Skip to main content

Registration for the 11th annual Asia Summit in Singapore September 18-20 is now open!

Easing Asia’s Retirement Crisis: The Alternatives Opportunity

Power of Ideas
Easing Asia’s Retirement Crisis: The Alternatives Opportunity

Speaking recently with peers in Singapore, I was struck to learn 70 percent of workers surveyed in Asia-Pacific this year believe their financial position is preventing them from retiring at their target age. It was another reminder that the global retirement crisis has acutely impacted Asia-Pacific. Sweeping demographic trends including aging populations, increased life expectancy, and record-low birth rates are pressuring already strained retirement systems. Estimates indicate that, by 2050, one in four people in Asia-Pacific will be over 60 years old, and the global retirement savings shortfall may exceed $400 trillion. Overcoming the immensely complex Asia-Pacific retirement crisis will require a multifaceted public- and private-sector approach.

Estimates indicate that, by 2050, one in four people in Asia-Pacific will be over 60 years old.

Stressed Systems

Asia-Pacific is a diverse region of varied communities, customs, and capital markets. No one-size-fits-all approach exists for providing retirement security, and the varied retirement systems in Asia-Pacific underscore this. Certain countries, such as Australia with its superannuation system for defined contribution, have largely succeeded in incentivizing private retirement savings. Others, such as Japan, heavily rely on public systems.

Overall, a lack of adequate coverage and funding plagues public pensions in most developed Asian nations. In Japan, the mandatory public pension system is projected to provide individuals with 20 percent less income over the next 35 years while, concurrently, the number of retirees will grow significantly. In South Korea, experts predict the National Pension Service will run dry of funding by 2055, and the list goes on.

Adding to regional retirement systems’ funding and coverage issues is an increasingly unpredictable macroeconomic and investment environment. Many of these plans arguably suffer from excess beta—or volatility—in their investment allocations. Add to that duration-matching issues, where concentration in shorter-duration investments has forced plans to offload assets at inopportune times. Put simply, many individuals in Asia-Pacific neither have adequate safety nets for their retirement savings and investments nor sufficient access to new, alternative investment options to help protect, and grow, these savings.

Addressing One Piece of the Puzzle: Retirement Income

With these factors at play, retirement income has become a matter of national significance. In addition to demographic shifts, higher inflation and fiscal debt levels across developed Asia-Pacific are limiting nations’ abilities to provide further support. And, without sufficient state support, younger generations will be forced to shoulder more of the burden of helping older individuals through retirement.

To help relieve these pressures, increasing and stabilizing investment income have started to become a critical national policy component in Asia-Pacific. Japan has made this clear, with its Government Pension Investment Fund making inaugural direct commitments to private equity funds and announcing plans to increase allocations to alternative investments after “promising returns” in 2022. It appears Australia is not far behind. However, more must be done to adequately alleviate the retirement income issue on a broader scale.

The Alternatives Opportunity

Alternative investments represent a divergent channel through which individuals in Asia-Pacific—both those investing on their own for retirement and those reliant on pensions—may access potentially higher returning, less volatile investments. Alternative investments defined here are any alternative to a publicly traded stock or bond, representing a wide range of longer-duration opportunities across the risk-reward spectrum that can offer some level of guaranteed income. A well-allocated alternatives portfolio can help to provide more stable income through retirement, buffer volatility in public asset markets, and enable retirees to manage inflation.

Arguably, insurers in Asia-Pacific are particularly well-positioned to offer retirement income products that can help increase retirees’ income sufficiency. A recent report found that combining guaranteed lifetime income products, such as annuities offered by many insurers, with a more aggressive asset allocation strategy, for instance one that incorporates alternatives, generates 29 percent more annual spending ability for participants in retirement—excluding social security from the relative comparison.

While challenges impacting retirement security in Asia-Pacific cannot be ignored, by no means should optimism be abandoned. Asia-Pacific pension systems are younger than their Western counterparts, better enabling them to take more innovative approaches to generating long-term, more stable income. Encouragingly, young people across Asia-Pacific have shown an eagerness to learn about new financial products, save, and invest.

Tackling Asia-Pacific’s multifaceted retirement crisis will likely require a commensurately multipronged approach, including tax policy support, a system of advisory on retirement solutions, pension reform, and much more. Leveraging the power of alternative investments has great potential to alleviate retirement savings and income shortfalls—a critical piece of this puzzle.