3 minute read 14 May 2019
whitewater rafters

How stronger governance can improve regional retirement outcomes

By

Josef Pilger

EY Global Pension and Retirement Leader

Passionate about helping governments, providers and members to more effectively tackle demographic transformation. Champion for better retirement outcomes for all.

3 minute read 14 May 2019

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Asia-Pacific’s pension market and its inherent risk to social and economic stability demand an entirely new level of governance.

Asia-Pacific is the fastest aging region with the largest retirement asset growth rate in the world. Yet, across the region, pension fund governance frameworks have not evolved in line with the size, complexity and importance of national retirement and social security systems.

In many countries, the pension and retirement industry is as large as the banking sector or GDP, with global retirement assets rapidly growing towards a US$500tr AUM target. Garnished with tax advantages and responsible for the retirement wellbeing of large percentages of vulnerable customers, governance in this massive, complex and growing sector should be highly robust.

Yet, large retirement savings gaps, the US DOL fiduciary duty debate, slow progress in adopting stewardship and customer first codes in Japan, and findings from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia all reflect the urgent need for governance to strengthen.

The Australian superannuation industry has served its members well. However, as the industry continues to grow, managing trillions of dollars of member savings, the maturity of its governance and risk management practices needs to mature.

With AUM booming and the shift to self-reliance intensifying, political, public and regulator scrutiny has never been sharper. Boards in the spotlight must respond by evolving their governance beyond a compliance platform and adopting globally leading practices.

Regardless of the nature of local fiduciary duties, this includes the requirement to demonstrate that boards and trustees are acting in members’ best interests.

How better governance can support members’ best interests

Pension fund boards and trustees have tremendous opportunities to use their oversight to improve retirement outcomes by:

  • Reducing fees – regional fees of more than 1% are double those charged by global peers, which offer comparable retirement outcomes for less than 0.5%. Generally, pension fund fees are measured as a percentage of AUM, with the assumption that delivery costs grow proportionately to asset volume. But, while some operational costs correlate with member and employer numbers, digitization and automation offer opportunities to streamline these costs considerably. Also, high asset pool systems are now extremely efficient. Boards and trustees could require their funds to harness emerging technologies and leverage economies of scale to reduce fees close to global levels, with the potential to deliver massive value to members. For example, in Australia, reducing fees to 0.5% would deliver savings of more than US$15b p.a. or 10% of 2017-2018 contributions.
  • Improving long-term investment outcomes – long-term investment returns significantly impact both retirement outcomes and financial sustainability. While the days of double-digit returns are gone, the current lack luster performance of some regional funds is unacceptable. Why are some boards and trustees satisfied with average risk-adjusted long-term returns of less than 6% p.a. if peers can achieve more than 9% p.a.? For the Hong Kong Mandatory Provident Fund system, this would create a significant uplift of the average return since 2000, which sits at 4.1%. As regulators begin to focus on fund underperformance, boards and trustees must demonstrate what they are doing to improve retirement outcomes for members.
  • Cracking down on conflicts of interest – conflict of interest issues can result in poor outcomes for members. So why do we tolerate these issues? Boards and trustees need to manage conflicts of interest ensure robust assurance around any amounts charged to members on behalf of third parties, whether or not these parties are associates.

With the shift to self-reliance intensifying, political, public and regulator scrutiny has never been sharper. Boards must respond by evolving their governance beyond a compliance platform and adopt globally leading practices. 

What needs to change

As Asia-Pacific rapidly grows towards US$100t in pension and retirement promises and assets, pension funds need to step up their efforts to stay ahead of public confidence issues, especially around expectations of member outcomes. Regulators should demand governance evolves in terms of its:

  • Direction – boards and trustees must clearly articulate and communicate the purpose, promise and measures of success and accountability for pension and retirement to guide stakeholder expectations.
  • Oversight – boards and trustees must define, implement and continuously evolve professional governance and oversight commensurate with size, complexity and importance for members and national economies. To improve clarity, we envision using various governance sub-dimensions, including promise, reform and industry governance, risk governance, investment governance and outcomes or customer governance.

To support these changes, regulators should describe a balanced set of relevant outcomes and success measures, and provide guidance on meaningful disclosure practices to frame short- and long-term expectations. Introducing relevant deterrents and penalties for poor behavior will also help to encourage appropriate behavior.  

Summary

Asia-Pacific is the fastest aging region with the largest retirement asset growth rate in the world. Yet, across the region, pension fund governance frameworks have not evolved in line with the size, complexity and importance of national retirement and social security systems.

About this article

By

Josef Pilger

EY Global Pension and Retirement Leader

Passionate about helping governments, providers and members to more effectively tackle demographic transformation. Champion for better retirement outcomes for all.