Strong Political Will Needed to Grow Asia’s Retail Retirement Markets

October 13, 2022 — Singapore

Growth in the third pillar is speeding up, but greater liberalization is needed

While uncertainty from COVID-19 has raised awareness of the need to build up individual retirement assets, the bigger driver of private retirement development remains the will and commitment of government and regulatory authorities to build a viable and functioning third pension pillar.

The pandemic threatened to further derail retirement security as many people lost income and some drew down on their pension pots or switched long-term investments to cash. At the same time, the massive uncertainty from the pandemic caused many more to realize the need to build up their individual retirement funds. But more importantly, as seen in Singapore, Malaysia, and China, government and regulatory support in establishing private pension schemes—supported by incentives such as tax breaks—is a catalyst to creating a sound third pillar.

Singapore’s Supplementary Retirement Scheme (SRS) now has S$14.4 billion (US$10.4 billion) in assets and continues to grow. One notable trend is that more young investors are turning to the scheme to build their retirement assets. According to data from Singapore’s Ministry of Finance, 25% of SRS account holders in 2021 were aged 18 to 35—a jump from 19% the previous year. Young investors accounted for only 11% of the total in 2015.

Similarly, Malaysia now has the fairly established Private Retirement Scheme (PRS), which continues to be one of the most institutionalized and centrally administered schemes in the region. The PRS now plays a key complementary role to Malaysia’s Employees Provident Fund (EPF). While the EPF has achieved a high degree of pension participation across the country, its members have largely depended on the fund for old-age income—which is not sufficient and sustainable for many. The PRS offers a solution to that by supplementing members’ retirement income. And because PRS providers are fund managers, the scheme provides a sure flow of assets for the local fund industry.

In China, regulators have implemented a flurry of initiatives over the past four years to develop the country’s third pillar, creating opportunities for financial services providers—from banks and insurers to fund managers. The most recent initiative was the rollout of a private retirement scheme in April 2022, which allows employees to contribute up to RMB12,000 (US$1,680) a year to individual pension accounts. Contributions, which will be invested in financial instruments such as public funds and bank wealth management products, will offer tax rebates to encourage participation. The scheme will have a trial of one year in selected cities before being made available across the country.

“The success of China’s third pillar plays an important role, not only in slowing the country’s pension crisis, but also in serving as a timely example of how other Asian markets can leverage private retirement by diversifying the schemes and types of products available to attract more participation across various investor segments,” said Shannen Wong, senior analyst at Cerulli.

“When that happens, the region could see larger inflows to retirement assets. However, this will require greater liberalization of markets, including enabling the development and sale of more product types and allowing more providers,” she added.

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Note to editors

These findings and more are from The Cerulli Edge—Asia-Pacific Edition, 4Q 2022 Issue.

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