Emerging Asia has an estimated pension savings gap of USD 3.8 trillion per post-retirement year. This totals USD 74 trillion over workers' full retirement years, equivalent to USD 50 000 per worker, or 11 times the average worker's annual income, according to the latest Sigma study by Swiss Re.
The pension savings gap is the unfunded gap between pension funds available and the retirement need of emerging markets' working populations. It is calculated as all pension contributions (mandatory and voluntary) and expected returns on pension funds and accumulated savings during working years,subtracted from the sum of money required to fund 65% of pre-retirement income during retirement years.
Malaysia has the highest pension savings gap perworker in the region, at about USD 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 USD 79 000, primarily from higher life expectancy and so longer retirement periods for its workers than other markets.
Swiss Re Institute also measures the adequacy of pensions (pension savings gap as a percentage of the funds needed for adequate retirement income) in emerging 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 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
For India, there is a lower pension saving gap than China, due to younger labour force longer contributing years and high interest rates.The gap is likely underestimated due to high labour force informality.
Stronger partnership is needed to ensure pensions sustainability. Emerging market governments should support a sustainable pension system, with strong foundations in a sound regulatory framework,commitment to education, incentives to participate, such as tax exemptions,and solid partnership between all parties.
Partnership can also provide routes for insurers to invest in long-term, public-private projects that are a good match for their liabilities, such as infrastructure finance.
"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, says.
"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' longterm economic growth,'' he said.
Emerging Markets
Workers in emerging markets are retiring without sufficient assets to cover their pension needs, creating a total pension shortfall of about USD 106 trillion, Swiss Re Institute
estimates. This pension savings gap is roughly three times emerging markets' GDP, as high as estimates for major advanced markets such as the US and Australia.
The costs of under-funded pensions may return to governments through higher risk of poverty, ill-health and strain on younger generations, but 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 USD 1.2 trillion in premium equivalent terms, 60% of which would be in emerging markets.
"The risks being passed to individuals have the power to significantly disrupt their ability to save for a pension and, in turn, gain a steady income in retirement", Russell Higginbotham, President and CEO Asia, Swiss Re says.
"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.