Pension Systems in Asia-Pacific: Main Issues and Diagnosis Presentation by Michiel Van der Auwera 16 October 2007 AFDC

Overview Socio-economic challenges Review of existing pension situation in Asia Way forward identifying need for reform contribution of multilateral development banks

I . Socio-economic challenges Ageing population Declining family support for elderly people Globalization

Ageing 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

Demographic dividend 4 3 Demographic dividend 2 1

Rapid ageing …

results in increased public spending on pensions If 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

2. Declining family 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

needs to be supplemented by formal 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, …

3. Globalization … Increased integration of markets and growing mobility across the world Labor market policies need to balance between addressing inequality and efficiency

requires adjusted pension 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

II. Pension systems in Asia Mandatory pension systems for the private sector in Asia & Pacific Provident funds Defined contribution schemes Defined benefit schemes in market economies Pension schemes in transition economies Indonesia India (partial) Malaysia Nepal Pacific Islands Singapore Sri Lanka Japan South Korea Pakistan Philippines Azerbaijan (DB) PRC (DB + DC-funded) Kazakhstan (DC-funded) Kyrgyz (Notional DC) Lao PDR (DB) Mongolia (NDC) Uzbekistan (DB) Vietnam (DB)

Major 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

Changing environment for Asian 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

III. 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)

Basic goals of pensions 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

Multi-pillar pension system Other sources of support informal 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

Interaction between pillars Example: Finland

Role of Multilateral Development 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

ADB pension projects, 1990–2004 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 Thailand Pacific Cook Islands Tonga South Asia Bangladesh Bhutan India Pakistan Southeast Asia Indonesia

Pension 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

(Michiel Van der Auwera, e-mail: mvanderauwera@adb.org) For More Information (Michiel Van der Auwera, e-mail: mvanderauwera@adb.org) Web site: www.adb.org