4 minute read 10 Apr 2019
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How to successfully navigate Asia-Pacific’s retirement markets

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.

Contributors
4 minute read 10 Apr 2019

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Those looking to participate in pension reform markets need to understand the challenges – not just the opportunities – as millions more customers join the region’s retirement markets.

Asia-Pacific will soon be home to the world’s top global retirement and asset management market, attracting pension and retirement funds, domestic and international life insurers, wealth and asset managers, and retail banks. Demographic transformation and social system reforms mean the region is expected to account for more than half of the retirement assets accumulated over the next decade.

Already, countries such as Australia and Singapore have demonstrated the region’s potential to accumulate significant retirement assets while building some of the world’s most successful markets. Over the last 25 years, thanks to a policy framework focused on building better retirement incomes, a mere 12 million contributing Australians have built an asset pool of US$2t.

Now, other countries are fundamentally shifting how they manage pensions and savings. More economics are opening up to asset managers and life insurers who can help boost retirement funds and savings – creating opportunities impossible to find anywhere else in the world. Sweeteners include the region’s high net worth customers, whose wealth is expected to add US$40t to AUM, and net operating margins above 40%.

Five considerations in regional retirement markets

Local and foreign organizations need to watch out for the five “C’s”:

  1. Context – socioeconomic factors may look favorable, but they can be misleading. Out of a total population of 1.4 billion, only the 2% who pay tax in China will purchase tax-deferred retirement products. But, tomorrow, small changes to regulatory levers, such as mandating or voluntary solutions, could radically increase participation. What regulatory changes will trigger your play?
  2. Culture – existing culture-driven product preferences in Japan or China offer tremendous retirement asset growth opportunities, with the potential to convert current bank deposits and guarantee products into trillions of dollars of investment-based wealth and retirement assets. But changing customers’ behavior will take significant effort and time. New concepts, such as financial advice, employer-servicing or financial well-being models, will find it hard to achieve cut through. How will culture impede or support your go-to-market approach?
  3. Contestability – many markets appear to have low barriers to entry, but often assets and customers are beyond the reach of external providers because they are managed in-house or tied to home brands. This can halve the actual addressable market size. What implicit barriers are you up against?
  4. Collaboration – asset managers and insurers have important capabilities and experience – in behavioral finance, financial advice and investment strategies – to empower people to make informed retirement decisions. Particularly in emerging markets, retirement expertise, tools and leading practices, including being a good corporate citizen, will be important to expand the addressable market more quickly. How can you collaborate to build trust rather than simply sell products?
  5. Customers – currently, the region’s retirement customers have limited financial literacy and lack trust in government-imposed forced savings solutions. They need both nudging and protection to improve retirement outcomes and financial well-being.

The continued hyper growth of retirement assets driven by demographic pressure of a large aging population makes us bullish about the future of Asia and Japan’s retirement markets.

Everyone has a role

Elliott Shadforth, Asia-Pacific Wealth and Asset Management Leader, notes: “As the responsibility for long-term savings shifts from the state to the individual, governments and industry bodies have a significant obligation to invest in boosting financial literacy. The middle class especially must be made aware of the need for increased savings and educated so they can engage in the process of how their money is managed. Trials are already starting in some countries to use gamification for this purpose. Governments should also consider embedding financial literacy in the education curriculum.”

At the same time, pension reform can greatly change the business case for market entry. For example, the region’s governments are responding to the need for better consumer protections with: Japan’s focus on customer first code; Hong Kong’s default and governance focus; and Australia’s Royal Commission. At the same time, customers are better engaged, and more digitally connected and informed than ever before. As a result, we expect to see better practices, more predictable outcomes and fairer provider compensation and profits.

The question is when will these forces intersect with your business model in each market? How will you effectively manage business case uncertainty?

“The middle class especially must be made aware of the need for increased savings and educated so they can engage in the process of how their money is managed,” Shadforth adds.

The continued hyper growth of retirement assets driven by demographic pressure of a large aging population makes us bullish about the future of Asia and Japan’s retirement markets. If the region evolves from its current 30% of retirement assets to GDP to US-type levels of 96%, this hyper growth will continue for some time. And, this is without including mature market solutions, such as pension buy-outs, in the growth prospects.

Local and foreign private sector asset management and life insurance product and service providers will play a pivotal role in supporting the delivery of predictable retirement outcomes for increasing numbers of the region’s retirees. Innovators should be thinking bigger, focusing on building broader financial well-being ecosystems that cover, not just wealth, but retirement health and happiness.

But every player needs to watch their step when expanding, growing or transforming to deliver better retirement outcomes across the region. Asia’s context, culture and customers mean its retirement markets will require participants to think and act differently.

Summary

Asia-Pacific will soon be home to the world’s top global retirement and asset management market, attracting pension and retirement funds, domestic and international life insurers, wealth and asset managers, and retail banks. Local and foreign private sector asset management and life insurance product and service providers will play a pivotal role in supporting the delivery of predictable retirement outcomes for increasing numbers of the region’s retirees.

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.

Contributors