transitions through working age up to retirement, generating aggregate income levels in excess of aggregate consumption, consequently increasing savings and investment, which results in a generally higher level of economic activity and likely has many years of robust economic growth and rising per-capita incomes ahead. Thus, longevity risk is likely to rise in Indonesia going forward due to the aforementioned correlation between level of economic attainment and longevity. It may come as a surprise that Vietnam s level of longevity risk is actually in the lower range despite its relatively low mandatory retirement age and rising life expectancy. That being said, the level of longevity risk facing Vietnamese retirees could increase rapidly in the coming years unless policy makers take action to increase the nation s relatively low mandatory retirement age. One of the most interesting factors shaping longevity risk in Vietnam is the fact that the nation has the widest male-female life expectancy gap among the subject countries and territories. Thus, we believe that Vietnam s population of widows in need of financial support could expand rapidly as the nation ages. Singapore is another surprise, as it has among the longest life expectancies in the region next to Japan and Hong Kong but evinces a relatively low level of longevity risk. One contributor to this seeming contradiction is the fact that the Singapore government has made significant inroads in increasing elderly labour force participation the island nation s elderly labour force participation rate is high for a developed market and seems set to continue rising. It is similarly surprising to find that Japan, which has among the highest life expectancies at birth in the world, actually has the lowest longevity risk within the region save the Philippines. We believe that this is largely because elderly labour force participation is high among Japanese males in fact, the average retirement age for Japanese men is 69 8 compared to the official mandatory retirement age of 61. That being said, Japan is also in a situation where it must monitor longevity risk closely. As population aging progresses in the nation, a higher and higher percentage of its retirees are falling into the old old category for which ability to work is often curtailed and healthcare costs are high. As this trend progresses, supporting this demographic group is likely to place increasing financial strain on the government. The Philippines lower level of longevity risk is largely due to the fact that it has the shortest life expectancy at birth among the 10 countries and territories examined. However, as is the case in Indonesia, we see the potential for longevity risk to rise going forward as the Philippines reaps the benefits of its demographic dividend and per-capita incomes rise and households are increasingly able to save and invest. Figure 9: Expected joint retirement duration for married couples in Asia (years) Taiwan Thailand China Hong Kong Malaysia Note: Reflects base-case of actual average retirement ages and husband-wife age gaps for each market. ARDM analysis for China reflects Beijing data as a proxy. ARDM analysis for Taiwan reflects Taiwan life expectancy tables, which only go up to age 85, and projections beyond age 85 based on adjusted China life expectancy tables. All other inputs for Taiwan are specific to that market. Source: Manulife Asset Management based on Asia Retirement Duration Model. Indonesia Mean 75th percentile 90th percentile Vietnam Singapore Japan Philippines 7. Manulife Investor Sentiment Index, November OECD, Ageing and Employment Policies - Statistics on average effective age of retirement,

12 Expectation versus reality: Underestimating retirement duration Our analysis of retirement duration across Asia and related degrees of longevity risk clearly illustrates the challenges facing those saving for retirement and governments looking to provide for their growing elderly populations. This is further complicated by the fact that most households in Asia significantly underestimate the potential length of their retirement and accordingly are likely not saving enough. The Manulife Investor Sentiment Index (MISI) survey asks 4,000 investors across eight markets in Asia 9 how long they believe that they will have to live off of their retirement savings. Comparing those results to our ARDM forecasts shows a significant divergence between investor expectations and the retirement duration they will likely face. While this ranges from a relatively insignificant 1.9 year gap in the Philippines to a staggering 13.5 year gap in Malaysia, it averages a significant period of 8.9 years. Figure 10: Retirement duration expectations versus ARDM projections (years) Taiwan Hong Kong China Malaysia Indonesia Singapore Japan Philippines ARDM MISI survey Note: The Manulife Investor Sentiment Index survey was conducted in November 2013 across eight countries and territories and 4,000 survey respondents. The results above are the average responses to a survey question regarding how long respondents think they will live off of their retirement assets. The ARDM results are based on average actual retirement ages by market and average actual husband-wife age gaps for married couples (see Appendix 1). ARDM analysis for China reflects Beijing data as a proxy. ARDM analysis for Taiwan reflects Taiwan life expectancy tables, which only go up to age 85, and projections beyond age 85 based on adjusted China life expectancy tables. All other inputs for Taiwan are specific to that market. Source: Manulife Asset Management s ARDM, Manulife Investor Sentiment Survey. 9. The Manulife Investor Sentiment Index in Asia is a quarterly, proprietary survey measuring and tracking investors views across eight markets in the region China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, Singapore and Taiwan on the attitudes towards key asset classes and related issues. Research quoted was conducted in November

13 Sensitivity analysis: Retirement age We believe that sensitivity to retirement age is a key input to a holistic assessment of longevity risk. Therefore, we also analysed three additional scenarios which disregard variability among countries and territories in terms of retirement age and husband-wife age gap. These scenarios reflect a three-year husband-wife age gap 10 and assume that both: Sensitivity case 1: Retire early at age 55 Sensitivity case 2: Retire at the normal age of 60 Sensitivity case 3: Retire late at age 65 Unsurprisingly, we found that retirement age and longevity risk are perfectly correlated ie, retiring one year earlier increases longevity risk by one year and vice-versa. This may seem axiomatic, but has powerful implications for how easily individuals can take action to reduce their longevity risk if they find their retirement income resources fall short of their expectations. Sensitivity analysis: Marital status As our longevity risk analysis is based on joint retirement duration for married couples, it is worthwhile to consider the sensitivity of longevity risk to marital status by examining the difference between an individual entering retirement single versus as part of a married couple. The results clearly illustrate the importance of taking joint life expectancy into account when planning for retirement. For example, ARDM indicates that a married male planning for retirement should add about 7.1 years to their expected retirement duration to account for the longer life expectancy of their spouse in the Philippines and 10.2 years in Hong Kong. This is a significant amount of extra time in financial deficit to plan for, and has far-reaching implications for the amount of retirement assets that must be accumulated. In fact, our sensitivity analysis reveals that variations in joint versus single longevity risk across economies arise mainly from differences in male and female life expectancy. Economies with wide male-female life expectancy gaps, such as Hong Kong, Japan, Singapore, Taiwan and Vietnam, evidence by far the largest differences in expected retirement duration for single males versus married couples. Figure 11: Gap between single male and married couple retirement longevity (years) Hong Kong Singapore Japan Taiwan Thailand Vietnam Malaysia China Indonesia Philippines Note: Assuming a married couple retiring when the male is aged 65 and the female is three years younger (see footnote 10). ARDM analysis for China reflects Beijing data as a proxy. ARDM analysis for Taiwan reflects Taiwan life expectancy tables, which only go up to age 85, and projections beyond age 85 based on adjusted China life expectancy tables. All other inputs for Taiwan are specific to that market. Source: Manulife Asset Management based on Asia Retirement Duration Model. Economies with wide male-female life expectancy gaps evidence by far the largest differences in expected retirement duration for single males versus married couples. 10. In line with the actual aggregate average of 2.61 years for the 10 countries and territories analysed based on data from the United Nations Population Division and National Statistics, Republic of China (Taiwan). 13

14 Longevity risk and providing for sole survivors ARDM also provides insight into how long married couples can expect to live together in retirement versus one or the other surviving alone. Marital age differences and the longer average lifespans of females mean that the sole survivor of a married couple is generally a widowed wife. ARDM reveals that married couples can expect to spend anywhere from 50-75% of their aggregate retirement duration together, but that the sole survivor usually the wife is likely to spend a considerable portion of their retirement alone. This has significant implications for joint retirement planning as females generally exit the labour market earlier than their male counterparts and thus usually have fewer retirement income resources at their disposal. However, while income can drop precipitously for the surviving spouse, retirement expenses do not usually halve following the death of a husband or wife as cohabitation delivers economies of scale for living costs. In aggregate, this suggests that Asia will likely face a growing wave of widows with diminished financial resources as its populations age. These surviving widows could represent a serious policy challenge for governments across the region. Taking Taiwan and the Philippines as an example (see Figure 13), ARDM reveals a broad array of potential joint retirement duration outcomes for retired couples, with retirement duration skewed towards ultra-long for Taiwan couples but more normally distributed around a mean duration of years for Philippine couples. ARDM indicates that a small minority will have ultra-short retirements of zero to five years, but the overwhelming majority in both markets will see retirements last 20 years or more. While this represents significant variability to account for when planning for retirement, the consequences of misdiagnosing retirement duration are asymmetrical over-estimating retirement duration has a far more favourable outcome than underestimating and subsequently outliving retirement savings. Figure 12: Mean sole survivor retirement duration after spouse s death (years) 13.6 Thailand Note: Reflects base-case of actual average retirement ages and husband-wife age gaps for each market (see Appendix 1). ARDM analysis for China reflects Beijing data as a proxy. ARDM analysis for Taiwan reflects Taiwan life expectancy tables, which only go up to age 85, and projections beyond age 85 based on adjusted China life expectancy tables. All other inputs for Taiwan are specific to that market. Source: Manulife Asset Management based on Asia Retirement Duration Model. Figure 13: Taiwan versus Philippines retirement duration 1.8% 0.5% 0-5 yrs 13.1 Taiwan 1.9% 6.5% 6-10 yrs Malaysia 5.0% 15.6% yrs Indonesia Taiwan 10.5% 11.9 Hong Kong 24.7% yrs 19.2% 26.5% yrs 27.7% yrs 17.0% Philippines 25.7% yrs Note: Assuming a married couple retiring when the male is aged 65 and the female is three years younger (see footnote 10). ARDM analysis for Taiwan reflects Taiwan life expectancy tables, which only go up to age 85, and projections beyond age 85 based on adjusted China life expectancy tables. All other inputs for Taiwan are specific to that market. Source: Manulife Asset Management based on Asia Retirement Duration Model Vietnam China Singapore Japan 6.7% 9.5% Philippines yrs 1.2% The consequences of misdiagnosing retirement duration are asymmetrical over-estimating retirement duration has a far more favourable outcome than underestimating and subsequently outliving retirement savings. 14

15 This is also clearly illustrated in retirement lifecycle charts for Taiwan and the Philippines (see figures 14a and 14b). Both begin with a married couple retiring together, transition to either a male or, more likely, female sole survivor and, ultimately, to the end of retirement with the death of the sole survivor. The charts clearly portray the probability of when these transitions are likely to occur and the extent of time that the sole survivor is likely to spend in retirement following the death of his or her spouse. It also shows that female sole survivors will likely be far more prevalent than male sole survivors. Finally, the retirement lifecycle charts show that retirement duration is backloaded in an economy such as Taiwan meaning that most couples entering retirement in this market can have a high degree of confidence that their dual retirement duration will be at least 26 years. With that understanding, those planning their retirements in long-lived markets will have a far better understanding of the retirement challenge they face and the amount of assets needed to minimise the risk of outliving their sources of income. Figure 14a: Taiwan s retirement lifecycle 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Note: Assuming a married couple retiring when the male is aged 65 and the female is three years younger (see footnote 10). ARDM analysis for Taiwan reflects Taiwan life expectancy tables, which only go up to age 85, and projections beyond age 85 based on adjusted China life expectancy tables. All other inputs for Taiwan are specific to that market. Source: Manulife Asset Management based on Asia Retirement Duration Model. Figure 14b: Philippines retirement lifecycle 100% Both alive Male only Female only Both deceased 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Both alive Male only Female only Both deceased Note: Assuming a married couple retiring when the male is aged 65 and the female is three years younger (see footnote 10). Source: Manulife Asset Management based on Asia Retirement Duration Model. 15

16 Conclusion Rapidly aging populations represent a challenge to governments, households and financial institutions across Asia from the perspective of retirement income security. This challenge is significantly aggravated by the fact that life expectancy is improving in the region, retirement ages remain generally low and marriage patterns are beginning to mirror those in the West (ie, marrying later in life, having fewer children and potentially divorcing). The situation is further aggravated by the fact that our research reveals that households in the region do not fully appreciate the potential duration of their retirements and thus tend to exacerbate longevity risk by not saving enough to cover their extended periods of financial deficit. This disconnect is magnified for married couples, which are significantly underestimating their potential retirement duration if they base their calculations on single rather than joint life expectancy. Our research further reveals that there is a large fan of potential outcomes around average retirement durations and that the ramifications of getting it wrong are asymmetrical. Our retirement duration analysis shows that each market in Asia is unique in terms of the degree of longevity risk faced, the causes of this risk and their stage of development. The only common bond we have uncovered is that all are aging rapidly and all seem to underappreciate the extent of the risk involved. This implies that the policy responses pursued by governments and the savings strategies pursued by households need to be unique to the particular circumstances in each country or territory. Overall, our findings reveal that retirement planning should be based on significantly longer retirement duration expectations than the averages that most households currently rely on. Our online ARDM tool is one resource households can use to reality check retirement duration expectations and our Aging Asia research has highlighted five key retirement income resources which can help ensure retirement income security: salary and wages; government social spending; pension benefits; family financial support; and income arising from household wealth. As illuminated in past Aging Asia research reports, there are the several key ways that households can enhance their retirement income security and decrease their degree of longevity risk. These include: efficiently deploying household financial wealth (see The Asian cash drag: Alternatives for a more diversified portfolio) and extending labour force participation into retirement (see Expectations vs Reality: Elderly labour force participation and retirement income security). 16

17 Appendices 17

18 Appendix 1: Retirement longevity scenarios Scenario Objective Description Base case Country specific retirement outcomes We use actual average retirement ages and husband-wife age gaps to show what the typical retirement looks like within each of the 10 markets included in our research. Market Husband s age at retirement Wife s age at retirement Age gap China Hong Kong Indonesia Japan Malaysia Philippines Singapore Taiwan Thailand Vietnam Sensitivity case 1 Early retirement For all markets we assume retirement age of 55 for husband and wife is three years younger* Sensitivity case 2 Normal retirement For all markets we assume retirement age of 60 for husband and wife is three years younger* Sensitivity case 3 Late retirement For all markets we assume retirement age of 65 for husband and wife is three years younger* * In line with the actual aggregate average of 2.61 years for the 10 countries and territories analysed based on data from the United Nations Population Division and National Statistics, Republic of China (Taiwan). 18

19 Appendix 2: Mortality methodology and assumptions We analysed 10 countries and territories within Asia using actuarial life tables for males and females on a country specific basis. We performed a joint probability analysis for any given period that estimates the likelihood that both members of a married couple are alive, one or the other is deceased and, ultimately, that both are deceased analysis of the latter is based on sex- and age-specific mortality rates. The output of this modelling is a year-by-year, probabilistic distribution of the full retirement lifecycle for elderly retirement duration segmented by married couple, widow/widower and both deceased. Projections reflect expected mortality improvements over time, but no further mortality improvements were assumed beyond China mortality rate tables for the years 1990, 2000 and 2011 are available from the World Health Organization Global Health Observatory. Data was grouped by five-year age intervals. Mortality rate tables by provinces and cities are also available from a published study, National and Provincial Life Tables Derived from China s 2000 Census Data, which also groups results by five-year age intervals. Our analysis led us to use mortality data for Beijing as a proxy for China. Mortality rates for single ages were then recalculated by extrapolating and re-fitting the survival rate table (Lx) and recalculating age-specific mortality rates. Agespecific mortality rates were then projected for the years based on average improvement rates observed during , and graded over three periods: , and The same improvement rates were assumed for males and females based on observed historical experience. Mortality rates were then smoothed using a simple moving average method. For Hong Kong, mortality rate tables for the years , as well as projections for the year 2016 and each subsequent five-year interval through 2041, are available from the Hong Kong Census and Statistics Department. Mortality tables for intermediate years were derived via interpolation. Projected mortality tables for the years following 2041 were estimated based on average improvement rates observed during , smoothed, with the expected improvement rates for males and females assumed to converge over time. For Japan, mortality rate tables for the years are available from the Japan Ministry of Health. Projected mortality rates for the years were estimated based on average improvement rates observed during , and improvement rates graded over three periods: , and The same expected improvement rates were assumed for males and females, based upon observed historical experience. Singapore mortality rate tables for the years are available from the Singapore Department of Statistics. Projected mortality tables for the years were estimated based on average improvement rates observed over , and improvement rates graded over three periods: , and Separate improvement rates were assumed for males and females. Mortality tables for Taiwan only extend to age 85. To extend the Taiwan life tables beyond age 85, we undertook a comparative analysis between Taiwan and China up to age 85. Based on that relative comparison, we then extended the Taiwan life tables beyond age 85 using China data. For Indonesia, Malaysia, the Philippines, Thailand and Vietnam, mortality rate tables for the years 1990, 2000 and 2011 were available from the World Health Organization Global Health Observatory. Data was grouped into fiveyear age intervals. Mortality rates by single age were then recalculated by extrapolating and re-fitting the survival rate table (Lx). We then recalculated age-specific mortality rates. Age-specific mortality rates were then projected for the years based on average improvement rates observed during , and graded over three periods: , and Separate improvement rates were assumed for males and females based on observed historical experience. Mortality rates were then smoothed using simple moving averages. 19