Target-Date Funds in Asia Gain Renewed Interest

October 28, 2022 — Singapore

Market liberalization and government support for third-pillar pensions drive demand

Although the market for target-date funds (TDFs) is still relatively small in Asia compared to the U.S., there is huge potential for this type of fund to play a greater role in the retirement market.

Over the past few years, government support has been the key in accelerating inflows into TDFs. In Korea and Japan, the use of TDFs as default funds in corporate pensions and within the DC segment has helped attract higher inflows. In China and Taiwan, inflows into TDFs have been supported by the launch of new private pensions and a retirement planning platform, respectively.

Korea’s TDF and lifecycle fund assets under management (AUM) have increased every year since 2016, more than doubling over 2021 to KRW11.7 trillion (US$9.8 billion)—a trend that is expected to accelerate following the launch of the default option in July 2022. With the implementation of the default plan in corporate pensions, higher awareness of TDFs as retirement products is expected. At the end of 2021, Korea had 16 pension providers offering 1,057 TDFs, up from 12 providers and 921 funds in 2020.

As Korea’s TDF market matures, there could be consolidation ahead, with more fund flows concentrated in high-quality TDFs, eventually reducing the number of providers. However, some industry players doubt that the Korean TDF segment could become as successful as in the U.S., since Korean market participants, especially millennials and Generation Z, prefer to do their own investing as opposed to leaving their corporate retirement pensions in default options. However, despite the uncertainties, the adoption rate is notable from the AUM growth trend, and corporate pensions may end up overtaking the National Pension Scheme by AUM in future.

In Japan, net assets held by target-date and target-risk fund managers both within and outside the defined contribution (DC) channel increased by 10.9% between March 2021 and March 2022 to ¥3.1 trillion (US$25.7 billion). Although the market is still small, assets and flows into target-date and target-risk funds are increasing, especially with growth in the DC market, and following the approval given to TDFs as default funds within the DC segment in 2018, which resulted in an increase in the number of pension funds adopting TDFs.

In April 2022, China launched its third-pillar private pensions, allowing participants to invest in multiple pension investment products. Subsequently, in June 2022, rules on how private pensions can be invested in mutual funds were released. Pension target funds (PTFs), which comprise both target-date and target-risk strategies, were identified as the first mutual fund category for private pension investments under the rules.

By the end of 2021, PTFs had grown 91.8% year on year to reach RMB113.2 billion (US$17.8 billion). As of May 2022, the number of PTFs reached 192. Cerulli believes that with the launch of the private pensions pilot scheme in April 2022, asset managers will speed up their participation in the PTF market, and competition in this space will increase.

Successful adoption of retirement products, including TDFs and target-risk funds (TRFs), however, will ultimately depend on investor education. “Investors should understand the differences in investment horizons and methodologies between such products and more commonly used retirement schemes,” said Shannen Wong, senior analyst with Cerulli. “Effective communication with investors is important to avoid the impact of market volatility on maintaining their fund holdings. Only by focusing on the steady income of long-term diversified allocations can investors realize value preservation and appreciate TDFs and other retirement products.”

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Note to editors

These findings and more are from The Cerulli Edge—Asian Monthly Product Trends, October 2022 Issue.

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