Retire

Asia Must Navigate Pensions Crunch

4 April, 2019
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"With Asia’s aging populations staying productive into their 70s and 80s, it is critical to improve the provision of adequate and sustainable retirement income."

Asian pension systems are facing major challenges. The region is experiencing seismic demographic changes, with rapidly aging populations and declining birthrates. But investment returns are relatively low due to geopolitical uncertainty and minimal interest rates.

With the region having relatively few robust retirement systems, many Asian countries will struggle to provide adequate pensions. Governments need to take positive action now to reduce financial pressures and avoid intergenerational conflicts between the young and old.

Life expectancy at birth in the region has increased by seven to 14 years in most countries during the last 40 years, according to the 2018 Melbourne Mercer Global Pension Index (MMGPI), which ranks pension systems round the world on adequacy, sustainability and integrity. This is an average of one additional year every four years. The increased life expectancy of a 65-year-old over the last 40 years has ranged from 1.7 years in Indonesia to 8.1 years in Singapore.

Much of the rest of the world is facing similar challenges relating to aging populations, and nations are pursuing similar policy reforms. These include raising pension ages, encouraging people to work longer, increasing the funding levels set aside for retirement and reducing the amount of money people can take out of their pension accounts before they reach retirement age.

The 2018 MMGPI findings pose the fundamental question: What reforms can Asian governments implement to improve the long-term outcomes of their retirement income systems?

The natural starting place to create a world-class pension system is ensuring the right balance between adequacy and sustainability. A system providing generous benefits in the short-term is unlikely to be sustainable, while a system that's sustainable over many years usually provides modest benefits.

Without changes to retirement ages and eligibility ages to access social security and private pensions, the pressure on retirement systems will increase, which could threaten the financial security provided to the elderly. Increased workforce participation by women and older workers can improve adequacy and sustainability.

Japan, China and South Korea rank near the bottom of the Mercer index. Their pension systems do not represent a sustainable model to support the retirement of current and future generations. If left unchanged, these countries will suffer social conflicts, since pension benefits will not be distributed equally between generations.

Japan, for instance, is taking baby steps to reform its pension system by gradually raising the mandatory retirement age of some 3.4 million civil servants to 65 from the current 60 years of age. Japanese retirees can now choose to start receiving their pensions at any point between the ages of 60 and 70, with greater monthly payments offered to those who start at age 65 or older.

Having the world's highest life expectancy and lowest birthrate, Japan's population is expected to shrink. This challenging situation is already contributing to skill shortages, which will further impact Japan's shrinking tax revenue base. The Japanese government could improve its pension system by encouraging higher levels of household savings and continuing to increase the level of state pension coverage, since 49 percent of the working age population is not covered by private pension plans. Introducing a requirement that part of the retirement benefit must be taken as an income stream and not a lump sum will improve the overall sustainability of the social security system — as would reducing government debt as a percentage of gross domestic product, as this improves the likelihood that the current level of pension payments can be maintained.

China faces different issues. China's unique pension system comprises various plans for urban and rural populations, as well as for rural migrants and public sector workers. The urban and rural systems have a pay-as-you-go basic pension consisting of a pooled account (from employer contributions or government expenditure) and funded individual accounts (from employee contributions). Supplementary plans are also provided by some employers, particularly in urban areas.

The Chinese pension system could be improved by increasing the use of workers' contributions to pensions to enhance the overall retirement protection of workers and increasing minimum support for the poorest retirees. A requirement that part of the supplementary retirement benefit must be taken as an income stream should be introduced, as well. More investment options should be offered to pension holders to permit a greater exposure to growth assets, while pension plans should improve their communications with members.

Hong Kong should consider introducing tax incentives to encourage voluntary member contributions, thus increasing retirement savings. Hong Kong should also require that part of the retirement benefit be taken as an income stream. Older workers should be retained in the labor market as life expectancies rise.

South Korea suffers from one of the weakest pension systems for the poor when expressed as a percentage of the average wage at just six percent. Its system would benefit by improving the level of support provided to the poorest pensioners, introducing a requirement that part of the retirement benefit from private pension arrangements be taken as an income stream and increasing the overall level of contributions.

Singapore's well-structured pension system is ranked top in the region and has seen improvements in sustainability. Its retirement system, the Central Provident Fund, provides flexibility to its members, who include all employed Singaporean residents and permanent residents. But more can be done. Barriers to establishing tax-approved group corporate retirement plans should be reduced, and the CPF should also be opened to temporary nonresident workers who comprise more than a third of the labor force. The age that CPF members can access their savings should be raised, as well.

Since pension systems are an intergenerational issue, they require a long-term perspective. Pension systems, which are one of the largest institutional investors in any market, should increasingly recognize the importance of acting as good stewards of the capital entrusted to them, including managing risks, such as climate change.

With Asia's aging populations staying productive well into their 70s and even 80s, it is critical to improve the provision of adequate and sustainable retirement income. Raising the retirement age, expanding the coverage of private pensions for workers and encouraging financial planning and early savings should be the focus of employers and policy makers.

Article originally published in Nikkei Asian Review.

More in Retire

Anil Lobo | 27 Jun 2019

Supplementary retirement savings plans can provide security and stability for older people who no longer have a steady paycheck — and India's National Pension System (NPS) aims to do just that. NPS is a supplementary Defined Contribution pension plan, and subscription to the scheme is purely voluntary in nature. Like most of the world, India's population is aging, and lifespans are increasing. As a result of improved health and sanitation conditions, the global life expectancy is forecast to increase from an average of 65 years in 1990 to 77 years by 2050.1 For most people, living longer means more non-working years to enjoy. But for growing numbers of people around the world, maintaining enough income to live comfortably during those non-working years is expected to be a challenge. Not only are most older people no longer earning income, but as the years advance, the cost of living and inflation continue to increase. As government leaders around the world consider ways to help citizens prepare for retirement, they can look to India's NPS as a model for boosting retirement savings and helping aging workers avoid poverty during old age. The Basics of India's National Pension System   In 2004, the Indian government launched its National Pension System with the goal of providing retirement income to its citizens.2 The system aims to institute pension reform and foster the habit of saving for retirement. Initially, the program was made available for government employees only, but in 2009, NPS became available on a supplementary basis for all Indian citizens between the ages of 18 and 60. A Tier I NPS account (a mandatory account offering tax benefits) is designed in such a way that it discourages early withdrawal until the account owner reaches retirement age. If the account owner intends to withdraw before retirement age, they are allowed to withdraw only 20%, and the balance has to be used to purchase annuity. The NPS offers a decent tax benefit for its participants — contributions are made before taxes — but a portion of withdrawals are subject to taxes. On reaching the retirement age, one can withdraw 60% of accumulations, which are tax free, and the balance of 40% has to be utilized to purchase annuity from approved annuity providers. One can defer the withdrawal and stay invested until the age of 70 or continue to make fresh contributions, if desired. Tier II NPS accounts provide voluntary savings options without stiff exit penalties or lock-ins. There is a proposal to provide some tax benefits under Tier II NPS, which would require a lock-in period of three years; however, this proposal is yet to be confirmed. Since the launch of the system, the Indian government has created additional social security programs to encourage retirement saving, especially among the working poor. In 2010, the government's Swavalamban Scheme committed to depositing 1,000 rupees into the accounts of each saver who contributed 1,000 to 12,000 rupees into their own account annually and was not covered by a government or employer pension. But in 2015, that plan was scrapped in favor of the Atal Pension Yojana (APY), which guarantees defined pension distributions during retirement for savers who meet certain qualifications based on their contributions. APY also offered a government contribution of 50% of the saver's total contribution or 1,000 rupees per year, whichever is lower, for a period of five years (from 2015 to 2020). India's NPS has gone through a few iterations and continues to evolve, but the plan is helping to boost retirement savings among Indian citizens. It's also shifting citizens' expectations: Instead of relying on younger family members to support them in their old age, many are now adjusting their savings and preparing to support themselves in their retirement years. On top of that, NPS is one of the cheapest investment products. Overall costs of the NPS are far lower than those of other products, and it is perhaps the cheapest pension product available. 3 Lessons You Can Learn From India's Model   For organizational leaders around the world, India's experiment in providing a national pension program for all its citizens offers a number of valuable lessons. 1. Unsustainable National Debt Requires New Solutions   Long before the NPS was launched, India's federal and state government employees were covered by a tax-funded defined benefit pension program that provided a 50% replacement wage at retirement with an inflation-linked adjustment. In the mid-1980s, this program cost the country less than $0.5 billion annually, but by 2006, with people living longer, the price tag jumped to more than $600 billion per year.3 Maintaining the program was unsustainable, and leaders realized they needed to develop a replacement program to ensure successful retirements for future workers and protect the nation's finances. Since the launch of NPS, all new government employees have been enrolled in it, fostering a responsibility among workers to prepare for their own retirement and protecting the government from continuing to run up unsustainable pension debt. 2. Tax Advantages Are Key for Supplementary Retirement Savings Plans   Most participants choose to invest in the NPS due to the tax benefits. However, some Indian citizens report that they did not opt for participating in the NPS as they perceived that some mutual fund instruments and private retirement savings vehicles have greater potential to beat the market and also provide better tax benefits. In order to encourage citizens and promote NPS, the government developed three categories of tax-saving options. The third of these options is exclusively for salaried employees whose contributions are made through the corporate model of NPS. All three categories can be availed together and exclusive of each other. Moreover, there was a recent relaxation in the tax-free withdrawal limit of corpus allowed at the time of retirement (from an earlier limit of 40% of corpus to 60% of corpus). Originally, though 60% was allowed to be withdrawn, the balance of 20% was taxed at normal rates, and making it entirely tax free has made it even more attractive. While a few senior executives may have access to other retirement savings plans, including employer-sponsored Defined Contribution superannuation plans, most of the population (particularly among the working class) do not have access to other retirement savings plans, and hence, the tax advantages inherent in NPS are crucial encouragement for them to save for retirement. 3. Citizens Need Education About the Model's Benefits   While the NPS offers a number of benefits to savers, participation rates remain relatively low.4 Some respondents to a recent survey revealed that not understanding the importance of saving and the advantages of compounding interest could have influenced their choice to stay out. NPS leaders have used a variety of methods for communicating and educating the population about the system. For instance, pilot programs staged in two different geographic areas hosted workshops, meetings and camps targeting unorganized sector workers and key stakeholders. Information was also distributed through cable television networks, radio, mobile publicity vans, seminars and road shows. India continues to measure the success of its pension program and may make more changes in the future. Many countries are struggling to solve the potential challenge of poverty in old age, but the NPS in India is an encouraging step toward protecting the future for many of its citizens, and it's worth taking a look at the model for inspiration. Sources: 1. United Nations: Department of Economic and Social Affairs,"World Population Prospects — 2017 Revision: Global life expectancy," United Nations: Department of Public Information, June 21, 2017, https://www.un.org/development/desa/publications/graphic/wpp2017-global-life-expectancy./ 2. "National Pension System — Retirement Plan for All," National Portal of India, October 22, 2018, https://www.india.gov.in/spotlight/national-pension-system-retirement-plan-all. 3. Kim, Cheolsu; MacKellar, Landis; Galer, Russel G.; Bhardwaj, Guatam, "Implementing an Inclusive and Equitable Pension Reform," Asian Development Bank and Routledge, 2012, https://www.adb.org/sites/default/files/publication/29796/implementing-pension-reform-india.pdf. 4.Zaidi, Babar, "5 Reasons Why Investors Stay Away From NPS. But Should You?" The Economic Times, December 27, 2018, https://economictimes.indiatimes.com/wealth/invest/5-reasons-why-investors-stay-away-from-nps-but-should-you/articleshow/61890679.cms.

Janet Li | 20 Dec 2018

Quality of life is a powerful force. When a generation of citizens experiences unprecedented economic opportunities and long-term financial well-being, there is a strong desire to maintain—or advance—those standards. In China, a surging middle class is determined to enjoy their comfortable lifestyles well into the future. In addition, a younger generation of tech-savvy and financially sophisticated Chinese employees is redefining the meaning of retirement for a population of 1.4 billion people.  Trust plays a key role. The Chinese strongly believe in the ability of external financial support sources—such as the government, pensions funds, employers, families, life insurance benefits, and financial advisors—to provide for them in retirement. Younger workers just entering the workforce are placing even greater faith in online tools and financial apps to manage their long-term finances. This trust, however, will be tested as China pivots to accommodate larger global economic forces and powerful cultural developments—such as societal aging—as detailed in the Melbourne Mercer Global Pension Index (MMGPI). The Challenges of Adjusting to Change   The MMGPI measures the retirement income systems for nations based on three key sub-indexes: Adequacy, Sustainability and Integrity. A comprehensive analysis of these data sets determines a nation’s overall index rating. For 2018, China received an overall score of 46.2. For perspective, the Netherlands and Denmark received the highest ratings—with scores of 80.3 and 80.2, respectively—and Argentina earned the lowest rating at 39.2. Japan (48.2), Korea (47.3) and India (44.6) all received similar scores to China. Unsurprisingly, these growth economies face domestic and policy challenges that are familiar to China—especially with regard to providing financial support to millions of aging people in an era of declining birthrates.   In 1970, the average life expectancy in China was 59 years; today it is 76.5 years. Aging Chinese workers are living longer and causing seismic changes throughout population demographics in China. Increasing life expectancies will test the nation’s pension resources and the financial power of China’s middle class to support the parents and grandparents who worked so hard before them. Currently, China’s retirement income system entails a rural system and an urban system that leverages a pay-as-you-go basic pension. Those pensions consist of pooled accounts (from employer contributions or fiscal expenditures) and funded individual accounts from employee contributions. In some urban areas, employers also provide supplementary benefit plans. These combined resources, however, are not keeping pace with the needs of China’s aging population.  Communicating a Diversity of Resources The MMGPI’s analysis of China’s retirement income system reveals that the most impactful path forward entails bolstering existing services, implementing proactive policies and educating employees about the various options and programs that best suit their individual needs. Specifically, the index findings recommend that Chinese policymakers: 1. Continue to increase the coverage of workers already in pension systems. Enhancing coverage allows for a more robust safety net for millions of retired workers, raising the Adequacy quotient. 2. Increase the minimum level of support for the poorest aging individuals. This demographic represents the most vulnerable and highest at-risk group in the aging population, and the one that benefits the most from additional support. 3. Require that part of the supplementary retirement benefit must be taken as an income stream. Installment payments or income annuity payments offer a fixed, effective means of paying the bills—especially when used as part of a diversified retirement income strategy. 4. Increase the age to qualify for a state pension over time. People are living longer, which naturally translates into working longer and retiring later in life. This is key to boosting Sustainability. 5. Allow more investment options to members, thereby offering greater exposure to growth assets. Diversification is the foundation of smart investing. Providing more investment opportunities leads to increased financial stability—especially for China’s middle class, which desires new ways to empower their assets. 6. Improve communications and better educate members regarding the details of pension plans. The accelerated emergence of new investing mechanisms, policies and digital technologies means individuals are often uninformed about the latest opportunities.     A Collaborative Quality of Life   Successful cultures strive to provide a dignified quality of life to every member of society. This requires the fair and disciplined acquisition and distribution of assets. In modern China, those assets are largely being created by younger workers, particularly in the growing middle class which has experienced a tremendous rise in wages and opportunities. As China’s middle class increases its appetite for new consumers goods, high-quality luxury products and improved standards of living, it must also come to terms with budgeting for the long term—both for themselves and their aging family members.   Nearly 43% of Chinese workers expect to be able to enjoy their desired quality of life after retiring by increasing their retirement fund contributions and working side jobs to supplement their savings. This demonstrates that significant segments of the Chinese population acknowledge the pension challenges ahead and are taking informed personal actions to mitigate potential future struggles. This engaged approach to personal financial well-being, supplemented by smart retirement income systems from employers and government organizations can empower Chinese workers—from GenY and Millennials to their aging parents and grandparents—with a synergy of resources that will make quality of life a standard part of getting old. To learn more about retirement income systems in China and the rest of the world, download the full Melbourne Mercer Global Pension Index  and visit Mercer China.

James Lawrence | 20 Dec 2018

There’s no denying it, in the same way fad diets work over the shorter term, simple investment strategies can also provide strong performance when everything works to their advantage. But, over the longer term, the result is likely to be the same for both our physical and financial health – a lack of fuel to power us through retirement. Ongoing investigations of the market for investment consultancy services by the Competition and Markets Authority (CMA) in the UK reinforce this point of view. In a provisional decision report, the CMA stated that they "encourage policymakers to consider how best to address the lower level of engagement by Defined Contributions (DC) schemes in investment matters." But there’s a disconnect between this and the design of DC investment strategies. Changing Relationship Between Employer and Employee Rather than the short term objectives, which drive the focus on current thinking in DC pensions, there needs to be an increased focus on investments, with a long-term time horizon and a disciplined set of core principles. This criteria will provide members with the fuel they need for a financially healthy retirement. Below are three key reasons we believe many investment strategies are lacking the ‘nutrition’ they need for the longer term, and why this needs to change. Deficiency #1: Low Cost = Good Value There’s no doubt that the current regulatory environment has a strong focus on cost, from the charge cap to value for money assessments. Low cost is also a key driver when selecting a provider. But there’s a key difference between cost and value that’s being missed by the market. This race to the bottom is compromising member outcomes. Instead, the focus should switch to value – pushing hard on fees, but not compromising on selecting the best investments when they add value for members. An open architecture structure, with transparency on which funds can be used, can help to manage and improve this selection process. Deficiency #2: A Focus on Cost Means Lack of Diversification Diversification is said to be “the only free lunch in investments,” but we see a number of investment strategies in the market lacking the balanced nutrition to provide members with a healthy pot at retirement. Whilst we’ve had a market environment over the past 10 years that has broadly been favourable for simple, undiversified strategies, the future is uncertain, with political risk across the globe, uncertainty around the impact of climate change, and DC members who are struggling to save enough for retirement. There’s a misconception that focusing on cost means you have to invest only in the traditional asset classes – equities and bonds. Not only does this leave members exposed, it also isn’t true. There are a number of more innovative asset classes that tick the box of being both cost-effective and strong diversifiers – emerging markets, infrastructure and property (on a listed basis) to name a few. On top of this, we believe that set-and-forget long term allocations are leaving money on the table. When you have the right expertise and depth, using a dynamic asset allocation process, adjusting for short to medium term market views, can and does add value by positioning portfolios for all market conditions. Deficiency #3: Members Move Around – Why Should I Care? Members will be invested for upwards of 40 years, but on average members will spend 8.6 years at each employer1. So you can see why employers are reticent to spend time, and money, on designing their investment strategies. But if we all took that view, we’d be failing members. Over the next 20 years, average DC pot sizes are expected to increase by 91 percent2. In addition, assets under management in the DC workplace pension market are expected to increase to c. £1.7trn in 20302. Whilst many members may be relying on other sources of income currently, this isn’t going to be the case in the near future, and the shift from DB to DC pensions means more people will be increasingly reliant on their DC pot to fund their retirement. Most people realise the importance of healthy eating and a balanced diet on their long term health, but often we don’t think they give the same care to investing for retirement. There are a number of reasons and key drivers for this –but these will need to be overcome for us all to have healthy retirements. While investment strategies which fall victim to these deficiencies will falter, and fads will run out of steam, an investment solution based on solid, grounded principles will stand the test of time. Choosing a DC pensions solution that has this at its core is critical. All parties will have a role in this, from members to trustees, pension providers to regulators, and we all need to take action to make sure investments are given the focus they deserve. Download the Investment Nutrition: The Fuel For Retirement report to continue reading what we believe are the key reasons many investment strategies are lacking the nutrition they need for the longer term, and why it’s critical to implement change now.  You can also visit UK.mercer.com to learn more.   1 Oecd -https://stats.oecd.org/Index.aspx?DataSetCode=TENURE_AVE 2 FCA - Retirement Outcomes Review.https://www.fca.org.uk/publication/market-studies/retirement-outcomes-review-interim-report.pdf

More from Voice on Growth

Fiona Dunsire | 05 Sep 2019

The markets across Latin America, the Middle East, Africa and Asia are some of the most exciting in the world, amid a backdrop of economic growth and changes in demographics, investment markets and regulations. Mercer's Growth Markets Asset Allocation Trends: Evolving Landscape report examined retirement plans in 14 of these markets, with a look at current investment positions and changes over the past five years. The study included retirement fund assets of almost $5 trillion across markets in the Southern and Eastern hemispheres. These areas offer exciting potential for asset owners, managers and investors, as almost 70% of global growth now comes from these economies, according to the World Bank. We are also seeing a rapid expansion of the middle class, creating different patterns of consumption and savings. In addition, half of the top 50 global institutional investors are located in these markets.1 The Global Investment Landscape Is Becoming More Robust   Because the economies of Latin America, the Middle East, Africa and Asia are large and growing, with a rising share of wealth being held by individuals, they are of particular interest to investors around the world. These markets are also becoming increasingly open to foreign investors. At the same time, regulatory changes within these regions are allowing domestic investors to invest more broadly and outside their home markets. All these developments translate into a more open and robust investment landscape, with increasing opportunities for investors across the globe. The pension and savings systems in these regions are also undergoing reform, with the same trend toward increasing individual responsibility for retirement savings as seen in Western countries. Overall, we are seeing a shift to defined contribution (DC) plans at the expense of defined benefit (DB) plans across both corporate and government-sponsored schemes. These changes further emphasize the need to deliver effective investment solutions to meet future savings needs and ensure trust in the systems. 3 Ways Investors Are Responding   Investors and plan managers are responding to the changing environment in three key ways: 1.  More investors are putting money in equities. In the past five years, equity allocations rose approximately 8%, from 32% to 40%. For investors in many jurisdictions, the shift was intended to increase expected returns on the portfolio. Investors across the world face challenges amid an increasingly competitive investment landscape and a low return environment. Adding equities to the portfolio mix should offer greater return expectations over time. 2.  Market liberalization is enabling more diversified portfolios, through increased exposure to foreign assets at the expense of domestic assets. On average, foreign exposure in retirement plans increased from 45% of the overall equity portfolio to 49% in the past five years. Investors sought greater geographic diversification, especially in Colombia, Japan, South Korea, Malaysia and Taiwan. In some countries, such as Brazil, Colombia, Peru and South Africa, recent changes in legislation now allow increased foreign asset exposure. In Japan, the Government Pension Investment Fund has seen a move to more foreign equities at the expense of domestic equities in recent years. The shift to foreign assets was also present in fixed income, with the proportion of foreign allocations rising from 16% to 23%, in part due to less attractive local interest rates, as well as a search for increased diversification. Significant home biases remain; however, we expect this trend to continue as regulatory changes support broader global investment. 3.  Investors are showing slightly more interest in alternative investments. More investors are including alternatives in their portfolios, and Mercer expects that trend to continue on an upward trajectory. Among those investors who provided details on their alternatives asset allocations, more than 70% of the average allocations went to property and infrastructure, and approximately 20% went to private equity. Changing regulations have made alternatives more attractive for investors in some areas. For instance, in Chile, a 2017 reform to the investment regime passed, allowing pension managers to invest in alternatives up to 10%, though specific limits vary by portfolio. The main objective of this enhancement is to boost returns and ultimately retirement incomes. As investors seek to diversify their portfolios and seek return enhancement, we expect alternatives exposure to continue to grow over time. We hope investors use our report's findings as an opportunity to review their own portfolio and determine where they can improve their asset allocation to achieve even better investment outcomes. To learn more, download the full report here. Sources: Top 1,000 Global Institutional Investors." Investment & Pensions Europe, 2016. https://www.ipe.com/Uploads/y/d/w/TOP-1000-Global.pdf

Jackson Kam | 05 Sep 2019

Over the past few years, China has emerged as a powerhouse in the increasingly digitized, e-commerce-driven world. Its digital economy accounted for 38.2% of its GDP growth in the first half of 2018,1 and it also happens to be home to 9 of the top 20 internet companies in the world, including the search engine Baidu, e-commerce behemoth Alibaba and internet services provider Tencent.2 China's success can serve as a lesson for companies and economies around the world that are pushing to remain relevant and keep a competitive edge. Policy Initiatives Help Drive Digitization   One driver behind China's success is the government's focus on shifting to a digital economy. In 2015, China's State Council, the highest organ of state administration, issued a report called "Made in China 2025." The document outlines its strategy for transforming China's manufacturing base through digital innovation. Its strategic goals include greatly increasing manufacturing digitization and "informationization." For instance, within the category of integrating IT and industrialization, the report lists a goal of increasing broadband penetration from 37% in 2013 to 82% by 2025.4 That said, the initiatives outlined have also prompted concern among policymakers across the globe.5 Some fear that an industrial policy directed by the government will include financial assistance to Chinese companies, creating an uneven global playing field. Some also worry about China's investments in foreign technology firms. At the same time, the goals and strategies outlined in the report signal that China's leadership intends to focus on ensuring the country is prepared for an increasingly digital world. Investments Are Bringing the Digital Future Into Focus   To that end, investments in research and development from Chinese companies, research institutes and the government have skyrocketed. Since 2000, it's gone from about $40 billion to $443 billion, just shy of the $484 billion invested within the U.S., according to data from the Organization for Economic Co-operation and Development.6 China is also working to minimize any digital divide between citizens in its major cities and more remote areas. Several provinces have developed plans to digitize their economies. For example, the province of Guizhou plans to grow its digital economy by 20% annually.7 The World Economic Forum also explains that, in what are known as Taobao villages, at least 10% of households run online stores for Taobao, which is the shopping site for e-commerce behemoth Alibaba. Across one such village, this generates e-commerce revenues of at least $1.6 million, and more than 1,000 of these villages dot the Chinese countryside.8 Along with financial investment, policies that enable technology companies to thrive are essential to an economy's digital transformation and success in an e-commerce world. This includes an educational model that helps students develop critical-thinking and problem-solving skills, as well as digital literacy. Moreover, education shouldn't stop once students graduate — instead, it needs to continue through training programs that help those employed stay abreast of advancing technology. Robust capital markets, solid protection for intellectual property and mechanisms to prevent and detect corruption are additional requirements for a strong, innovative technology sector. Collaboration between private and public sectors, such as programs that nurture new businesses, also contributes to a thriving digital environment. Start with Your Employees to Build a Digital Workforce   Businesses, as well as governments, can prepare for a growing digital environment and remain relevant and competitive. Somewhat surprisingly, it makes sense to focus on the workforce first and then the technology. Employees can make or break even the most advanced technology solutions. Here are three requirements for an innovative work culture: 1.  Means: This refers to the tools and authority employees need to conceive an idea, establish the right team, build the business case, and develop and test it. 2.  Motive: Organizations provide motivation by encouraging employees to think beyond their immediate job function and even take risks within a predefined framework. They can also enable them to participate, perhaps through a bonus, in any financial upside resulting from their work. 3.  Opportunity: Employees need time, tools and space for brainstorming and innovation. Agility is also key to an innovative digital workplace. Employees should feel confident collaborating with colleagues across functions and sharing ideas without encountering undue criticism. A solid budget for training will also ensure employees obtain the skills they need to contribute to their employers' success on an ongoing basis. Invest in Technology to Keep Pace with Innovation   Of course, technology plays a vital role in digital success. Constraints, such as inadequate network capabilities and legacy applications that can't integrate with new systems, have impacted the digital transformation activities for three quarters of brands, according to a survey by manufacturing services company Jabil. Fortunately, 99% are investing in new technology to replace outdated platforms that hinder their operations.9 China's rise as a digital power is the result of planning, investment and work — and both companies and countries can learn from their digital efforts and e-commerce successes. Sources: 1 China Academy of Information and Communications Technology (CAICT) under the Ministry of Industry and Information Technology (MIIT), Xinhua News, December 23, 2018,http://www.xinhuanet.com/english/2018-12/23/c_137693489.htm. 2 Heimburg, Fabian von, "Here are 3 lessons Europe can learn from China's flourishing start-ups," World Economic Forum, September 15, 2018,https://www.weforum.org/agenda/2018/09/3-lessons-europe-can-learn-from-china-flourishing-start-up-ecosystem/. 3 World Payments Report 2018," Capgemini and BNP Paribas Services, https://worldpaymentsreport.com/non-cash-payments-volume/. 4 State Council of China, "Made in China 2025," IoT One, July 7, 2015,http://www.cittadellascienza.it/cina/wp-content/uploads/2017/02/IoT-ONE-Made-in-China-2025.pdf. 5 The Made in China 2025 Initiative: Economic Implications for the United States," Congressional Research Service, August 29, 2018,The Made in China 2025 Initiative: Economic Implications for the United States," Congressional Research Service, August 29, 2018,https://fas.org/sgp/crs/row/IF10964.pdf. 6Gross domestic spending on R&D," Organization for Economic Co-operation and Development (OCED), accessed on April 1, 2019,https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm.https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm. 7CAICT under MIIT, "China's digital economy surges 18.9%, drives growth," China Daily, July 20, 2017,http://www.chinadaily.com.cn/business/2017-07/20/content_30179729.htm. 8Wenway, Winston Ma, "China's mobile economy, explained," World Economic Forum, June 26, 2017,https://www.weforum.org/agenda/2017/06/china-mobile-economy-explained. 9Digital Transformation Strategies: How are They Changing?" Jabil,https://www.jabil.com/insights/blog-main/how-are-digital-transformation-strategies-changing.html.

Editorial Staff | 23 Aug 2019

Blockchain has potential to make a huge impact. Learn about fascinating blockchain trends that are emerging in 2019 and beyond. Blockchain technology was invented to safeguard the cryptocurrency infrastructure (e.g. Bitcoin), enabling secure financial transactions without the need for a bank or a middleman. But blockchain’s ledger technology is now expanding beyond digital currency and financial services, offering great potential to improve upon many areas of our lives.  As blockchain matures and becomes more accessible, companies across various industries are finding compelling use cases for blockchain to make businesses processes more efficient. For example, banks can now reduce infrastructure cost by 30% throughblockchain solutions. This is achieved by encrypting millions of storage points, none of which contain a full name or an account number.  While blockchain is currently only being used by 0.5% of the global population, emerging trends are making it more scalable. It is anticipated that 80% of the population will be using blockchain technology in some capacity within 10 years.  Because the HR department is charged with managing so much sensitive data, blockchain technology will be integrated directly into the HR function through a multitude of possible use cases—adding transparency and trust to an organization’s operations. The evolution of blockchain will also mean companies need a workforce with new skills, so HR will be kept busy with recruitment and talent management.  The following blockchain trends are lifting ledger technology from the obscurity of cryptocurrency and making blockchain part of the mainstream conversation.   1.  More potential real-world uses on the horizon will raise the visibility of blockchain.  While cryptocurrency and financial institutions are the pioneers of blockchain, it is important to note that tokenization and securing payments are just precursors to many potential real-world uses for ledger technology.  Every transaction on the blockchain is on public record and its enhanced security makes it a virtually incorruptible platform. Because no central party will ever be in control of all of the record keeping, blockchain can be used to mitigate financial, political and institutional corruption in corporations and governments, alike.  Blockchain may also be able to improve the political sphere in terms of voting systems. Because records cannot be altered in any way, blockchain is ideal for voter registration, identification and vote tallying. Election corruption and voter fraud would be eliminated, ensuring a more accurate, fair electoral process.   The general public will also be drawn to blockchain’s ability to eliminate transactions fees. Owing to decentralization, sending and receiving money can be expedited and enhanced. This has implications for automated legal procedures, customs payments, ownership transfers and business transactions—allowing widespread disintermediation across industries and economies.  Another mainstream use could be in public records of ownership, citizenship and identity. Even in the thriving digital era, these records are stored in centralized databases for security. However, this exposes them to tampering because of the intermediaries it engages. Blockchain opens up the possibility of a decentralized, public, fixed and consensus-driven ledger of records that could nullify the need for intermediaries. A groundbreaking example of this is Estonia’s E-Citizenship Program, which stores citizens’ information on a blockchain.  The application of blockchain can also be extended to include organizational information for the HR department, where one day a company can maintain one identity stored in a master Blockchain. This could be safely accessed by all stakeholders including vendors, employees, customers and tax authorities. 2.  Blockchain as a Service (BaaS) will facilitate business adoption. A Blockchain-as-a-Service (BAAS) platform is a full-service cloud-based solution that connects developers, entrepreneurs and enterprises on one platform. On the BaaS, stakeholders can develop, test and deploy blockchain applications and smart contracts. Moreover, the BaaS platform provides all the necessary infrastructure and operational support, ensuring that the applications run efficiently.  BaaS providers include major companies like Microsoft, IBM, SAP, Amazon, Oracle, and Hewlett Packard. These providers are nurturing blockchain adoption among business because the platforms enable companies to engage blockchain projects without having to spend anywhere near as much money as they would developing customized blockchain solutions independently.  As more businesses look for convenient and cost-effective ways to implement blockchain technology, BaaS collections will most likely continue to expand. Keeping an eye on the emerging BaaS space can help an HR department choose the right provider for (future) company needs.  3.  Blockchain will be less associated with cryptocurrency & possibly rebranded.  Blockchain was born and bred to protect Bitcoin’s infrastructure— but now ledger technology is leaving the cryptocurrency nest to explore more business endeavors.  Blockchain’s association with the volatile cryptocurrency market has potentially diluted its reputation. There are still negative connotations with cryptocurrencies, including wild price swings and the perceived link to people buying illegal items from the dark web.  But mainstream industries, such as manufacturing and retail, are proving the power of blockchain to improve supply chain management and ownership tracking. To break out of the cryptocurrency pigeonhole, it is expected that the blockchain industry will make a concerted effort to establish an identity that’s separate from cryptocurrency—and better educate the business sphere on the advantages it offers, beyond financial transactions.  To take the rebrand a step further, research from Forrester suggests that it might be beneficial for the blockchain industry to drop the name blockchain and replace it with distributed ledger technology (DLT).  4.  Blockchain enabled Internet of Things (IoT) systems. Gartner predicts that the number of installed Internet of Thing (IoT) will exceed 20 billion by 2020. As HR departments integrate more IoT into companies, there is growing concern because these connected devices often open the door for hackers. The same vigilance applied to computers is sometimes overlooked when ensuring the security of the IoT infrastructure. As a company’s digital ecosystem expands to include more IoT devices, they can be left vulnerable to hacks. Blockchain offers strong protections against data tampering by locking access to IoT devices and shutting down compromised devices within the IoT infrastructure if a security event is suspected.  Blockchain serves to effectively decentralize data, which provides a safety net from hacks and fraud. In the digital age, data is fast becoming the most prized asset a company has. If you store all your jewelry, cash and other valuables in one location of your home, what happens if a burglar enters your home and is able to find this location? Because it spreads data across a large network of computer storage spaces, storing records on a blockchain network is like placing your most valuable digital assets across a multitude of places to mitigate your risk of being severely impacted or wiped out by a hacking event.  One of the first blockchain IoT-specific platforms is IOTA, which provides transaction settlements and data transfer layering for IoT devices. IOTA has launched its  Tangle platform, which developers describe as “going beyond blockchain.” This serves as a blockless, cryptographic, decentralized network, where, rather than outsourcing network verification to data miners, users verify transactions of other users. Such IoT platforms promote greater scalability while also eliminating the need to pay transaction fees to data miners. These are both essential factors in a practical IoT network, which could potentially require the processing of billions of micro-transactions between devices daily.  5.  Hybrid blockchains are promising the best of public & private networks.  As blockchain rapidly comes of age, there are generally two communities that have been established. On one side of the tracks, there is a large community supporting public blockchains and arguing for decentralization. On the other side, there is a more niche community—comprised mostly of businesses and their clients—pushing for private blockchains operated by a single entity that also grants permissions to users.   Traditional blockchains (e.g. Bitcoin and Ethereum) are public and completely open, meaning anyone can join the consensus protocol and participate in maintaining the shared ledger. Users often join public blockchains because, apart from operating in a decentralized system, they can offer incentives for mining or staking.   But public blockchain have limitations, including visibility. Data is completely transparent so anyone can access it, presenting a privacy concern for many uses. In some blockchain use cases, data would need to be restricted and a public blockchain cannot do this. Public blockchains also demand high computational power and consume large amounts of electricity. There are also scalability concerns for public blockchains because the consensus protocol places limits on speed and the number of transactions it can process.  Private blockchains operate similarly to public blockchains with an important exception: they are not open to everyone and require an invitation to join. These blockchains are also permissioned networks and can be customized to interact with certain users differently than the general users. Unlike in the public blockchain, provisions can be outlined to determine who is allowed to participate in the network and what specific transactions they are authorized to conduct. While private blockchains address some data security concerns, the main drawback is that they are not as decentralized as the public blockchains.   To build a bridge, hybrid blockchains are being developed to offer decentralized platforms that can restrict visibility of some information on the network. In particular, this model is appealing to regulated markets because it offers the benefits of public and private blockchains in one network.   Through a hybrid blockchain solution, a company can conduct transactions from certain short-term partners and vendors on the public blockchain side. Since the transaction timeline of these partners is shorter, public blockchain is an ideal solution. It would not require the level of trust needed with a private blockchain. The private side of a hybrid blockchain solution can be used to conduct transactions with long term partners. It would operate with a classic permissioned setup, where authorized parties can view, transact and make changes based on permissions they are given. This private network is fast, scalable and secure. However, adding more parties and establishing their trust takes longer than on a public blockchain so it would only be reserved for transactions with designated users.   6.  Sidechains are improving scalability. For all their power and complexity, blockchains face challenges in scalability and speed. These limit some applications of the relatively new technology. One solution that seeks to improve blockchain efficiency and scalability is the sidechain. As its name indicates, a sidechain is a type of blockchain that accompanies a master chain. In the relationship, the master chain is the parent chain and the sidechain is the child chain.   In order to trade assets from the master chain for assets from the sidechain, the user would first need to send their assets on the master chain to a certain location. This would effectively place a lock on the assets for the time being. After the transaction completes, the sidechain would receive a confirmation and release a designated amount of the sidechain to the user—equivalent to the amount of assets locked up by the main chain times the exchange rate. This also works in reverse to trade assets from the sidechain to the master chain.   As sidechains store data and process transactions, they help to uphold the integrity of the master blockchain while making it smaller and more agile. When implemented correctly, sidechains relieve the master chain of some of the work, helping to solve the inherent scaling problem associated with blockchain solutions. Sidechains have practical applications for stock exchanges.   7.  Artificial intelligence (AI) & blockchain are teaming up.   While both AI and blockchain involve high levels of distinct technical complexity, there is potential for these two technologies to team up and score major technological victories in the next five to ten years.   The first change win might be in optimizing data management. Blockchain currently relies on hashing algorithms for data mining and these operate in a brute force style, meaning the algorithm inputs all possible sequences of characters until it finds the one that matches with the verification process. This demands extra steps, lags and effort. AI can step in to offer an intelligent data mining system that streamlines the entire process and cuts down total costs exponentially. This streamlining also has implications for improved energy consumption for blockchains.   AI can infuse natural language processing, image recognition and multi-dimensional real-time data transformation capabilities into a blockchain’s peer-to-peer linking. This allows data miners to turn a large-scale system into a series of micro-economic environments. In turn, this can optimize data transactions in a secure and effective manner. Most importantly, machine learning intelligence adds flexibility to the process.   On the flipside, blockchain’s data decentralization technology can help AI step up its game in creating better machine learning models. Introducing secure data sharing across systems, which have traditionally stored and operated data in an isolated manner, introduces higher quality data. Richer data means better models, better predictions and better insights.   Data decentralization will offer companies of all sizes access to analytics and insights they could not possibly generate from an individual data source. When AI’s deep learning algorithms gain access to multiple data points from multiple data pools that have been standardized by blockchain, the competitive advantage of an AI technology will no longer be about finding the data itself. Nor will it be about having the resources and funds to gather the most data. Instead the focus will be on writing the most innovative algorithms. This evolution ushers in a new era of scalability for deep learning where AI finds itself in new marketplaces, opens doors for smaller players and gains trust with the public at large.   The future looks bright for blockchain and it will likely innovate business processes in many industries, including human resources. However, its widespread adoption and full potential have yet to be seen. The next phase of development for blockchain will be in addressing scalability and accessibility challenges, which will pave the way for more applications and varied use cases across more industries.   Amid the rapidly evolving digital landscape, one thing is clear: blockchain is in a state of metamorphosis with many disruptive trends on the horizon. For HR professionals, it is important to keep an eye out on how this nascent technology is impacting various industries and making its way to the world of work.  

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