Article

Viewpoints Q&A: Retirement security and sustainability in Asia

September 11, 2017
| China, Hong Kong, India +8 more
  • Indonesia
  • Japan
  • South Korea
  • Malaysia
  • Philippines
  • Singapore
  • Taiwan
  • Thailand

With ageing populations and a general lack of financial education, in many countries in Asia — including those with well-established social security programs — there’s a question mark around the sustainability of current retirement systems.

Our research shows that many Asian employees are not confident about their financial security during retirement — and that there’s a strong link between financial anxiety and stress, which then creates poor engagement and poor health. From an employer perspective, it’s also a cost issue if organisations are spending money to secure these benefits, but there is low uptake from their workforce.

Regional leaders from Willis Towers Watson’s Asia Retirement practice recently discussed retirement trends and challenges in the region, how the government is responding to these challenges, and the role of employers.

  • Jeff Howatt, Head of Retirement, North Asia
  • Kulin Patel, Head of Retirement, South Asia
  • Haichuan Wu, Head of Retirement, China

Q — What are some of the retirement trends and challenges in your market or sub-region?

A — Jeff Howatt: In North Asia, the key trend is ageing. Japan is the oldest country in the world, with already over a quarter of the population over 651. And South Korea is fast catching up. Both countries have a well-established social security program but, as you might expect, neither is adequate on its own to provide for retirement for individuals.

Our research shows a strong link between financial anxiety and stress, which then creates poor engagement and poor health.

In both countries, if someone were to fully participate in the social security program over their career they would have about a 40% replacement ratio (this is the ratio of the income you receive from your pension, to your income just before retirement). And that would be low earners. Those making more than the salary caps that are in place for contributions would have a ratio closer to 15 – 25%. So clearly, individuals need more to retire comfortably.

These fears have been borne out by our research — the 2015/2016 Global Benefit Attitudes Survey found that both Japan and South Korea both scored right at the very bottom when it came to how confident employees were about their financial security during retirement. Over 80% of respondents in both countries said that they were not confident in their ability to live comfortably 25 years into retirement, which is average life expectancy today. And our research shows a strong link between financial anxiety and stress, which then creates poor engagement and poor health.

A — Kulin Patel: South Asia’s interesting because it is so diverse — from countries like Singapore and Thailand with median ages approaching 40, which over the next decade or two may increase by another seven or eight years, to countries like the Philippines where median ages are still in their late 20s, and may only increase by maybe four or five years in the same timeframe. So there’s a very wide demographic, which means that the public retirement provision will also be at very different stages.

Probably the most embedded public scheme in the region is the Central Provident Fund (CPF) in Singapore. It’s well established, and well known within the workforce — but is it adequate? Even within that system, have employees really understood what their situation will be as they approach retirement and then years into retirement? It’s questionable.

For countries that are just starting that journey, in India for instance, which introduced a voluntary national pension system relatively recently, the uptake is low. Thailand is another example — the Thai government has just announced a new national pension plan that will be mandatory for companies with more than 100 employees from 2018 and they are just beginning to realise the implications and challenges in store in rolling out the plan.

A — Haichuan Wu: The ageing situation in China is similar to what Jeff described for Japan. But many feel even more pessimistic because, as they say, Japan is growing rich before the people get old. In China, while the population is ageing, government funding for social security is still fairly low. The government has also been talking about extending the normal retirement age for years, and that may become effective this year or next.

The other challenge facing China is the aftermath of the one child policy. Like many other Asian countries, most people in China rely on family support in their old age. And as a result of the one child policy, essentially one person ends up supporting their parents as well as grandparents. That’s not sustainable. That policy has now been abolished, and Chinese couples are allowed to have a second child.

Another factor in China is workforce mobility, particularly movement between the private and public sectors. The government is a major employer and it’s common for employees to move back and forth between public and private. Historically, there have been two systems of social security for each sector and this has often given rise to confusion. For example, government employees who contribute to the public sector plan (which is well funded), but then join the private sector, find that when they retire, the pension they receive is different from what they expected. The government has made it a priority to converge these two systems. In fact, it’s already happened in Shanghai.

Q — How are governments responding to these challenges, and how sustainable are current national retirement systems?

A — Jeff Howatt: Haichuan mentioned the Chinese government extending the retirement age — this is a theme in North Asia too. In Japan, between 2004 and 2017, contributions were increased steadily, and benefits cut, with further cuts likely coming over the horizon.

Another complication in Japan is that about 40% of the workforce is what you’d call a part-time or a contract worker. These employees are mostly not covered by social security or a corporate plan. More than 50% of women in the workforce are employed in that manner. So that’s another serious issue as far as the coverage of social security, in addition to other concerning workforce implications.

There’s a dire lack of financial education in the region and most individuals remain unclear about the type and amount of benefits they will receive on retirement.

One final point on sustainability — Haichuan mentioned the dependency ratio. While there’s no one child policy in Japan and South Korea, the ratio of individuals that are aged between 20 and 64 to those aged 65 and above is already 2.1:1 in Japan2. That means we have only two active workers to support every retiree. By 2050, that’s going to be 1.3:1. In South Korea, this ratio is 5.1:1. But even there it’s going to 1.4:1 by 2050. That’s going to create major pressure on social security.

Given these challenges, there’s a critical need for communication and education around financial planning. There’s a dire lack of education in the region and so most individuals remain unclear about the type and amount of benefits they will receive on retirement.

A — Kulin Patel: We see the same sort of pressures in South Asia, particularly in the slightly “older” countries. In Singapore for instance, 40% of those in the age brackets of 65-70 are now continuing in the workforce. And this is becoming a reality for the broader region as well.

From a regional standpoint, there are two other aspects of the payout that impacts this question of sustainability. First: in some countries such as Indonesia, India and Malaysia, some of the benefits are available at a relatively young age (between 55 and 60). And that’s not sustainable in the long term — and employees aren’t necessarily going to realise that. In Malaysia, for instance, it’s been projected that people are coming out of their employee pension fund with only two or three times their total earnings capital. That’s not going to last very long in retirement, especially with many retiring early.

Second: from a broader payout perspective, whether that’s employer plans or social security, it’s very common around the sub-region for payouts to be lump sum. And the big question around that is, when individuals have access to this lump sum, then what? How do they plan? And this depends very much on their financial education, to ensure that they manage their expenses and lifestyle to get the most value from that money, and not use it too quickly or too slowly.

A — Jeff Howatt: That’s a critical point, Kulin, and also very relevant for North Asia. Pension plans in Japan and South Korea typically pay out just lump sum benefits unless strict age or service requirements are met, so often employees don’t have an option to annuitise.

In Japan, even when individuals have a choice, they tend to select a lump sum benefit because they want to for example pay off their mortgage rather than saving for retirement.

A — Haichuan Wu: To pick up on the point mentioned earlier about part-time workers, this is also true in China. And in particular, this links back to individuals working beyond their retirement age — I’ve worked with many clients who are seeing employees reach the retirement age but then come back for contractual work. Some even to work full-time.

The government is trying to cover all individuals — including rural and urban residents — into the national, multi-layer social security system. This makes the system more fragile and overwhelmingly dependent on public financial support.

The Chinese social security system is pay-as-you-go. In 2015, six out of 23 provinces reported that pension payouts exceeded contributions from active workers3. In addition, official data also shows that (as of 2015) the accumulated nominal individual account balance was CNY 4,700 billion (USD 690 billion), while actual cash accumulated was less than CNY 330 billion (USD 49 billion) — a deficit of CNY 4,400 billion (USD 640 billion).

The government has been exploring possible solutions in addition to relaxing the one child policy, such as extending the retirement age, in addition to relaxing the one child policy, converging retirement systems in public and private sectors, and encouraging annuity payouts from the Enterprises Annuity Plan, etc. The government is also trying to encourage retirement savings with tax incentives, for example, there will be a tax differed individual pension insurance product launched later this year.

Q — What role can employers play to bridge these gaps?

A — Haichuan Wu: There are quite a few things employers can do. I’ll start with an example — a leading American multinational has had an Enterprise Annuity plan for its employees in China for years. And the last time I visited them, they were very concerned about low participation in this plan. One of their managers told us that up to 30% of their employees have chosen not to participate, despite the employer matching provision.

The reason is the general business environment and attitudes toward savings. People tend to think that it’s more important to save towards marriage or buying a home. Young people in particular don’t put away for retirement as they not only do not realise that family support may be inadequate in retirement, but they also underestimate how much responsibility they will have on their shoulders later. That goes back to my earlier point about the one child policy and each person having to support their parents, and grandparents. And young people tend to think that they will have a 100% replacement ratio — again going back to the point about education.

From an employer perspective, it’s also a cost issue if organisations are spending the money on securing the benefit, but 30% of their workforce does not even take advantage of it. Again, employers need to take more actions on financial education, particularly for young employees.

Targeted messages that are put into the context of life stages and broader financial priorities of employees makes a huge difference in the level of interest and engagement.

A — Kulin Patel: It’s the same in other markets. In India, for example, we surveyed employers4 on the rollout of the National Pension System, another voluntary DC plan for employees. We found that, amongst about 40 or so companies who responded, there was only two or three that had seen more than a 10% participation rate. And they said amongst the top challenges was the way that employee communications was done.

When it comes to effective communication, we find that targeted messages that are put into the context of life stages and broader financial priorities of employee segments makes a huge difference in the level of interest and engagement. In this way, we’ve helped several of our clients hit a participation over 20%.

Generally, in South Asia, there’s a very low prevalence of supplementary employer plans, because a lot of the population’s either embedded in mandatory government plans or social security-type plans. So the question then is, what’s the employers’ role? Our Global Benefit Attitudes Survey last year showed that just over half of Asian employees think their employers should take an active role in encouraging their employees to better manage their finances.

So I think the employer challenge is how to educate people, as Haichuan mentioned; how to help people understand whether the plans they will come to rely on may or may not be enough for them. And then employers can either facilitate further savings, but that basic awareness is the first thing.

A — Jeff Howatt: Yes, I have to echo the point about communication and education. Both are crucial. And one of the broader questions is — what are employers and their plans doing to help protect or prepare employees for retirement? Are they using these plans to help attract, retain and engage their workforce?

And part of the answer to these questions starts from the plan design they have in place to begin with — defined benefit, defined contribution (DC), or some combination of the two. The contribution level also comes into play — for example, in South Korea, there’s a minimum rate of 8.3%, and most companies will leave it there. But in the financial sector, there are many companies that will do more as an attraction tool. In Japan, DC is becoming more prevalent, but benefit outcomes for plan members are not nearly what they should be thanks to the lack of investment education and knowledge. Now a new type of defined benefit plan called the “Risk-Sharing Plan” has been enacted, allowing employers to shift risk to employees but operating the plan investments collectively. It will be interesting to see how these plans, and employee outcomes, evolve. Naturally, plan governance will be critical.

And the next questions are — what are the kinds of communication and education program in place for employees? Are companies working to optimise outcomes? Do they have a strong governance practice in place? Do they monitor the performance of their investment managers? Do they have an oversight policy?

Some organisations are leading the way — Haichuan mentioned a U.S. multinational company. This company has a very robust global governance approach, including a strong pension committee, which we support with on a quarterly basis and we touch on all areas of governance around the retirement plan. They communicate regularly with employees, and are seeing the increased engagement from that. It’s led to a rise in the appreciation and the awareness of the benefits themselves. From some focus groups we arranged, we got a good understanding of what employees like and don’t like, and retirement benefits was at the top of the list of benefits they said they wanted. This changing perception represents a major opportunity for employers to differentiate themselves by how they provide, communicate and maintain their retirement programs.

1 2014 Japan National Institute of Population and Social Security Research
2 United Nations World Population Prospects, 2015 revision
3 2015 Annual Report on Social Insurance Development in China
4 2016 India Benefits Response Study