There is no one-size-fits-all for the globally prevalent problem of providing security for ageing populations, according to a discussion by a panel of experts at the Global Insurance Forum in Berlin.
(L-R): Mr Luis Valdes, President and Chief Executive Officer, Principal International; Ms Jessica Mosher, Private Pension Analyst, OECD; Mr Takahide Maruki, Manager, Group CEO Supporting Office, Sompo Holdings; Mr Ari Chester, Principal, McKinsey & Company; Mr Vijay Kumar Sharma, Chairman, Life Insurance Corporation of India; Mr Thomas Cheong, President North Asia, Principal International
One speaker observed, not only is pensions reform a politically sensitive issue, “one thing pensions have in common with insurance is, it’s an important problem, but it’s always viewed as a problem you can put off for another day.”
Principal International president and CEO Luis Valdes, who moderated the session, noted that there are three general pension trends: the move from payable system to fully-funded ones; from defined benefits to defined contributions; and from occupational pension plans to those tailored to individuals.
From the discussion, the way to close the pension gap is for the public and private sector, including life insurance companies and asset managers, to look at new solutions, including innovative ones
Among the key takeaways from the experts:
How acute is the retirement gap? - McKinsey principal Ari Chester
Providing a global perspective from his experience working with multiple pension schemes, Mr Chester noted that the pension gap in eight major economies (Canada, Australia, Netherlands, Japan, India, China, the UK and the US) stood in excess of $70tn in 2015, but is predicted to hit $400tn in 2050. The gap is getting worse for these reasons:
- Longevity. Someone who was 65 in 1980 would live until 80, but someone who is 65 today lives on average till 95.
- Old-age dependency ratio has increased. In 1950, OECD countries saw 10 workers for one retiree. Now there are five to one, and in 2050, this will be just two to one.
- People are not saving.
- Public pensions in OECD were 5% of GDP in 1980 and 8% now. In the US, the cost of social security programmes are going to exceed income for the first time in 2020.
- Interest rates are down and will bring low returns.
- Morbidity. There is a health gap, with people living longer but unhealthier lives.
China’s pension reform - Principal International president North Asia Thomas Cheong
China is facing demographic challenges. It is projected that 30% of the population will be aged over 65 by 2050. Its population will decrease and dependency ratios will fall.
Yet this is happening when it is still growing from an emerging economy to a developed one, and has not yet accumulated a stash of wealth, unlike mature Western economies.
Longevity risks increasingly being shifted to individuals
I turned 75 - more people should
The majority of its pension accumulated savings resides in Pillar 1 while the remaining is in Pillar 2 (mainly state-owned enterprises) and none in Pillar 3. Eighty per cent of the population is not covered by any mandatory pension plan.
The government needs to shift the pension burden from Pillar 1 to Pillars 2 and 3 and address structural problems:
- Retirement age in China is relatively low, at 55 for women and 60 for men even as life expectancy is above 80
- Declining fertility rates as the economy develops. This has proved to be difficult to reverse in most countries.
Mr Cheong highlighted the following policy reforms China is already working towards:
- A shift from Pillar 1 to 2, to alleviate the burden on the employer. For a start, Pillar 2 will be mandatory through introducing an occupational annuity that applies to all civil servants
- Addressing the labour mobility issue by reallocating the pension pot. This means resolving the distribution of surpluses in wealthy urban areas where people work and contribute to pension schemes, compared to rural areas, where people eventually retire but are only able to tap small coffers.
- Incentivise a shift to Pillar 3. In Shanghai, Suzhou and Fujian, China has launched a pilot programme to encourage the purchase of commercial pension insurance by offering tax exemptions to buyers, with a view eventually to expand this nationwide to include pension and asset management firms.
India’s rising middle class - Life Insurance Corporation of India chairman Vijay Kumar Sharma
India’s rising middle class provides numerous opportunities for pension funds and insurers. It is unique in being a diverse country, with 60% rural population against 40% in urban areas. In rural areas, there is little or no access to pension schemes and the government has made recent efforts to improve social security. In 2014, the government introduced Pradhan Mantri Jan Dhan Yojana (PMJDY), a scheme that aims to expand and make affordable access to financial services such as bank accounts, remittances, credit, insurance and pensions.
Another major initiative was to introduce a guaranteed pension scheme for senior citizens in 2017. PMJDY is offered by LIC and offers an assured return of 8% over 10 years. If there is a shortfall between the actual return earned under the scheme and the guaranteed return of 8%, the government will subsidise LIC for it.
- Change consumer behaviour to make them help themselves - eg, encourage saving through tax incentives and raising awareness
- Annuitise retirement assets. This is easier said than done, given the large capital needed for annuity markets and the population’s general dislike for annuities, which are seen as risky investments should their life expectancy be lower than expected
- Design new products that are structured to be less capital intensive, reduce guarantees but offer higher pay-outs
- Some US successes in wealth management products can be brought to other markets - low-cost mutual and ETF target date funds and monetising illiquid assets into income streams, eg, reverse mortgage and home equity loans
- Move to collective products, like collective defined contribution plans which eliminate guarantees and are based on pooled risks and economies of scale.
- Insurers should look beyond insurance in providing complementary services. Companies like Sompo are expanding into relevant nursing and healthcare business which also increases customer contact.
- The insurance industry has the responsibility to communicate the need for urgent reform of pensions systems
Keep the message for the population at large simple: Start early, save enough and diversify your risks.
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