Way Forward for Pensions Globally (From A Service Provider Perspective) Rex Auyeung President Asia Principal Financial Group April 3, 2012 1
Developing Trends in Global Pension 1. Various types of reform 2. Growth in privatization 3. Product evolution 4. Plan sponsors prefers defined contribution plan over defined benefit plan 5. Lifestyle changes 6. Asia growth story 2
3 1. Various Types of Reform
Main Types of Pension Reforms Around The World Raising contribution rates (e.g. Malaysia) Raising minimum retirement ages (e.g. U.S.) Increase minimum number of contribution years to qualify for pension (e.g. France) Cut back on rich-benefit retirement programs (e.g. Greece) New options for default fund (e.g. Target date fund) 4
5 2. Growth in Privatization
Public Pension Spending Faces Upward Pressure Countries are looking at pension privatization to reduce pressure on public pension expenditures 6
What Can You Learn from Developed Countries Experience? Many emerging markets will consider some form of pension privatization to encourage early savings Build towards an adequate and sustainable system Not over-promise pension benefits Fix your system before it is too late! 7
Benefits of Private Pension Pension funds provide essential liquidity that helps make domestic financial markets function effectively and efficiently Pension funds are critical drivers of growth and economic activity in domestic market because they are one of the only significant sources of long term, patient capital Positive impact on job market 8
9 3. Product Evolution
Retirement Product Provider Trends Pre-retirement products Lifecycle Funds (Target Date, Target Risk funds) Deferred annuity Post-retirement products Immediate annuity Reverse mortgage Pension Administration User empowerment on administration and information access through electronic means i.e. internet Paperless 10 More mobile
4. Plan Sponsors Prefer DC Plan Over DB Plan 11
Transition from DB to DC Environment 12 SOURCE: Towers Watson The survey covers Australia, Canada, Japan, Netherlands, Switzerland, UK and US
Why DC Plan is Preferred? Advantages to Workers Portability Personal control Fair benefits as traditional DB plan benefits are skewed to favor the longer term and oldest workers over others Advantages to Plan Sponsors No investment risk No unfunded liability Greater control over costs 13
14 5. Lifestyle Changes
Lifestyle Changes Working beyond retirement Retirement homes New products/services relate to the elderly population Medical care Adult care center Senior citizens accessories Travel service 15
16 6. Asia Growth Story
Role of Asian pension funds in the top 20 ranking 2010 2009 Rank Rank Fund Market Assets (US$ million) 1 1 Government Pension Investment Japan $1,432,122 2 2 Government Pension Fund Norway $550,858 3 3 ABP Netherlands $318,807 4 4 National Pension Korea $289,418 5 5 Federal Retirement Thrift U.S. $264,013 6 6 California Public Employees U.S. $214,387 7 7 Local Government Officials Japan $189,633 (1) 8 12 Canada Pension Canada $149,142 (2) 9 19 Employees Provident Fund Malaysia $145,570 10 11 Central Provident Fund Singapore $144,844 11 8 California State Teachers U.S. $138,888 12 9 New York State Common U.S. $133,023 13 10 PFZW Netherlands $133,002 14 14 National Social Security China $129,789 15 18 GEPF South Africa $128,232 (1,2) 16 15 Pension Fund Association Japan $124,987 (1) 17 16 ATP Denmark $123,757 18 13 Florida State Board U.S. $123,373 19 17 New York City Retirement U.S. $115,204 20 22 Ontario Teachers Canada $108,148 $4,957,197 1 Estimate 2 As of 31 March 2011 3 As of 31 March 2010 4 As of 30 June 2011 17 Source: Tower Watson
Asia Pacific: Rapid Retirement Asset Growth Expected Till 2020 18 The size of the bubbles reflects the estimated asset volume in 2020
Summary Growing need that government face to reform their pension systems into more financially sustainable structures Private and public pension funds create jobs and drive economic growth As the size of pension funds increase, the benefit of private pension to domestic economy will become more apparent Product innovation on pre-retirement asset accumulation and post-retirement income stream Asian pension funds will grow at a rapid pace and ease pressure on public pension expenditure 19
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