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.
Growth economies are making a proverbial splash on the business world and the ripple effect will leave no organization untouched. While conventional business philosophies will help some leaders navigate the rough waters, truly succeeding in this rapidly changing landscape, goes far beyond any business school curriculum. Whether you’re a leader of a startup or a Fortune 500 company, we are all grappling with rapid and borderless news cycles, accelerating urbanization, new technologies, the creation of global marketplaces, and an abundance of cheap capital. In the midst of it all, we are working to solve the same core problem: how can we be relevant in a fast-paced world? Some will turn to business school principles for the answers, but finding solutions for this deep-seated question goes beyond a change in operations, technology adoption and business structure. It requires a less tangible solution. Leaders and companies seeking to be relevant must adopt a growth mindset and culture—the foresight, courage and ingenuity to identify and take hold of novel opportunities and do it sustainably. Step 1: Recognize the Need for Change The Western powerhouses that have historically dominated the world economy are “passing the baton” of global economic leadership to the growth economies of Asia, the Middle East, Africa, and Latin America. These economies are turning the business world on its head. It’s phenomenal to consider these regions have contributed more than 80 percent of global economic growth since the 2008 financial crisis. By 2050, they will dominate the world’s top 10 economies. In addition to where the world is doing business, we’re experiencing major shifts in how business is done. Digital, mobile and social media are transforming the customer experience, disrupting industries and businesses and creating new ones, and workforce skills and demographics need to change in tandem. The growth of mobile technology and solutions in Asia and Africa alone is staggering. It is fundamentally changing not just payments but whole systems of social and business interaction. The bottom line is the world is changing. Fast. Leaders with a growth mindset want to amplify strategic choices and fuel innovation. They know with a clear purpose and by keeping people at the core, they can use the external environment to their advantage. Leaders inspired by unleashed potential, new terrain and competitive possibilities, and who are undeterred by the challenges that accompany it, will be the ones who succeed. Step 2 : Adopt a New Way of Thinking At its core, a growth mindset is a deeply engrained belief that influences how decisions are made. Those with a growth mindset feel emboldened by challenges; they perceive them as opportunities to expand their point of view, learn something new, and better themselves from the experience. And by doing so, they find profitable business growth in even the most difficult environments. On the contrary, those lacking this mindset are threatened and paralyzed by uncertainty. Take for example, Carol Dweck’s case study of fixed mindset CEOs in Mindset: The New Psychology of Success. In the book, she explains how the fixed mindset helps us understand where egos come from and why they become self-defeating. Referencing fixed mindset CEOs, Dweck says they start believing some people are superior, and have a need to prove and display their superiority by using their subordinates to feed this need, rather than fostering the development of their workers. By not embracing diversity of thinking or inviting controversial views, in the end, fixed mindset leaders have sacrificed the long term success of their companies or worse, drove them to extinction. In order to incite meaningful change and remain competitive on the expanding global stage, successful leaders do not fall victim to a finite mindset. They must continue to seek alpha, agitate for growth and have a bias toward relentless execution. Step 3: Cumulative Leads to Exponential – Share the Love & Rally your team Really successful leaders say it takes ‘1,000 good decisions’. What this refers to is the cumulative effect over time of out-competing the opposition making the highest quality decision at every turn. An open growth mindset applied consistently across a business portfolio and sustainably over time, will lead to exponential growth. Like the power of compound interest, growth decision on growth decision on growth decision and so on, across an organization, will lead to accelerating competitive advantage. Though the concept of a growth mindset is simple in nature, fostering this mentality consistently among employees is a challenge. Mercer research conducted among 800 organizations, across 57 countries and 26 industries, found only two in five employees say their company has a compelling, differentiated value proposition. Based on this research, Mercer developed the Thrive Model: How to Win in an Age of Disruption. This model emphasizes that in changing times, organizations need to develop a ‘growth-focused’ culture or growth mindset – empower their employees, focus on inclusiveness, connectedness, and innovation. For leaders, advancing and nurturing this perspective must be a priority. Studies indicate employees in a growth mindset culture expressed 47 percent more trust in their company than those in fixed mindset companies; are 34 percent more likely to feel a sense of ownership and commitment to the future of their company; are 65 percent more in agreement that their companies support risk taking; and are 49 percent more in agreement that their companies foster innovation. Developing a growth mindset and culture starts with talking about it. Passion is contagious. Great leaders inspire others by sharing their visions. Through a compelling storytelling approach, leaders can provoke change not by executive order, but by standing for something bigger, going beyond the profit narratives and articulating the why. As Simon Sinek said, “If you talk about what you believe, you will attract people who believe what you believe.” Step 4: Achieve Exponential Growth The potential inherent in being relevant to our changing world is extraordinary. Growth economies account for 90 percent of the global population under the age of 30, which means 85 percent of the global work-age population will be in growth economies by 2030. It’s no wonder growth economy multinationals on the Global Fortune 500 list increased by 240 percent between 2005 and 2013; or that these markets are set to account for nearly 60 percent of the world’s GDP by 2030. Having a growth mindset opens doors to opportunities in existing markets and to many new frontiers. Companies, and leaders, who anticipate and meet market needs in the rapidly growing corners of the world will reach and inspire many more people. They will demonstrate their value—not just at home, but across the globe. To quote Rwandan author Bangambiki Habyarimana, “Break to pieces whatever indoctrination and programming that holds you hostage. The world is yours. Get possession of it.” Today’s business leaders have the opportunity to create a future that was previously inconceivable. As technology and globalization dissolve the boundaries between us, we must also dissolve the boundaries of our own thinking. The time for a growth mindset and culture is now. 1 International Monetary Fund. (2016, February 04). The Role of Emerging Markets in a New Global Partnership for Growth by IMF Managing Director Christine Lagarde. https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp020416#P27_3292 2 PWC. (2015). The World in 2050 Will the shift in global economic power continue?. https://www.pwc.com/gx/en/issues/the-economy/assets/world-in-2050-february-2015.pdf 3 Dweck, Carol S. Mindset: The New Psychology of Success. New York: Ballantine Books, 2007. Print. 4 Mercer. (2017). Thrive Model: How to Win in an Age of Disruption. https://www.mercersignatureevents.com/ASIAHR2017/hongkong/agenda.html 5 Senn Delaney. (2014). New Study Findings, Why Fostering a Growth Mindset in Organizations Matters http://knowledge.senndelaney.com/docs/thought_papers/pdf/stanford_ agilitystudy_hart.pdf 6 Euromonitor International. (2014, May 30). Emerging Markets Account for 90% of the Global Population Aged Under 30. http://blog.euromonitor.com/2014/05/emergingmarkets- account-for-90-of-the-global-population-aged-under-30.html 7 Lam, David. (2014). The Demography of the Labor Force in Emerging Markets. https://www.kansascityfed.org/publicat/sympos/2014/2014Lam.pdf 8 GE Reports. (2014, June 20). The Rise of Emerging Market Startups. https://www.ge.com/reports/post/93343731983/the-rise-of-emerging-market-startups/ 9 OECD. (2010, May 26) Economy: Developing countries set to account for nearly 60% of world GDP by 2030, according to new estimates. http://www.oecd.org/dev/pgd/economydevelopingcountriessettoaccountfornearly60ofworldgdpby2030accordingtonewestimates.html
Thanks to the miracles of science and better nutrition, we’re getting older and we’re living longer. Only a few generations ago, the average global life expectancy was 34 years. Today, it is 71 – with roughly half of those born in the Western world expected to live past 100.1 But is this blessing a curse in disguise? While we all might prefer for ourselves and our loved ones to live longer, demographic shifts and new economic realities will place seismic pressures on future generations of our world’s retirees. Simply put, we are at the dawn of an enormous global pension savings gap. Addressing this gap will require drastic changes to the way we live, spend and invest. Faced with the reality of our times, Mercer collaborated with the World Economic Forum to pinpoint possible solutions for this unprecedented global retirement challenge. In a study of eight nations – including China, Japan and India – we discovered a gap between aggregate savings and expected annual retirement income totaling 465 trillion renminbi (RMB) – one and a half times the combined gross domestic product (GDP) of all eight Countries. China had the biggest gap as a multiple of GDP. What’s Driving The Gap? Thanks to its growing middle class, urbanization, falling poverty rates, and improved healthcare, China’s average life expectancy has more than doubled within one generation to reach 76 – five years longer than the global average. By 2050, there will be over 600 million retirees in China. Low birth rates, stemming from China’s one child policy, and a lack of immigration, are adding to the country’s rapidly aging population and plummeting ratio of workers to retirees. That all adds up to a projected seven percent year-over-year growth in China’s long-term savings gap—which is expected to reach US$119 trillion by 2050. But China can close this looming gap. The nation’s almost unprecedented wealth creation over the past decade, combined with a personal savings rate of 38 percent3 (significantly higher than for the US or UK, at 3.5 percent and 5.9 percent, respectively), gives China the means – and more importantly, the right savings behaviours and culture – to avoid this retirement debacle. At the moment, however, most household savings in China are not in preparation for future retirement. Chinese families are more likely accumulating assets like homes and cars, saving for their children’s education, or even preparing to support aging parents! The reason for this contradiction lies in the mistrust many Chinese citizens put in investment vehicles. The population remains largely “unbanked,” with approximately 50 percent of Chinese household savings (excluding property) held in savings deposits with negligible financial returns. Also, government regulations limit access to fruitful overseas investment options that would help Chinese savers diversify their investment risk1 (for example, China has a yearly USD$50,000 cap on exchanging yuan for foreign currency.) Where Are We Now? China’s current retirement income system is divided between urban and a rural social security systems. Both rely on basic, pay-as-you-go pensions consisting of a pooled account (from employer contributions or fiscal expenditure) and funded individual accounts (from employee contributions). Supplementary plans are also provided by some employers, mainly in urban areas, with rural areas largely ignored. Recent findings from the 2017 Mercer Melbourne Global Pension Index make it resoundingly clear that the existing patchwork of China’s long-term savings system is ill-equipped to support its current and future generations into old age. Despite the gravity of the retirement challenge, the government has not yet stepped up its provisions. Pension benefits remain extremely low relative to income. Beijing’s average monthly pension of RMB 3,573, for example, is an inadequate safety net for the growing middle class, representing a replacement ratio of approximately 55 percent of average pre-retirement earnings. In all, China’s total accumulated pension savings balance only represents 13 percent of GDP – exceptionally low by comparison to 140 percent in the US, 209 percent in Denmark, 96 percent in the UK, 30 percent in Japan, and 113 percent in Australia. Bridging The Gap Studies show greater financial knowledge by itself rarely translates into action. What does spur action is giving individuals access to smart tools, default options, tax incentives to save, and guidance that can help them succeed. Individuals, employers, government and financial intermediaries across China all have important roles to play in securing the financial future of the nation. Individuals Must Take Personal Responsibility Changing China’s retirement outlook starts with individuals themselves. For those born in China today, a traditional working life of 40-45 years will not support 52+ years of adulthood. Individuals must take responsibility for their own retirement savings, which in many cases means embracing the reality of having to work longer to achieve their financial goals. The onus is also on individuals to seek out expert assistance and financial intermediaries to plan and manage their savings and investments along the way. Individuals who seek out financial intermediaries to help them “get rich quick” must modify their expectations, and instead seek advisors who will help them become financially secure slowly, but surely. Employers Must Work on Employees’ Behalf For most of the world’s working population, with every paycheck comes a swarm of competing priorities. The world’s most effective pension systems make it easier for people to prioritize immediate versus long-term financial obligations by making saving contributions compulsory or at least incentivized. Given China’s pension system is not compulsory, there are three key actions Chinese employers can take to ensure their employees are exposed to the growth assets needed to build a sufficient level of savings to fund their retirements: increase workers’ pension coverage in both urban and rural, contribute consistently to employees’ pension plans, and offer more growth-oriented investment options. Chinese employers have much to gain by taking these priorities seriously. First, helping their employees attain financial wellness is simply the right thing to do. Beyond that, research shows employees who are not financially healthy have higher levels of stress and distraction, leading to lower productivity, poorer customer service and impaired health. On average, employees spend 13 hours per month worrying about money matters at work – a significant drag on productivity. The Government Must Act At the heart of China’s retirement gap stands the government and the opportunity to modernize outdated practices. The reality is, the state pension age must be increased over time to reduce the ratio of time in retirement to working life. To help individuals mitigate their risk of outliving their savings, the government should introduce a requirement that at least a minimum safety net proportion of supplementary retirement benefits be taken as lifetime annuity income streams. Access to high-quality investment options will play a critical role in helping Chinese citizens achieve financial security, and here government plays a key role. The government should permit overseas investment to provide its citizens with access to growth-oriented investment options. Diversification would permit Chinese citizens to pursue high investment returns at lower risk, rather than being limited to Chinese domestic securities. At the very least, the government should mandate that employers communicate plan options and opportunities to members in order to better employee understanding of their pension. In combination, these actions would narrow the gap directly, while helping individuals and employers play their own respective roles on a more favorable playing field. Financial Intermediaries Must Help Educate China’s rapid economic growth is lifting most of the population out of poverty, especially in urban areas. The purchasing power of China’s middle class is sky rocketing. By 2022, more than 75 percent of China’s urban consumers will earn RMB 60,000 to 229,000 a year. This is equivalent to the average income of Brazil and Italy. How the newly wealthy Chinese population spends or saves its money will be dramatically influenced by the low financial literacy plaguing the country. Without financial direction, short-term expenditures are being prioritized over long-term savings. A “casino” mentality is prevalent across Chinese individual investors. Financial intermediaries have an important role to play in helping individuals set more practical financial priorities. Through long-term-oriented advice, tools and financial products that are high in quality and low in cost, financial intermediaries can break through individual inertia and entice people to save. Partnering with the government and employers, these intermediaries can help China get better at recognizing what “good” financial advice and products look like. Assuring China’s Future The ability of Chinese citizens to consume and spend during their working years and throughout their retirement will have a direct impact on China’s growing economy. If China does not address its long-term savings gap, it risks aggravating a growing wealth divide and sparking unrest that could damage its social fabric. As the ancient Chinese philosopher and writer Lao Tze famously said, “The journey of a thousand miles begins with one step.” Mending China’s pension gap requires immediate and bold action from a number of key stakeholders. It’s time to take the first of many steps. 1 Mercer. (2017). Bold Ideas for Mending the Long-Term Saving Gap. https://www.mercer.com/our-thinking/wealth/bold-ideas-for-mending-the-long-term-savings-gap.html. 2 Human Mortality Database. University of California, Berkeley (USA) and Max Planck Institute for Demographic Research (Germany). www.mortality.org 3 FKPMG. (2016). OECD, National Bureau of Statistics of China.中国养老金发展的战略趋势探讨. 4 “United States Personal Savings Rate 1959-2017 | Data | Chart | Calendar.” United States Personal Savings Rate | 1959-2017 | Data | Chart | Calendar, tradingeconomics.com/united-states/personal-savings. 5 “United Kingdom Household Saving Ratio 1955-2017 | Data | Chart | Calendar.” United Kingdom Household Saving Ratio | 1955-2017 | Data | Chart | Calendar, tradingeconomics.com/united-kingdom/personal-savings.6 FKPMG. (2016). OECD, National Bureau of Statistics of China.中国养老金发展的战略趋势探讨. 6 O’Keeffe, Kate. “China Curbs Hollywood Deals, but Greenlights Tech Investments.” The Wall Street Journal, Dow Jones & Company, 18 Aug. 2017, www.wsj.com/articles/china-issues-guidelines-on-curbing-outbound-investment-1503064455. 7 Mercer. (2017). MELBOURNE MERCER GLOBAL PENSION INDEX 2017. https://www.mercer.com.au/our-thinking/mmgpi.html?utm_medium=social&utm_source=twitter&utm_campaign=mmgpi. 8 Li, Patrick. “Bureau of Statistics: Beijinger Workers Average RMB 6,500 per Month.” PatrickLi, The Beijinger, 17 June 2015, www.thebeijinger.com/blog/2015/06/17/beijing-averages-rmb-6500-month-report-bureau-statistics. 9 Mercer. (2016) Inside Employees’ Minds Financial Wellness. https://www.mercer.com/content/dam/mercer/attachments/global/inside-employees-minds/gl-2017-inside-employees-minds-financial-wellness.pdf. 10 Barton, Dominic, et al. “Mapping China’s Middle Class.” McKinsey & Company, McKinsey & Company, 1 June 2013, www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class.