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Tuesday, 16 November 2004
Page: 38


Senator WATSON (5:16 PM) —Recently I was invited to chair and speak at the First Asian Conference on Pensions and Retirement Planning in Singapore. Practically all the Asian countries, including participants from Mauritius, were represented, together with principal speakers from the OECD and the United States of America.

One of the most pressing problems facing Asia is the dramatic change in population from status of high birth and death rates to low rates. Populations are therefore ageing. The impact of this demographic change will be felt far into the future. The United Nations has reported that one out of every 10 persons is now 60 years or older. But by 2050 one out of every five persons will be 60 years or older. With ever greater improvements in medical science, human longevity has also risen. Over the last half of the 20th century, 20 years have been added to the average lifespan, bringing global life expectancy up to 66 years.

Japan has the oldest aged society in the world. The difference between Japan and the rest of the world is that the Japanese have been great savers. The Japanese place greater preference on protecting their household assets than on increasing returns. These significant assets will supplement shortfalls in pension coverage. All Japanese adults are compulsory members of a national pension, and payout generally begins at age 65.

Singapore, on the other hand, has one of the fastest ageing populations in Asia. The increase in life expectancy and improved quality of life is not unwelcome. However, as it is a relatively new phenomenon, there may be implications that are not yet fully appreciated. Financial service providers, consumers and governments will have to prepare for the reality of an ageing population. As well as an ageing population, other demographic changes include smaller families, a move towards individualisation and increased wealth. Increased affluence leads to higher retirement lifestyle expectations.

The changing market will present both risks and new opportunities for the financial services sector. While there will be benefits for this sector, there will be challenges in managing the risks to consumers and the industry itself while at the same time producing and selling innovative retirement products. Consumers will also need to adapt and be better equipped to make informed decisions about their retirement.

There are a number of issues, as highlighted during the conference, that now need to be acknowledged and addressed. These issues include the inadequacy of retirement planning; the need for younger folk to be more self-reliant; exposure to investment risk; consumer education; and security of funds under investment. The issue of inadequacy of retirement planning is one which faces consumers of all ages. Most people put this off and do not allow themselves adequate time. However, if the younger people do not plan early, they will find they end up with a level of retirement income far below their expectations.

Another issue is consumers not having enough for their retirement and being unaware of the increased exposure to investment risk and the probability of living longer. Younger consumers will need to adjust their savings behaviour as they will have to be more self-reliant than the previous generation and will have to provide for their own retirement. Also, an area of concern is that consumers do not understand their investment choices. The complexity and expanding range of products does not help the situation. Both products and taxation implications need to be simplified.

In the past larger families provided parents with their retirement security. Nowadays, whether by government duress through one-child policies, such as exist in China, or changing world patterns and greater work force mobility, couples are having fewer children. Countries such as China will grow old before they grow rich and this will have a profound impact on their future.

Nations are focusing more closely on demographics and the ageing of the baby boomer population. They must act to provide and strengthen private pension plans to meet these challenges. Countries in Asia, the Western Hemisphere, Europe and to some extent Africa are starting to move away from pay-as-you-go government social safety nets that have threatened to bankrupt them. Globally the issues on pensions are similar. PAYG pensions funded by the government are no longer affordable. In some countries pensions given to civil servants are far too generous. In relation to occupational pension plans, many are unfunded or underfunded, and defined benefit arrangements are under financial pressure. The low retirement age in many countries places additional financial pressures on government. There is often no portability of vested rights. As for personal pensions, there is a lack of tax incentives and they are not affordable for large segments of the population in many countries.

One of the main goals of a pension system should be poverty relief to ensure a minimum standard of living in old age. It should also be a savings vehicle which will allow people to redistribute income across their lifetime. A pension system should also provide insurance in the form of a social safety net. It should provide a stimulus for economic growth. Worldwide government reforms are under way. Italy and Sweden have enacted pension reform by way of defined contribution schemes and Chile is also considering this type of scheme. A pensions bill has been enacted in the United Kingdom which envisages a new regulator. India's new government is continuing with reforms introduced by its predecessor in the form of a new independent pension regulatory body. Mexico and Lithuania are also introducing pension reforms. The European Union has an occupational pension directive which aims for a single market of $2.5 billion of pension assets in 2005.

Hong Kong's MPF and Singapore's Central Provident Fund are amongst the world's most successful. Singaporean employers and employees make compulsory contributions and tax deductions are available in respect of such contributions. Interest is pegged to the short-term interest rate in the market and on reaching the age of 55 savings can be withdrawn tax-free. However there are criticisms of the scheme, such as that it has become rather complex and that many members have inadequate savings for retirement. There are also insufficient tax incentives for supplementary savings. Another criticism is that too much was invested in property. While the problems surrounding pension systems around the world are similar, there cannot be a one-size-fits-all approach for all countries and all circumstances. What works in Hong Kong may not work in India, Chile or Sweden. There will continue to be a diversity of pension arrangements due to differing cultures, differing demographics, differing economies and the myriad of other differences between countries. I wish them well in their endeavours for reform.