Pension Systems in Asia-Pension Systems in Asia-Pacific: Main Issues and Pacific: Main Issues and

DiagnosisDiagnosis

Presentation by Michiel Van der Auwera

16 October 2007AFDC

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OverviewOverview

• Socio-economic challenges

• Review of existing pension situation in

Asia

• Way forward

– identifying need for reform

– contribution of multilateral development

banks

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I . Socio-economic I . Socio-economic challengeschallenges

1. Ageing population

2. Declining family support for

elderly people

3. Globalization

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1.1. Ageing populationAgeing population

• Asian population grew from 1.4 billion people in 1950 to 3.7 billion in 2000

• Demographic transition from high fertility and mortality rates to low fertility and mortality rates

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Demographic dividendDemographic dividend

Demographic change in China

0

500

1,000

1,500

2,000

1950 1975 2000 2025 2050

Year

Po

pu

latio

n (

in m

illio

n)

65+

15-64

0-14

Demographic dividend

1 2

34

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Rapid ageing …Rapid ageing …

Old-age dependency ratio (population 65+/population 15-64)

0%

10%

20%

30%

40%

2000 2025 2050

Year

Dep

ende

ncy

ratio Cambodia

China

Lao PDR

Myanmar

Thailand

Vietnam

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results in increased results in increased public spending on public spending on

pensionspensionsIf the past relationship between demography and public spending on old-age pensions continue:– Expenditure of national income devoted

to pensions in Asia, excluding China, will rise from 2% in 1990 to 10% in 2050

– Expenditure of national income devoted to pensions in China will rise from 3% in 1990 to over 13% in 2050

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2. Declining family 2. Declining family support for elderly …support for elderly …

• Traditionally, Asian families provide support for the elderly relatives

• Increased mobility from rural to urban areas is weakening traditional support

• Changing family structure: declining birth rates, increasing number of single head households

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needs to be needs to be supplemented by supplemented by

formal mechanismsformal mechanisms • Pure market solutions (individual savings)

work to some extent, but often fail– Shortsighted behavior, leading to insufficient

saving when young– Lack of reliable savings instruments

• Governments interventions are required– Mandatory pensions plans, means-tested

assistance– Regulation and supervision, information, …

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3. Globalization …3. Globalization …

• Increased integration of markets

and growing mobility across the

world

• Labor market policies need to

balance between addressing

inequality and efficiency

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requires adjusted requires adjusted pension designpension design

• Public programs, including pension schemes, will have to be adjusted

• Pension designed to accommodate mobility of the labor force, not only between public and private sector, but also across states

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II. Pension systems in II. Pension systems in AsiaAsia

Mandatory pension systems for the private sector in Asia & Pacific

Provident fundsDefined contribution schemes

Defined benefit schemes in market economies

Pension schemes in transition economies

IndonesiaIndia (partial)MalaysiaNepalPacific IslandsSingaporeSri Lanka

India (partial)JapanSouth KoreaPakistanPhilippines

Azerbaijan (DB)PRC (DB + DC-funded)Kazakhstan (DC-funded)Kyrgyz (Notional DC)Lao PDR (DB)Mongolia (NDC)Uzbekistan (DB)Vietnam (DB)

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Major areas of concernMajor areas of concern

• DB schemes: fiscal sustainability – link between contributions and benefits

• Funded schemes: investment policy and performance

• Overall: – governance and management of the

pension systems– limited coverage

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Changing environment for Changing environment for Asian pension systemsAsian pension systems

• New requirements– Increased demand for old-age

protection– Increased formalization– Increased flexibility

• Existing situation– Limited coverage– Need for improved governance – Need for improved pension design

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III. Way forwardIII. Way forward

• Objective: pension systems that deliver adequate and affordable benefits in sustainable way

• Reform towards multi-pillar pension systems

• A long-term endeavor!

* World Bank. 2005. Old-Age Income Support in the Twenty-first Century: An International Perspective on Pension Systems and Reform (Holzmann, R. and others)

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Basic goals of Basic goals of pensionspensions

• Reducing or preventing poverty among the elderly

• Providing adequate retirement income, maintaining same standard of living, smoothing of lifetime consumption

• Encourage economic growth through increased saving

These goals can be addressed by a multi-pillar pension system

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Multi-pillar pension Multi-pillar pension systemsystem

Other sources of supportinformal support, health care, housing,…

“ third pillar” voluntary individual savings accounts

“ second pillar” mandatory individual savings accounts

“ first pillar” mandatory contributory schemes

“ zero pillar” non-contributory schemes

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Interaction between Interaction between pillars Example: Finlandpillars Example: Finland

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Role of Multilateral Role of Multilateral Development BanksDevelopment Banks

• Raise awareness among policy makers

• Assist in pension reform when support is required

• Available tools– TA to prepare reform

– Loan programs to assist in implementation

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ADB pension projects, ADB pension projects, 1990–20041990–2004

Region DMC 1990–1996 1997–1999 2000–2004

Regional 1 RETA

East and Central Asia

Kazakhstan 1 loan, 1 PPTA, 4 ADTAs

Kyrgyz Republic 1 PPTA

PRC 1 ADTA

Mekong Lao PDR 1 ADTA

Thailand 1 ADTA 1 ADTA

Pacific Cook Islands 1 ADTA

Tonga 1 ADTA

South Asia Bangladesh 1 ADTA 1 ADTA

Bhutan 1 ADTA 1 ADTA

India 1 ADTA

Pakistan 1 ADTA

Southeast Asia Indonesia 1 ADTA 1 ADTA

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Pension reform needsPension reform needs

• Following Asian financial crisis focus on strengthening financial market institutions

• Emerging reform needs– sustainability of the maturing pension

systems – adequacy and affordability of the pension

systems for the ageing population

• Pension reform in Asia and Pacific is still at the initial stage

For More InformationFor More Information

(Michiel Van der Auwera, e-mail:

mvanderauwera@adb.org)Web site: www.adb.org