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Institutional Investment - July 24, 2013

Investment Solutions for East Asia's Pension Savings

The purpose of this publication, which is drawn from the AXA Investment Managers research chair at EDHEC-Risk Institute on “Regulation and Institutional Investment”, is to examine the role of pension systems in the financing of current and future standards of living in Asia’s ageing nations and to study the potential contribution of scientific asset management to the challenges faced by the region’s pension reserve funds and funded pension schemes.

The five jurisdictions reviewed in this study - Hong Kong, Japan, Korea, Mainland China and Taiwan - have important common traits impacting the state and health of pension systems: their populations are ageing at a uniquely rapid pace, and their economic development trajectory is characterised by equally rapid change and significant financial and economic imbalances.

The stakes are high for the populations of East Asia, since current trends may lead to a significant rise in poverty for the next generation, or to public liabilities on a very large scale, or both.

In this context, we highlight an important conundrum: while East Asia's households save considerably more than in the rest of the world, only a limited amount of these savings has so far made its way into dedicated investment solutions designed to protect consumption levels post-retirement. Averting East Asia's pension crisis is thus possible if the region’s vast savings can be used adequately to finance future consumption needs.

This requires understanding the demographic process that creates explicit and implicit liabilities, for each household and entire nations, across several generations. It also requires addressing the risks of structural imbalances and the impact of a potential re-balancing of East Asian economies. Finally, regulation needs to help channel the region's savings into adequate retirement solutions.

This publication examines these issues for pension reserve funds, defined-benefit and defined-contribution plans. It proposes a perspective on the region’s pension systems that is new to the pension literature. It addresses both macro- and micro-economic issues, which although intricately related had heretofore been treated separately.

Its conclusion is unambiguous: adopting state-of-the-art asset management techniques and suitably designed investment solutions before the region’s demographic window of opportunity closes, could go a long way in helping East Asia avert looming pension crises.

This research was produced as part of the "Regulation and Institutional Investment" research chair at EDHEC-Risk Institute, in partnership with AXA Investment Managers.