Asia’s pension funds’ growth is being boosted by significant asset increases, a strategic shift to alternative investments, and a series of transformative reforms, according to the Thinking Ahead Institute’s latest Global Pension Assets Study.
Together, they depict a region that is rapidly adapting to the evolving global financial landscape.
The past decade has witnessed Asia-Pacific economies outstripping global trends and setting a precedent for emerging markets worldwide, according to Jayne Bok, head of investments for Asia at WTW.
“Over the last decade, Australia, Hong Kong, Japan, and South Korea all achieved significant increases in pension assets as a percentage of GDP,” Bok told AsianInvestor.
Source:Thinking Ahead Institute: Global Pension Assets Study 2024
This pronounced growth is exemplified by Australia, where pension assets have swelled from 108.3% to 145% of GDP in the 10 years to 2023, and South Korea, where assets have climbed from 37.1% to 64.5% of GDP.
Such increases underscore the region’s growing financial depth and importance of pension assets in the broader economic context.
“Asia has also come a long way in terms of diversification. Not only in terms of reducing domestic exposure but also in terms of increasing allocations to alternatives,” said Bok.
ALTERNATIVE ALLOCATION
As part of the strategic evolution in asset allocation, Asian pension funds are increasingly turning to alternative investments.
“Many of the more sophisticated public pension funds in our region are now allocating 10% to 15% to alternatives,” said Bok.
Jayne Bok,
WTW
The increasing commitment to alternatives such as real estate, infrastructure, and private equity reflects a maturation of investment strategies, aiming to optimise returns and mitigate risks associated with market volatility, she said.
“I’d expect to see allocations continue to move closer to 20% in line with more developed pension markets.”
This expected progression towards higher alternative investment allocations mirrors the practices of established pension markets.
It also highlights a growing sophistication in Asia’s pension investment landscape.
REFORMS FUEL GROWTH
Reforms are central to the evolution of Asia’s pension sector, with various countries implementing significant changes to bolster their pension systems, according to Bok.
“Australia is the most advanced pension market in the APAC region, with recent reforms focusing on strengthening governance, increasing contributions, and measures related to post-retirement,” she said.
These reforms are not just confined to Australia; emerging economies are also focusing on enhancing their pension frameworks.
“The original Asia tigers have all taken steps over the last few decades to drastically increase their pension savings through a combination of public as well as private schemes,” said Bok.
Hong Kong’s MPF system is a good example of this, although there is argument that not enough has been done to achieve pension savings on par with western nations, and demographic shifts are making pension reform challenging, she explained.
Developing markets with underdeveloped pension systems are in the process of setting up new schemes (such as in Thailand) and announcing reforms of new schemes (such as in Malaysia) and increasing the governance of existing public schemes.
“What is clear is that savings for retirement in the APAC region have a way to go, but policymakers are working towards addressing pension reform issues in each of these jurisdictions,” she said.
KEY RISKS
A key systemic risk in Asia is around financial liberalisation, particularly in China.
“Capital flows remain restricted into and from China and financial markets are underdeveloped compared to economies like the US or Australia,” said Bok.
History has shown that liberalisation of financial markets often causes volatility in asset prices, she explained.
“Chinese authorities have been managing this process in a measured way, but we still see it as a key risk to the region going forward.”
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