Allianz: Retirement Reform Drives Pension Asset Growth in Emerging Markets

Governments of emerging markets in Asia and Central and Eastern Europe are pushing ahead with reforms on retirement and pension schemes, substantially lifting the amount of pension assets and products under development.

New defined contribution systems formulated by pension reforms will rapidly build a massive amount of pension assets, according to Allianz Global Investors A.G. These assets' annual growth rate is projected to be 17% for emerging markets in Asia and 19% for Central and Eastern Europe, according to an Allianz Global Investors report on pension trends in emerging markets.

In Asia, the main component of retirement income traditionally came from family supports, namely children caring for elderly family members. But an aging population and changes in family and social structures are driving the need for pension reforms. Most Asian countries are looking to establish formal pension systems to replace conventional family-based support systems.

The speed of aging is unprecedented in Asia, according to Allianz Global Investors, which conducted research in 18 countries in Asia and Central and Eastern Europe.

In China, Allianz predicted the country's old age dependency ratio, which calculates number of pensioners to every 100 working people, will rise from 11 in 2005 to 39 in 2050. Overall, Asia's dependency ratio will rise from 12 to 49.

On the sustainability of pension systems, Allianz Global Investors said governments, financial institutions and individuals need to improve education, product design, regulation and transparency of asset management.

In funding the pension systems, Allianz Global Investors senior pension analyst Alexander Boersch said emerging markets' governments "are following a reform path that promises to generate sustainable pension systems." At the current stage, Boersch said "a solid foundation is in place, the fine-tuning of the system becomes the major task."

The new defined contribution systems are likely to build up a massive amount of pension assets to 1.05 trillion euros in Asia and 245 billion euros in Central and Eastern Europe by 2015, according to the report.

Global financial turmoil has imposed severe challenges for pension systems with exposure to volatile capital markets. Almost all emerging economies apply quantitative restrictions to their pension fund investments with maximum limits on equity or foreign investment. While asset managers need to provide transparent product and give sound advice, regulation should not overly restrict investment opportunities, said Allianz Global Investors in the report.

Allianz Global Investors is a unit of Allianz S.E., which has a Best's Financial Strength Rating of A+ (Superior).

(By Iris Lai, Hong Kong bureau manager: [email protected])