Pensions in aging Asia and the Pacific: Policy insights and priorities

Chomik, Rafal; O'Keefe, Philip; Piggott, John Working Paper Pensions in aging Asia and the Pacific: Policy insights and priorities ADB Economics Working Paper Series, No. 746 Provided in Cooperation with: Asian Development Bank (ADB), Manila Suggested Citation: Chomik, Rafal; O'Keefe, Philip; Piggott, John (2024) : Pensions in aging Asia and the Pacific: Policy insights and priorities, ADB Economics Working Paper Series, No. 746, Asian Development Bank (ADB), Manila, https://doi.org/10.22617/WPS240491-2 This Version is available at: https://hdl.handle.net/10419/310353 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/3.0/igo/ ASIAN DEVELOPMENT BANK ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org ADB ECONOMICS WORKING PAPER SERIES NO. 746 October 2024 Pensions in Aging Asia and the Pacific Policy Insights and Priorities Pension systems across Asia and the Pacific face common challenges of low contributory coverage, inadequate social pensions, and failure to include the informal sector. They also exhibit gender inequities, a lack of policy flexibility and attention to labor incentives, and underdeveloped governance. This paper reviews the structure and performance of regional pension systems, and makes proposals for an expanded role for social pensions with inclusive targeting, reformed contributory schemes, innovations for the informal sector and women, and enhanced reliance on technology. About the Asian Development Bank ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 69 members —49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. PENSIONS IN AGING ASIA AND THE PACIFIC POLICY INSIGHTS AND PRIORITIES Rafal Chomik, Philip O’Keefe, and John Piggott ASIAN DEVELOPMENT BANK The ADB Economics Working Paper Series presents research in progress to elicit comments and encourage debate on development issues in Asia and the Pacific. The views expressed are those of the authors and do not necessarily reflect the views and policies of ADB or its Board of Governors or the governments they represent. ADB Economics Working Paper Series Rafal Chomik, Philip O’Keefe, and John Piggott No. 746 | October 2024 Rafal Chomik ([email protected]) is a senior research fellow; Philip O’Keefe ([email protected]) is professor and director of the Ageing Asia Research Hub; and John Piggott ([email protected]) is professor and director of the Australian Research Council Centre of Excellence in Population Ageing Research at the University of New South Wales. Pensions in Aging Asia and the Pacific: Policy Insights and Priorities Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) © 2024 Asian Development Bank 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Tel +63 2 8632 4444; Fax +63 2 8636 2444 www.adb.org Some rights reserved. Published in 2024. ISSN 2313-6537 (print), 2313-6545 (PDF) Publication Stock No. WPS240491-2 DOI: http://dx.doi.org/10.22617/WPS240491-2 The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies ofthe Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The mention of specific companies or products of manufacturers does not imply that they are endorsed or recommended by ADB in preference to others of a similar nature that are not mentioned. By making any designation of or reference to a particular territory or geographic area inthis document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. This publication is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) https://creativecommons.org/licenses/by/3.0/igo/. By using the content of this publication, you agree to be bound bytheterms of this license. For attribution, translations, adaptations, and permissions, please read the provisions andterms of use at https://www.adb.org/terms-use#openaccess. This CC license does not apply to non-ADB copyright materials in this publication. If the material is attributed toanother source, please contact the copyright owner or publisher of that source for permission to reproduce it. ADB cannot be held liable for any claims that arise as a result of your use of the material. Please contact [email protected] if you have questions or comments with respect to content, or if you wish toobtain copyright permission for your intended use that does not fall within these terms, or for permission to use theADB logo. Corrigenda to ADB publications may be found at http://www.adb.org/publications/corrigenda. Notes: In this publication, “$” refers to United States dollars, and “B” refers to Thailand baht. ADB recognizes “China” as the People’s Republic of China, and “Hanoi” and Ha Noi. ABSTRACT Asia and the Pacific has the most diverse regional pension landscape globally. Yet the region’s pension systems are facing common challenges as they attempt to expand coverage, and ensure adequacy and fairness, while maintaining fiscal sustainability. We review the structures and performance of pension systems across Asia and the Pacific. Most remain characterized by low contributory coverage, social pensions with inadequate benefits and often low (or no) coverage, and informal sector schemes with modest traction to date. They are also characterized by gender inequities, lack of policy flexibility and attention to labor incentives, and underdeveloped governance structures. The paper makes proposals for addressing these challenges through an expanded role for social pensions with inclusive targeting, reformed contributory schemes, ongoing innovations for the informal sector and women, and enhanced reliance on technology. Keywords: pension, Asian pension, social protection in Asia, means tested pension JEL codes: H55, N35, J18 _______________________ This paper was prepared as a background input for the ADB Asian Development Policy report, Aging Well in Asia. The authors are grateful to Aiko Kikkawa, Donghyun Park, and Albert Park from the ADB Chief Economist’s Office for guidance and comments on an earlier draft, as well as Professor Thanh Long Giang from the National Economics University of Hanoi and participants in an ADB seminar in August 2024. In addition, comments and insights were received from Himanshi Jain, Robert Palacios, Dewen Wang, and Ilsa Medeina. The authors acknowledge financial support for the work from ADB and CEPAR. The grant fund for this study was received from the Japan Fund for Prosperous and Resilient Asia and the Pacific financed by the Government of Japan through the Asian Development Bank. Correspondence: Rafal Chomik ([email protected]). I. INTRODUCTION: A CONSTELLATION OF CHALLENGES Asian economies are among the world’s most rapidly aging. The People’s Republic of China (PRC), Indonesia, Thailand, and Viet Nam are expected to have the same total population in 30 years as now: 1.9 billion. But their population aged 65+ is projected to almost double from 250 million to 485 million. In South Asia, Bangladesh, India, and Pakistan are expected to add around 180 million older people in the same period. In the Caucasus, Armenia and Azerbaijan are aging faster than some economies of the Organisation for Economic Co-operation and Development (OECD) (Figure 1). By 2050, all 33 emerging economies in Asia and the Pacific that are featured in this report will be older; 13 will be “aged” societies (more than 14% of the population aged 65+); and 6 “super-aged” (more than 20% of the population aged 65+). These aging trends have economic, social, and fiscal implications. How will pension systems in the region protect these expanding cohorts of older people? Designing adequate, sustainable, and comprehensive pension systems faces various challenges. Indeed, there is a constellation of interconnected challenges that characterizes many emerging economies in the region (Chomik and Piggott 2015). First, aging is taking place at lower levels of economic development than was the case in OECD economies. The decline in working age populations across the region, including in the PRC, Georgia, Japan, the Republic of Korea (ROK), Thailand, Sri Lanka, and Singapore will act as an economic headwind and constrain government budgets. For example, shrinking workforces in the PRC and Thailand are estimated to result in annualized gross domestic product (GDP) growth reductions of more than 1% (Kotschy and Bloom 2023). Many economies in the region will get old before they become rich. Second, the demand for competing public outlays is considerable. Aging will place greater pressure on governments to not only invest in pensions, but also in currently underfunded health and care programs. For example, incremental pension spending alone between 2015 and 2050 was projected to increase by three percentage points and five percentage points in several economies of East Asia and Southeast Asia (World Bank 2016). Third, a large informal sector limits productivity growth, constrains fiscal maneuverability, and poses challenges for pension design. The typical economy in the region has most of its workforce employed in informal settings, and many have low revenue raising capacity (e.g., Indonesia, Malaysia, 2 Myanmar*, and most South Asian economies have some of the lowest revenue–to–GDP globally; Figure 1). Informality also poses challenges for pension systems with social insurance elements, which require both contributions and good record keeping. Fourth, strong migration from rural areas to large urban centers (and internationally for some economies such as Nepal and some Pacific DMCs) is leaving behind (grand)parents and sometimes children, which compromises traditional forms of dependent support and complicates social protection systems, especially where they require portability of pension rights. And fifth, existing social protection structures in much of the region are underdeveloped, often lacking good governance, adequate benefits, and/or having poor coverage of the population. This is the point of departure for this paper, which assesses recent policy developments and insights and suggests policy priorities to improve pension systems in the emerging economies of Asia and the Pacific. * Effective 1 February 2021, ADB placed a temporary hold on sovereign project disbursements and new contracts in Myanmar. 3 Figure 1: Pension Context, Parameters, and Outcomes Demography Development Social Pensions Contributory Aging Level (65+ % of pop) Aging Rate (pp chg by 2050) Life Expectancy (at 60) Healthy Life Exp. (at 60) Development (GDP per cap $PPP) Informality (% of employment) Fiscal (Tax to GDP) Participation (women 55 –64) Participation (men 55 –64) Coverage (% of age eligible) Coverage (% of 60+) Benefit Adequacy (% of GDP per cap) Access Age (w/m) Social Pension Spend (% of GDP) Membership / Participation (% of working age) Access Age (w/m) Contributions (% of wage) Central Asia and Caucuses Armenia 14% 8% 80 76 $20k 50% 23 % 72% 79% 0% 0% 12% 65 0.00% 27% 63 10% Azerbaijan 8% 11% 77 73 $19k 32% 36% 24% 11% 62/67 0.30% 25% 61 25% Georgia 15% 6% 79 74 $22k 56% 27% 66% 80% 100% 28% 60/65 23% 60/65 4% Kazakhstan 8% 4% 79 75 $33k 20 % 100% 104% 6% 58/63 0.70% 80% 63 19% Kyrgyz Republic 5% 4% 80 76 $6k 63% 37% 55% 77% 16% 58/63 35% 58 25% Tajikistan 4% 4% 76 73 $5k 28% 29% 65% 29% 24% 12% 60/65 0.10% 21% 58 25% Uzbekistan 5% 6% 79 75 31% 15% 49% 0% 0% 30% 55/60 0.00% 86% 55/60 15% East Asia Hong Kong, China 21% 19% $73k 14% 48% 71% 20% 14% 5% 65 0.10% 52% 65 10% Republic of Korea 18% 21% 86 80 $57k 27% 27% 61% 82% 70% 50% 4% 65 0.20% 54% 62 9% Mongolia 5% 9% 76 73 $15k 44% 34% 32% 51% 2% 1% 19% 55/60 0.00% 47% 55/60 25% PRC 14% 16% 81 76 $23k 54 % 26% 71% 71% 2% 60 0.30% 37% 55/60 24% South Asia Bangladesh 6% 9% 81 76 $9k 95% 9% 26% 85% 35% 30% 5% 62/65 0.10% 2% India 7% 8% 79 73 $9k 89% 19% 29% 79% 24% 2% 60 0.00% 15% 58 16% Nepal 6% 5% 78 73 $5k 82% 18 % 19% 44% 80% 31% 31% 70 0.70% 2.50% 58 20% Pakistan 4% 2% 77 73 $7k 84% 12% 15% 72% 7% 55/60 6% Sri Lanka 12% 10% 81 75 $14k 67% 8% 31% 76% 33% 13% 4% 70 18% 50/55 20% Southeast Asia Cambodia 6% 7% 78 73 $6k 89% 24% 67% 86% 2% 60 4% Indonesia 7% 8% 78 73 $16k 80% 15% 57% 85% 0% 0% 6% 70 0.00% 17% 65 6% Lao PDR 5% 6% 78 73 $10k 90% 10 % 51% 71% 1% 55/60 11% Malaysia 8% 10% 80 75 $37k 39% 19% 33% 69% 4% 5% 11% 60 0.05% 42% 55 24% Continued on the next page 4 Demography Development Social Pensions Contributory Aging Level (65+ % of pop) Aging Rate (pp chg by 2050) Life Expectancy (at 60) Healthy Life Exp. (at 60) Development (GDP per cap $PPP) Informality (% of employment) Fiscal (Tax to GDP) Participation (women 55 –64) Participation (men 55 –64) Coverage (% of age eligible) Coverage (% of 60+) Benefit Adequacy (% of GDP per cap) Access Age (w/m) Social Pension Spend (% of GDP) Membership / Participation (% of working age) Access Age (w/m) Contributions (% of wage) Myanmar 7% 7% 78 74 $5k 81% 13% 31% 78% 100% 1% 7% 85 0.00% 60 6% Philippines 6% 5% 78 73 $11k 38% 20% 49% 72% 44% 4% 60 0.40% 35% 65 14% Singapore 16% 18% 86 80 $133k 12% 62% 84% 48% 65 37% Thailand 16% 16% 84 78 $22k 65% 20% 59% 80% 86% 4% 60 0.40% 29% 55 7% Timor-Leste 5% 2% 78 73 $4k 81% 20 % 38% 57% 100% 100% 15% 60 0.50% 6% Viet Nam 10% 10% 80 75 $14k 69% 19% 63% 78% 28% 7% 60 0.10% 30% 60/62 22% Pacific Fiji 6% 4% 76 72 $17k 44% 21% 28% 68% 51% 18% 6% 65 0.10% 41% 55 18% FSM 6% 4% 75 71 $4k 66% 44% 77% 33% 65 15% Kiribati 4% 4% 74 70 $2k 56% 91% 33% 48% 93% 35% 33% 67 1.20% 15% 50 15% Marshall Islands 5% 6% $6k 33% 66% 38% 73% 61 16% Papua New Guinea 3% 4% 76 72 $3k 17% 2% 8% 60 0.00% 3% 55 12% Samoa 5% 3% 78 73 $7k 51% 26% 32% 64% 93% 65% 19% 65 0.90% 25% 55 10% Solomon Islands 3% 3% 75 72 $2k 29% 0.00% 16% 50 13% Tonga 6% 3% 79 74 $7k 97% 25 % 41% 60% 100% 70 60 10% Vanuatu 4% 3% 76 72 $3k 72% 36% 37% 50% 0.00% 17% 55 8% Other economies Australia 17% 7% 86 79 $65k 26% 36% 63% 75% 70% 51% 28% 67 2.60% 70% 60 12% Japan 30% 7% 86 80 $52k 37% 70% 90% 3% 18% 65 85% 65 18% New Zealand 17% 8% 85 79 $54k 39% 75% 85% 99% 71% 37% 65 4.50% 65 6% Continued on the next page 11 has increased little over recent decades. There has been substantial expansion only in the PRC and the ROK, and many economies have seen no or very modest expansion between the early 1990s and the mid-2010s. In large part, this reflects the stubbornness of labor market informality in that period. In the face of such stubbornly low coverage, economies are combining different approaches to coverage expansion (Section III.B). B. Low-Hanging Fruit The first and possibly easiest option to increase contributory pension coverage is to expand coverage among workers who are either already in the formal sector but not contributing to a pension scheme or in the informal sector but in work arrangements that have formal characteristics, such as an employer-worker relationship, with monitorable incomes. For example, many systems in the region currently exclude mandatory contributions from the self-employed, business owners, or workers in enterprises below a certain size. In addition, outright noncompliance in formal sector enterprises may further reduce coverage, and/or under-declaration of wages for the purposes of calculating contributions. This includes employers and internal migrant workers who negotiate to avoid paying pension contributions by keeping current wages higher. Including these various categories of workers and taking non-compliance of already included workers seriously may be considered the “low-hanging fruit” of the coverage expansion agenda. With the rise in digital transactions and modernization of contribution collection systems, the economic activity of smaller enterprises and nontraditional workers becomes more observable. This allows policymakers to revisit historical barriers to wider pension contribution mandates. Some economies in Asia and the Pacific have already done so, often combining labor and social insurance law reforms, to gradually lower the threshold number of workers needed for enterprises to require contributions and engage in formal reporting. Some regional economies have lowered the bar from 20 workers to 10 workers and even 5 workers, and ensured that certain categories of workers in formal firms are not excluded from participation as a matter of policy (e.g., internal migrant workers). Self-employed workers remain a challenging category, though economies like the ROK have now included them in their pension systems, and Viet Nam’s 2024 reforms include registered business owners in the mandate. A group that has received considerable attention in this regard is contract-for-service workers, most prominently in the gig or platform economy. This is part of a wider debate around whether employers are deliberately bypassing labor laws for such workers despite the employment arrangement having many characteristics of a regular employment relationship. This is a rapidly evolving legal and implementation agenda, and one of high relevance in Asia and the Pacific (International Labour 12 Organization [ILO] et al. 2023). The first step in the process is typically providing greater legal clarity on the nature of such employment relationships and whether platform workers are employees or selfemployed workers. This remains a legal grey area in many economies in the region and globally. Pending a wider resolution of the legal status of such workers, some economies have begun to pursue innovative policy directions: (i) working with platform companies as aggregators to catalyze voluntary platform worker pension contributions (e.g., GOJEK in Indonesia; Grab in Malaysia); (ii) using auto-enrollment and/or auto-deductions with opt-out options and developing user-friendly apps; or (iii) targeting operators through earmarked taxes (e.g., India's social security code anticipates a tax on the turnover of platform companies to fund some social security cover for their workers; ILO et al. 2023). C. Covering Migrant Workers A further group who are often excluded either as a matter of policy or in practice is international migrant workers. Covering this group remains an ongoing challenge in the region. At times, this is grounded in constitutional provisions that assure social security only for citizens of the economy (e.g., Indonesia). Even in some of the richer economies in Asia and the Pacific, contributions for foreigners are not mandated (e.g., in Singapore's Central Provident Fund). At the same time, practice is mixed, with Australia and the Philippines, for example, including foreign workers regardless of nationality. Others include foreign workers in their short-term benefit programs in the formal sector (e.g., Malaysia’s PERKESO), but do not mandate contributions for retirement savings. Even where foreign workers, in principle, are subject to the same mandate as nationals (e.g., Thailand), they are often far less likely to be covered because of the informal nature of employment noted above, or because of unilateral employer avoidance or mutual agreements to avoid contributions in formal enterprises. While the relative importance of noncoverage or under-coverage of migrant workers varies significantly (both for sending and receiving economies), their exclusion as a matter of policy remains a cause for concern. Even where foreign workers are mandated to participate in pension schemes, often there remains a major issue of portability of entitlements once they return to their home economies. This requires having bilateral social security agreements in place to promote portability, including totalization of entitlements across national systems (frequently an issue because of migrant workers failing to meet vesting requirements in one or both of their home and receiving economies). While such agreements are a common feature in OECD and European Union regimes (Holzmann and Koettl 2011, Holzmann 2018), they are largely absent in Asia and the Pacific, and work is needed to develop such arrangements (Pasadilla 2011). 13 Work is starting at the bilateral level, but it is early days (e.g., Viet Nam is in the process of negotiating its first such agreement with the ROK; Australia and Vanuatu have an agreement to allow transfer of Australian DC funds of Vanuatu migrant workers to the Vanuatu provident fund). A promising regional initiative is the 2022 Declaration on Portability of Social Security Benefits for Migrant Workers in the Association of Southeast Asian Nations. It commits to policy coverage of migrant workers and building a network of social security agreements, which would allow for portability of pension rights across economies. One consideration to keep in mind as this work progresses is that funded DC schemes lend themselves to simpler portability and totalization arrangements than DB schemes. But recent innovations include the redesign of benefits that separate pre-saving and redistribution aspects, allowing DB rights to be transferred with the use of multinational private sector providers (Holzmann 2018). At national level, the PRC has also adopted guidelines that regulate cross-provincial portability of both DB and DC entitlements. D. Getting More from Voluntary Schemes Mandated approaches alone will only achieve so much success in addressing pension coverage gaps in settings where truly informal work continues to dominate. Therefore, some Asia and the Pacific economies have introduced voluntary schemes for informal sector workers that provide a contribution match from general revenues and other features to incentivize old age savings. The approach was initiated by Sri Lanka in 1987–1990 for farmers and fishermen. The ROK followed suit in 1995 for the same groups. Over the last decade or so, other Asian economies have done the same, including India, Malaysia, the Philippines, Thailand, Viet Nam, and most recently Bangladesh. A unique hybrid of a matching scheme was introduced in the PRC in 2009, first for rural and then all informal workers. It combines a modest match on contributions ex-ante with provision of a (modest) lifetime basic pension after age 60 after 15 years of contributions or the lump-sum equivalent (Dong and Park 2019). Most such schemes are specific to informal workers, although it is integrated into the main scheme in Viet Nam. Most are DC designs, though India and Viet Nam use a DB approach. Administration is typically done by the mainstream pension authorities, providing a degree of cross-subsidy of administrative costs. The level of matching also varies significantly across economies, with some offering a 1:1 match (e.g., India and the ROK) and others as low as 15% match on contributions (Malaysia). In some schemes, there is a lifetime limit on the period or cumulative amount of matching (e.g., Malaysia's i-Saraan and i-Suri matching schemes introduced lifetime caps on the government match in the 2024 budget, which is equivalent to 10 years of the annual maximum match in each case; 14 India's Atal Pension Yojana scheme had a 5-year limit, though the more recent Pradhan Mantri Shram Yogi Maan-dhan scheme has removed that). Often, there is also an annual cap on the amount of the match. For most schemes, the design is simple and flexible: contribution amounts can be modest and irregular to accommodate the volatility of informal sector incomes. Globally, other innovations in matching schemes have been introduced, including (i) bundling retirement savings with short-term benefits to address the multiple needs of informal workers and myopia with respect to old age savings (this may include life or funeral insurance, health or maternity cover, or access to other financial products such as microfinance.); (ii) simplification of know-yourcustomer requirements for opening accounts (e.g., India's Atal Pension Yojana scheme); (iii) use of auto-enrollment, auto-deductions, or auto-escalation with opt-outs; (iv) reliance on contribution aggregators (e.g., trades unions, worker associations, coops, microfinance institutions, self-help groups, and telcos) to increase peer incentive effects and efficiency of administration for program implementers; and (v) expansion of contribution channels, in particular, use of mobile payments, platforms (e.g., WhatsApp in India), and convenience stores. While matching schemes can lift voluntary contributions and increase participation in old age saving, low combined contributions, lifetime caps, and/or low contribution density still mean that only modest financial protection for the relevant groups is likely as they reach old age. Incremental coverage has also been modest to date. In Malaysia, Viet Nam, and India, only an additional 1%, 3%, and 5%, respectively, of the working age population have joined a matching scheme. Thailand has had more impact, with about 12% of the working age population in matching schemes. The most notable successes with matching schemes have been the ROK, which more than doubled participation between 1995 and 1999, and the PRC’s hybrid scheme, which covered more than 380 million contributors by 2020, more than 90% of them in rural areas (Wang and Feng 2022). E. Delivering Adequacy and Sustainability in Contributory Schemes While policies to increase coverage are important, the level and fiscal affordability of contributory schemes also require policy attention. For DC schemes, fiscal sustainability is ensured by design (in the absence of generous minimum benefit guarantees), but adequacy remains a major challenge. This is commonly because of low or incomplete contribution density, particularly for women (section V.F); generous early withdrawals rules (e.g., from designated contingency accounts in places like India, Malaysia, and most Pacific DMCs); early withdrawal ages (e.g., Kiribati, Malaysia, and Sri Lanka); and low fund investment returns in some economies (e.g., in several Pacific DMCs historically). Even when DC accumulations are more substantial, lump sum withdrawal rules can compromise adequacy since they are typically exhausted within a short period after access and thus fail to provide financial 15 protection across older ages (e.g., in Malaysia, the majority of members are estimated to exhaust their lump sum within 3 years of withdrawal at age 55). The lump sum approach is particularly an issue in cultures where sharing of resources among extended families and clan or tribal networks is prevalent (e.g., wantoks in Melanesia). At the same time, the absence or underdevelopment of annuity markets across most emerging economies in the region make a rapid transition to annuitized benefits unlikely, and an approach of phased withdrawals has been preferred in a number of cases (creating, in effect, a “term DC”). For NDC schemes (e.g., in Azerbaijan, the Kyrgyz Republic, and Tajikistan), benefits are paid throughout old age, but the benefit level is adjusted according to life expectancy at retirement of each cohort, which ensures fiscal sustainability but may yet compromise adequacy. For DB schemes, the trade-off between benefit adequacy and fiscal sustainability in many regional economies has tended to be struck in favor of providing adequate benefits, with attendant risks for fiscal sustainability and a future reversal of pension promises. The pattern has been observed in OECD economies in the past, which had generous pension offers that were later curtailed in response to population aging (Whitehouse et al. 2009a). This is evident in Figure 4A, which shows often significant benefit rates in emerging economies in Asia and the Pacific. For some economies (e.g., the Philippines and Thailand), sustainability concerns are driven more by low DB contribution rates, while for others (e.g., Viet Nam) it is driven more by high target replacement rates even where contribution rates are significant. As a result, a number of DB schemes in the region face serious sustainability challenges over the medium to long run. At the same time, the absence of rule-based indexation mechanisms for benefits in payment in most economies (except in Viet Nam) provides a fiscal lever to control costs (e.g., not increasing benefits at times of inflation), but erodes adequacy by stealth (Whitehouse et al. 2009b). It is crucial to index pension values to a measure of community standards (e.g., wages; refer to section V.C), or at a minimum to prices to ensure sustained purchasing power. In discussion around pension system sustainability and adequacy, a common and charged debate in many economies in the region has been around raising retirement and/or access ages for pensions and old age savings. A number of economies still have retirement ages that were set decades ago when life expectancy at retirement was years lower than presently (e.g., the PRC and Thailand) and the issue is more pronounced for women in economies with differential retirement ages. While there has been progress in the number of economies in Asia and the Pacific gradually increasing their retirement ages (including Indonesia, Viet Nam, and the Central Asia and Caucasus economies early in the transitions), a common source of resistance is the concern that raising retirement ages will 16 compromise the labor market prospects of younger workers. This concern, known as the “lump of labor fallacy” has been repeatedly shown not to be borne out in practice in OECD economies. More recent studies in the PRC, Malaysia, and Latin America reach similar conclusions (Zhang 2012, World Bank 2020 Apella 2024). F. Increasing Adequacy via Redistribution within Contributory Schemes A third major design feature of contributory schemes is the degree of internal redistribution between higher-income and lower-income contributors. There is considerable variation in this regard (Figure 4B). In general, in DC schemes, target replacement rates for low-income and highincome full-career workers are expected to be similar in economies with individual account and provident fund DC schemes (e.g., Indonesia, Malaysia, Singapore, and Sri Lanka). In contrast, some pension systems in Asia and the Pacific offer substantially higher replacement rates for lowincome workers through a combination of minimum pension floors, contribution caps, benefit ceilings, or other flat rate components of benefit schedule design (e.g., Armenia, India, the Kyrgyz Republic, Pakistan, and the Philippines). In some cases, the earnings link of DC schemes is weakened via tax or by way of noncontributory universal or targeted schemes that raise replacement rates of low-income workers (e.g., Thailand and, among advanced economies in the region, Australia; refer to section IV on targeting). The result can mean that, in a number of economies, formal workers on half the average wage can expect 20to 30-percentage point higher replacement rates than those on twice the average wage, and in the case of Pakistan, more than 60 percentage points higher. Figure 4A: Net and Gross Replacement Rates 0% 20% 40% 60% 80% 100% Net Replacement Rate Gross Replacement Rate Continued on the next page 17 Figure 4B: Net Replacement Rates for Highand Low-Income Earners PRC = People’s Republic of China; ROK = Republic of Korea. Note: Replacement rates are for full career workers (starting work at age 22 and retiring at the prevailing economy’s access age) defined as pension entitlement as a proportion of pre-retirement earnings. Latest available year. Source: Organisation for Economic Co-operation and Development 2022 IV. COVERAGE AND ADEQUACY VIA SOCIAL PENSIONS A. The Incomplete Bridge for the Coverage and Adequacy Gap Given the challenges of achieving widespread participation in contributory schemes and persistently high informality, an increasing number of economies in Asia and the Pacific have supplemented contributory schemes with noncontributory social pensions with some success. These exhibit considerable variation in terms of coverage, from being the foundational pillar of the entire pension system at one extreme (e.g., Georgia and Timor-Leste) to absent or negligible (e.g., Cambodia, the Lao PDR, Pakistan, Sri Lanka, and several Pacific DMCs). Among economies that do have social pensions, the trade-off between fiscal sustainability and adequacy has often prioritized the former. Indeed, a typical characteristic in the region is a low level of social pension coverage, low level of benefits, or both (Figure 5). Only five economies in Asia and the Pacific have benefit levels above the global average of 16% of GDP per capita, and three have benefits above the OECD average of 22%. In addition, 11 emerging economies in the region have social pension coverage below 50% of the age eligible population (often well below) even as their contributory systems remain underdeveloped. Investment in social pensions is typically very low (Figure 1), in some cases at the same time as continued high rates of public investment in regressive and environmentally harmful subsidies and excessive spending on generous civil service or military pensions (Damania et al. 2023, Asian Development Bank [ADB] 2016). 0% 20% 40% 60% 80% 100% Net RR for high earners (2 x avg) Net RR for low earners (0.5 x avg) pp difference 18 Figure 5: Social Pension Coverage and Benefit Levels GDP = gross domestic product, OECD = Organisation for Economic Co-operation and Development, PRC = People’s Republic of China, ROK = Republic of Korea. Notes: Based on data from 2018 or latest. Benefit rates can differ for different groups (e.g., Thailand has different rates by age: those 60–69 get B600, which increments with each decade of life by B100 per month, to maximum of B1,000 per month over 90 years of age). Source: Authors’ best estimates based on data from the United Nations 2022, World Health Organization 2023, International Monetary Fund 2023, International Labour Organization 2023a, International Labour Organization 2023b, Organisation for Economic Co-operation and Development 2022 and 2024, World Bank WDI, P4SP 2024 for PICs, HelpAge International 2018, Allianz 2023, and Asian Development Bank personnel and national sources. B. Raising Social Pension Benefit Levels to Improve Adequacy The outcome of low social pension benefits is that, even where they have substantial reach, existing schemes tend to have modest impacts on the well-being of older people and are weak in reducing poverty (though have the potential to achieve a real impact in some economies [Box on page 21]). For example, in Thailand, raising the social pension benefit level to 16% of GDP per capita is estimated to move another 12% of older households above the purchasing power parity (PPP) $6.85 per day poverty line, reducing the PPP $6.85 poverty rate to just 4.47% of households with older persons. Similarly, raising the benefit to 16% of GDP per capita in India would also move 12% of older households above the PPP $3.65 per day poverty line, reducing older households’ PPP $3.65 poverty rate to 593%. Higher benefit levels would obviously reduce poverty further. For example, if India’s and Thailand’s social pension benefit was in line with 22% of GDP per capita, it would reduce old-age poverty to 48% and 2%, respectively, among older households (noting the differential poverty lines). PRC Mongolia Indonesia Malaysia Myanmar Timor-Leste Bangladesh Nepal Sri Lanka Armenia Azerbaijan Kazakhstan Tajikistan Uzbekistan Fiji Kiribati Samoa Hong Kong, China ROK 0% 5% 10% 15% 20% 25% 30% 35% 40% 0% 20% 40% 60% 80% 100% Social pension benefit (% of GDP) Social pension coverage (% of 60+ population) Asia and the Pacific Non-Asian Economies OECD average benefit Global average benefit 19 By contrast, raising the benefit to the global average for social pensions (16% of GDP per capita) or the OECD average (22% of GDP per capita) is estimated to make a far greater difference, with variation between economies depending on level of development, consumption distribution, and household composition (Figure 6A). Figure 6A: Simulated Old Age Poverty Rates, By Level of Benefit and PPP Poverty Lines Figure 6B: Simulated Fiscal Costs, By Level of Benefit Avg = average, GDP = gross domestic product, OECD = Organisation for Economic Co-operation and Development, PPP = purchasing power parity, soc = social. Notes: Simulation is of 2024 poverty rates of households with age eligible persons and fiscal estimates assuming universal coverage of people aged 65+. Note different scales in spending charts. Sources: Authors’ best estimates based on data from the United Nations 2022, World Health Organization 2023, International Monetary Fund 2023, International Labour Organization 2023a, International Labour Organization 2023b, Organisation for Economic Co-operation and Development 2022 and 2024, World Bank WDI, P4SP 2024 for PICs, HelpAge International 2018, Allianz 2023, and Asian Development Bank personnel and national sources; Authors’ analysis of data from United Nations Economic and Social Commission for Asia and the Pacific (2023). Georgia India Indonesia Kiribati Thailand Uzbekistan 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% 4% 8% 12% 16% 20% Simulated old age $2.15 PPP poverty rate by level of benefit OECD average soc. benefit (22% GDP pc) Global average soc. benefit (16% GDP pc) % of recepient households in poverty Georgia India Indonesia Kiribati Mongolia Thailand Uzbekistan 0% 4% 8% 12% 16% 20% Simulated old age $3.65 PPP poverty rate by level of benefit Georgia India Indonesia Kiribati Mongolia Thailand Uzbekistan 0% 4% 8% 12% 16% 20% Simulated old age $6.85 PPP poverty rate by level of benefit Georgia Thailand 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 0% 4% 8% 12% 16% 20% Simulated fiscal cost by level of benefit OECD avg soc benefit 22% GDP pc Global average soc benefit 16% GDP pc Spending on social pension as % of GDP India Indonesia 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 0% 4% 8% 12% 16% 20% Simulated fiscal cost by level of benefit Kiribati Mongolia Uzbekistan 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 0% 4% 8% 12% 16% 20% Simulated fiscal cost by level of benefit 20 Choosing the exact benefit level is ultimately a political consideration related to social views of poverty and fiscal capacity. While the basic acceptable standard of living could be judged against some absolute value (e.g., a fixed basket of goods), with increasing development, economy-wide benchmarks such as relative poverty lines, share of GDP per capita, minimum wages or community standards tend to apply (OECD 2023). As with parameters in contributory schemes, the advantage of raising and transparently linking benefits to a measure of national income ensures that benefits do not erode over time, serving the integrity of the pension system (e.g., Viet Nam, despite periodic increases in social pension benefits, has seen the real value of benefits eroded by around 25% over time). The simulation exercise can also shed light on concerns about fiscal sustainability of social pensions (Figure 6B). Spending on a universal social pension with a benefit set at 16% of GDP per capita would, in 2024, be expected to cost between 0.7% of GDP (in Kiribati) and 2.9% of GDP (in Thailand). The differences are driven by the age distribution of the population, which also shifts over time. For example, rapid aging in Thailand can be expected to increase the costs of such a scheme to 3.6% of GDP in 2034. One solution to achieve adequate social pension benefits while ensuring fiscal sustainability is targeting of benefits, discussed in the following section. 27 Figure 7B. Simulated Fiscal Cost of Universal Social Pension with Variable Eligibility Age (% of GDP) GDP = gross domestic product. Notes: Based on social pension benefit set at 16% of GDP. Based on binary test of means where only those within the indicated proportion of population receive it. Assumes administration cost of 5% of cost of scheme. In Figure A, eligibility age is constant at 65. In Figure B, all age eligible households are assumed to receive the benefit. Source: Authors’ analysis of data from United Nations Economic and Social Commission for Asia and the Pacific (2023). An inevitable question when considering the feasibility of an expanded social pension is how it would be financed. The question is more acute in the economies of Asia and the Pacific that have very low aggregate public revenues, and often significant debt service obligations (Figure 1). For some economies, there is potential to create fiscal space through reallocation of existing spending, most notably from consumer fuel subsidies (e.g., Indonesia, Malaysia, and Pakistan). In such instances, the cost of such subsidies presently easily exceeds the potential costs of introducing or expanding a welldesigned social pension. A second source of potential fiscal space is parametric reforms of contributory schemes, such as increases in retirement age, adjustments in accrual rates, or actuarially determined early retirement provisions. For example, modelling for Indonesia shows that the legislated gradual increase in retirement age in its contributory scheme would finance around one quarter of the cost of introducing a modest social pension (Kudrna, Piggott, and Poonpolkul 2024). Reforms of very generous civil service and military schemes offer particular potential in this regard. Beyond measures to reduce existing expenditures, the question becomes a wider one of how to improve public revenue performance to create fiscal space for social pensions, enhanced MDC matching, pension fund deficit coverage, or indeed any other general revenue financed expenditure. While greater reliance on progressive income taxes would be desirable, the combination of high informality, generous PIT thresholds, and sometimes weak tax administration capacity limits the scope of that channel in much Georgia India Indonesia Kiribati Mongolia Thailand Uzbekistan 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 65 66 67 68 69 70 71 72 73 74 75 Access age Spending on social pension as % of GDP 28 of Asia and the Pacific. Looking at other revenue instrument requires balancing considerations of their revenue potential, costs and feasibility of administration and compliance, impacts on growth and incentives of firms and workers, redistributive implications, and other factors (Ter-Minassian 2019). V. OTHER POLICY PERSPECTIVES AND INNOVATIONS The complexity of pension systems means that there are multiple objectives, moving parts, and perspectives to consider beyond the broad imperatives of increasing coverage, adequacy, and maintaining fiscal sustainability. Here we touch on several specific issues for Asia and the Pacific pension reform agenda. These include: work incentives of pensions, interaction with private transfers, automatic adjustment mechanisms (AAMs) in pensions, gender dimensions, lessons and ramifications of the coronavirus disease (COVID-19) pandemic, and some innovative policy highlights that are related to financial decision-making and financial technology. A. The Interaction between Pensions and Work Incentives Discussion above has tackled the effect of targeting on incentives and labor market behavior of households. But there is evidence that pensions systems exert other financial incentives that affect work and retirement decisions (Gruber and Wise 1998, 1999). Recent literature in Asia and the Pacific also suggests that getting pension settings right is important for work incentives. For example, the probability of workforce withdrawal increases statistically significantly upon receiving a contributory pension among urban workers in the PRC as well as urban and rural men in Indonesia (O’Keefe, Giles, and Yang 2021). In Thailand, the slightly more generous social pension also has had some observable impact (Giles and Huang 2017). By contrast, the impact of receiving a hybrid social pension is limited in the PRC (Zhang, Giles, and Zhang 2014). It is unsurprising that where older workers can retire early on reasonable incomes, they choose to do so. For policymakers, the balance is to set pension system parameters in such a way that older people are protected, but system incentives still encourage people to work longer and continue contributing to the pension system. The most obvious policy lever is pension access ages, the setting of which should consider both fairness and long-term sustainability, as well as labor market impacts (Chomik and Whitehouse 2010). As noted earlier, in many economies in the region, access ages are low for social, contributory, or both types of pensions, even taking account of differences in healthy and total life expectancy (e.g., the PRC, Solomon Islands, and Thailand, for contributory schemes; the PRC, Kazakhstan, Thailand, and Uzbekistan, for social pensions). These could be raised and linked to some measure of life expectancy (Section C on automatic stabilizers). 29 Another policy lever is the extent to which contributory pensions require retirement to receive a pension. Such work tests or earnings tests are not uncommon, but OECD economies have sought to remove them (e.g., Norway, the United Kingdom, the United States, and most recently Denmark). Most economies of the former Soviet Union removed such tests as part of their pension reforms during transition and provident funds in Asia and the Pacific do not typically impose them, but some DB schemes in the region have retained them (e.g., the Philippines, for those between ages 60 and 65). Modelling based on advanced economies suggests that removing work tests can delay retirement but reduce claiming age, often resulting in longer working lives but with lower work intensity (Song and Manchester 2007; Blundell, French, and Tetlow 2016). Pension policymakers, therefore, may wish to complement the abolishment of work tests with mechanisms that increase pensions if these are claimed later. This takes place automatically within DC schemes and can be done via an actuarially fair adjustment within DB schemes. Regulations and laws outside the pension system can also affect retirement choices. One obvious feature relates to mandatory retirement ages (e.g., Viet Nam had to amend its labor code provisions on retirement age before it was able to raise the age in social insurance legislation). In most OECD economies, anti-age-discrimination legislation has sought to outlaw mandatory retirement ages, though in much of Asia and the Pacific employment discrimination legislation generally has not yet explicitly included age as a prohibited basis for workplace discrimination. B. The Interaction between Pensions and Private Transfers Another potential trade-off when designing pension systems is between public and private transfers, though it is unclear the extent to which such concerns should inhibit the development of publicly supported benefits. In many economies in Asia and the Pacific, financial transfers from adult children to older parents occur, though empirical evidence from East Asia and Southeast Asia suggests that they are often less substantial and, in net terms, kick in notably later than popularly believed (World Bank 2016). Nonetheless, understanding whether social pensions may crowd out private transfers is an important consideration in assessing their net welfare impact. Evidence from developed economies suggests that the crowding out effects of public transfers tend to be modest (Feldstein and Liebman 2002). A useful literature review of crowding out effects of public transfers in developing economies is provided by Nikolov and Bonci (2020). For pensions specifically, including social pensions, just over a third of the studies reviewed globally find no crowding out effect of pension transfers on familial transfers, though the average effect across all studies reviewed was about 27% of the transfer amount. 30 That said, regional studies in the PRC, India, and Nepal suggest low levels of crowding out and, even in some cases, significant crowding in (Nikolov and Adelman 2019; Chen et al. 2016; Kang 2004; Dutta, O’Keefe, and Rashid 2008). In Nepal, crowding-in of private transfers saw an additional 20% in private transfers to social pension recipients. Overall, the authors also find that gender impacts may differ, but again not in consistent directions across economies. A study in Bangladesh, for example, on crowding out of private transfers found that the effect was larger for older men than older women (McKernan, Pitt, Moskowitz 2005). An important takeaway is that findings across economies are variable, suggesting that robust evaluation of welfare impacts of social pensions should be carried out for individual economies. In such studies, it is also vital to consider nonfinancial support from adult children to older parents, whether in the form of housing, care support, food, or other in-kind support. Behavioral responses with respect to nonfinancial support may well differ from those for financial interfamilial transfers. C. Automatic Adjustment Mechanisms in Pension Systems A striking feature of pension systems in emerging Asia and the Pacific is the absence of AAMs, which have become an increasingly common feature of pension systems in OECD economies (DC and NDC schemes in Asia and the Pacific are an exception). AAMs refer to “predefined rules that automatically change pension parameters or pension benefits based on the evolution of a demographic, economic, or financial indicator” (OECD 2021). From a system viewpoint, these help pensions remain sustainable in the face of evolving factors. From a political viewpoint, they reduce political turbulence accompanying ad hoc adjustments in pensions. From the households’ viewpoint, they provide greater predictability around pension income (e.g., via rule-based indexation of pensions), though may also result in downward adjustments of benefits. In 2021, about two-thirds of OECD economies had one or more AAMs built into their mandatory or quasi-mandatory pension systems. AAMs can take several forms: (i) an NDC structure of the pension system which has inbuilt adjustment mechanisms around shifting demographics (e.g., Azerbaijan, the Kyrgyz Republic, and Tajikistan in Asia; and Italy, Norway, Poland, and Sweden in OECD); (ii) adjustments in access age automatically linked to changes in life expectancy (e.g., on a 1:1 basis as in Denmark and Italy or some proportion of the increase in life expectancy as in Finland, the Netherlands, and Portugal); (iii) benefits adjustments automatically linked to life expectancy, demographic ratios, wage bill, or GDP (as in Finland, Greece, Japan, and Portugal); (iv) balancing mechanisms to ensure short-term or long-term projected financial balance of pensions, relying on differing combinations of changes to pension benefits, points, or contribution rates (e.g., Canada, Germany, the Netherlands, Sweden, and the United States); and (v) funded DC systems (when no minimum benefit guarantee is provided) also act 31 as automatic stabilizers as no fixed promise is made about the level of pension until the point of retirement (i.e., longer life expectancies automatically means the flow of benefits will be lower or last less long). While AAMs help with predictability of pension systems, they also have limitations, as seen by OECD examples where they have been changed or cancelled. Like any public policy, they may be reversed because of political pressure (e.g., as in Germany, the Slovak Republic, and Spain), or diluted via temporary suspensions (e.g., as in Italy and the Netherlands). Alternatively, technical design issues or unanticipated developments in indicators may undermine their implementation (e.g., where projected and actual life expectancies diverge). Alternative approaches to achieve long-term equilibrium of pension systems include the use of reserve funds. This approach was initiated in the United States social security system and, subsequently, has been adopted in more than 20 OECD economies, including Japan and the ROK, and more recently in the PRC. Reserve fund assets in several OECD economies amount to over one quarter of GDP, with about a third of GDP in Japan, about 45% in the ROK, but only about 3% of GDP to date in the PRC (OECD 2021). Underpinning any mechanism to promote balance and sustainability of public pension systems should be regular actuarial projections of the system finances, preferably with sensitivity analysis around the underlying assumptions. Regular projections are particularly important in a region like East and Southeast Asia which are rapidly aging, or South Asia, which will soon begin to. While a growing number of public pension funds in the region undertake such analyses, it is important to mandate such a practice and ensure that it is carried out regularly (say every 3 years or so as is mandated for EU economies, for example). D. Governance Issues in Pension Systems Promises and preservation of pension rights must survive for long periods in pension systems, and this inevitably strains governance in any economy. In public pay-as-you-go systems, promises are routinely broken by governments: access ages are increased, survivor pensions are cut, and indexation of pensions in payment is reduced. These actions, however, are taken by accountable governments (i.e., in most cases, governments can lose office because of broken promises, or a failure to deliver). Less clear are the nature and implications of governance failure in pre-funded pensions systems, particularly where private fund managers are part of the system. Here, financial and legal governance 32 must be robust over the whole period of working life and often beyond. This is challenging in advanced economies with decades of experience in managing long-term contractual saving. In emerging economies, the risk of governance failure must be factored into pension design. Where private fund managers are involved, there are additional issues of capacity of pension fund supervisors and principal-agent challenges. At one extreme, fraud and/or embezzlement of government or privately managed pension funds remain real risks where regulatory oversight is weak (e.g., the arrest of Kazakhstan’s pension fund head in 2017 for embezzlement; investment of pension or provident fund assets in businesses of connected parties as occurred in some Pacific DMCs provident funds in the 1990s and early 2000s). Governance shortcomings can take many forms. A dramatic example is when individual accounts are nationalized and governments renege on the system design and promises (e.g., Argentina’s and Hungary’s nationalization of funded accounts). They may take less dramatic forms such as the use of DC contributions by subnational authorities in the PRC to make current pay-as-you-go pension payments, resulting in the widespread phenomenon of empty accounts in the contributory pillar, compromising adequacy of future pensions. By 2012, it was estimated that more than 90% of individual contributory pension accounts in the PRC were empty (Zuo 2014). Where private players are involved in the collection, investment, and management of mandated pension schemes, governance challenges tend to be more acute in developing economies. This may be because of low regulatory capacity of agencies that are supervising private fund managers, lack of competition in the fund management sector, or poorly managed financial institutions with opaque management practices. In this context, the International Social Security Association (ISSA), the International Organization of Pension Supervisors (IOPS), and OECD (2016) provide useful guidance and standards. ISSA’s Good Governance Guidelines for Social Security Institutions focus on governance of public pension organizations and IOPS’ Principles of Private Pension Supervision focus on privately managed funds. The ISSA guidelines emphasize five mutually enforcing principles of pension fund governance: accountability, transparency, predictability, participation, and dynamism. Accountability requires that social security administrators are accountable for managing the program prudently, efficiently, and equitably. Transparency requires availability and accessibility of accurate, essential, and timely information to ensure that stakeholders are well informed of the true state of the social security program, and clear and simple rules, systems, and processes to limit discretion and arbitrariness in program administration. Predictability refers to the consistent application of the law and 33 its supporting policies, rules, and regulations. For social security programs, the rights and duties of members and beneficiaries must be well-defined, protected, and consistently enforced. Participation refers to the active education, engagement, and effective involvement of stakeholders to ensure the protection of their interests. Dynamism refers to ongoing improvements in fund operations. IOPS provides guiding principles for the regulation and operation of private pension systems, including the need for clear objectives on coverage, adequacy, security, efficiency, and sustainability. The IOPS principles form the basis of the 2016 OECD Core Principles of Private Pension Fund Regulation. Some Asian economies are taking note. Recent policy revisions in the PRC for supervision of social insurance funds expressly state many of these same principles. In addition to the principles, IOPS also has a series of detailed guidelines on specific dimensions of private pension fund management and supervision (e.g., licensing of funds, risk management practices, fund projections, use of alternative investments and derivatives, and integration of environmental, social, and governance principles in investment). In addition to the regulation and management of private funds themselves, the OECD and IOPS place strong emphasis on well-functioning capital markets and financial institutions to ensure that pension savings can achieve adequate and diversified investment returns that balance risk and return over time. Where these conditions do not exist domestically, economies may consider atypical options. Kiribati provides an example in Asia and the Pacific absent local capital markets where the provident fund outsources fund management to an offshore fund manager in Australia. Public trust in government and financial institutions is vital to the development of funded pension systems, and indeed any pension system. Available evidence on public trust suggests varying levels of trust in public institutions in general in Asia and the Pacific (Figure 8). More generally, in the region, while the share of people who are banked has increased steadily in recent years, among those who remained unbanked (overwhelmingly in the informal sector where the pension coverage challenge is most acute), lack of trust in financial institutions remains a non-negligible barrier (e.g., in India and Uzbekistan [Figure 11B]). One overarching way to balance risks it to not put all of a pension system’s “eggs in one basket:” multipillar structures are better protected when one part of the system does not deliver on its promises. 34 Figure 8: Levels of Trust in Business and Government PRC = People’s Republic of China, ROK = Republic of Korea, UAE = United Arab Emirates. Notes: Based on question: “how much do you trust the institution to do what is right [9-point scale]”. Data based on November 2022. Source: Edelman Trust Barometer (2023). E. Pension Systems in Asia and the Pacific During COVID-19 During the COVID-19 pandemic, many economies made temporary adjustments in their pension systems to help mitigate the impact on contributors and firms. This was in addition to the widespread expansion of direct social assistance cash transfers. The most common measure was reductions, holidays, and deferments in pension contribution rates, but several economies with provident funds also allowed exceptional early withdrawals. In addition, a number of economies provided wage subsidies that mitigated the burden of pension contributions. Finally, a number of economies with DB pension schemes temporarily relaxed rules on the scheme funding requirements to reduce the need for emergency asset sales, which would have had long-term negative consequences on fund balances (OECD 2021, Feher and di Bidegain 2020, Gentilini et al. 2022). Reductions, holidays, and deferments of pension (and often other social) contributions in Asia and the Pacific varied in scope, duration, and scale. For example, in some economies, virtually all contributing firms were covered (e.g., Fiji and Thailand), while in others, the support was targeted by contributor type or by region (e.g., in the PRC, initially in Hubei only, and then for all areas seriously impacted subsequently; in Samoa, contribution holidays for small and medium-sized enterprises only; in the ROK, special treatment varied for individuals according to their income level and for firms was focused on small and medium-sized enterprises; in Uzbekistan, only for individual entrepreneurs; ; and in Viet Nam, for firms with at least 50% of their workforce on temporary leave as a result of COVID-19 impacts). In most cases, initial short-term support (for 2 months–3 months) was extended during 2020 and sometimes beyond as the pandemic took hold. 0 20 40 60 80 100 Trust in business Trust in government 35 The scale of reductions in contributions ranged from relatively modest to quite substantial (e.g., in Fiji, twothirds of the total employer and employee contributions were waived during the latter three quarters of 2020; in Thailand, contributions were reduced to only 0.1% of wages for several months in 2020). While most economies did not have any explicit compensation to pension or provident funds for lost revenues, Mongolia was an example of an economy that borrowed from the World Bank to compensate its pension fund. There were also examples of bringing forward pension payments (e.g., India), adding a one-time supplemental payment through the fund (e.g., Samoa), or accelerated introduction of permanent increases in pension benefits (e.g., Georgia and Uzbekistan). For DB systems, the impact of reduced contributions was borne by the fund and, in the long-term, the budget to the extent that future fund deficits widen. Exceptional early withdrawals were allowed in a number of economies with provident funds (e.g., Fiji, India, Malaysia, Papua New Guinea, Samoa, and Tonga). The impact was directly on individuals’ longer-term savings because of withdrawals (sometimes during a trough in asset valuations) and lower bases for compounding of investment returns. Malaysia was a very pronounced example, authorizing four rounds of special withdrawals during 2020–2022, with withdrawals totaling about 15% of total assets of the Employees Provident Fund (Yap et al. 2023). Even prior to the pandemic, average balances were low, and the special withdrawals further reduced the share of contributors considered to have minimal adequate balances from 28% to 22% overall, and from 34% to only 19% for those aged 26–30 (Bank Negara Malaysia 2022). Gentilini et al. (2022) provide a detailed economy profile of COVID-19 social protection responses, including through the pension system, and Feher and di Bidegain (2020) provide a useful summary of pension policy responses during COVID-19, differential impacts on pension funds and members under different pension system arrangements, and policy guidance for use of the pension system in future crises. F. Gender Dimensions of Pension Systems in Asia and the Pacific Across much of the world, including Asia and the Pacific, there tend to be significant differences between genders in the level of financial protection offered by public pension systems. This is a product of several factors which often compound. The first is the gender gap in labor force participation in market work, and often higher rates of informal sector work even for women engaged in market work. As a result, many women are not primary members of contributory pension schemes. A second factor is the gender wage gap, which leads to lower amounts contributed over even full formal work histories. For example, in East Asia and the Pacific, the regional gender wage gap in 2015 was about 20%, and in South Asia was 33% (UN Women 2015). A third factor is the lower density of pension contributions because of primary care duties for children, older parents, and often grandchildren. This may be exacerbated in economies where the official retirement age for women is lower than that for 36 men (e.g., Bangladesh, the PRC, Georgia, Kazakhstan, the Lao PDR, Pakistan, Uzbekistan, and Viet Nam), a particular feature of economies with socialist systems or legacies. In DC systems, the longer average life span of women also means lower average benefits across the remaining years of life or greater likelihood of exhausting lump-sum payouts. Some negative gender outcomes in terms of adequate coverage are partly offset in systems with survivor benefits for spouses of male pension contributors in DB systems or inheritance of the undrawn accumulation in provident funds or DC schemes (though accumulations in most provident funds in Asia and the Pacific are usually exhausted before the death of the spouse). Most DB schemes in the region have survivor benefits, though the design varies across economies and in the degree of financial protection offered. In some (e.g., the PRC, Indonesia, and Thailand), the survivor benefit is paid as a lump sum, and hence does not assure financial protection throughout older age. Other economies pay a lifetime benefit at differing levels, ranging from full benefits equal to those promised to the deceased (e.g., Malaysian civil service scheme and the Philippines), to those with variable fractions of the deceased’s benefit (e.g., the ROK, Mongolia, and Uzbekistan), or some other benchmark (e.g., in Kazakhstan by a complex formula involving the benefit of the deceased and other adjustment factors, and in Viet Nam, a fraction of the minimum wage). Overall, even with full benefits, the level of protection from survivor schemes is only as strong as the coverage and adequacy of the contributory system. Benefit design features within contributory systems that include redistributive elements are likely also to favor women (floors, flat rates, caps, and minima). Other examples of parameters that directly affect women include (i) long vesting periods which are less likely to be met by women because of career interruptions (and are an undesirable feature for all workers, particularly those who move between formal and informal sectors or in and out of the jurisdiction during their working lives); (ii) treatment of periods out of the paid workforce because of caring or child-rearing responsibilities (e.g., this is taken account of in Hong Kong, China; Timor-Leste; and Viet Nam for example); (iii) the use of sex-specific mortality rates to compute annuities in Hong Kong, China; India; Indonesia; Malaysia; and Singapore, mean that women’s longer life expectancies result in lower benefits (most OECD economies do not allow this, so that annuity contracts cross-subsidize between sexes); and (iv) how lower pension access ages mean that women end up working less long, save less for old age, and have longer retirements (e.g., various economies in the region, including the PRC, the Lao PDR, Mongolia, and Viet Nam still have lower access ages for women, something that nearly all OECD economies have phased out). 43 however, they face challenges and opportunities, some common and some structure specific which together form a pension reform agenda for the region. Social pensions are a priority. In most cases, social pensions are either nonexistent or offer benefits well below poverty levels. Establishing effective and adequate social pension systems is a priority. Social pensions have the potential to expand coverage to those most likely to face poverty when their earnings capacity is exhausted. When carefully but inclusively targeted, the simulated cost of adequate social benefits need not be high even in the face of population aging, and fiscal space may be created with reforms of consumer subsidies and in some economies’ contributory schemes. Existing social pensions have low coverage, low benefits, or both. While social pensions exist in a significant number of economies in Asia and the Pacific, in nearly all cases they provide (very) low benefits/inadequate financial protection (for the purposes of our analysis, adequate is thought of as a benefit above 15% of GDP per capita, based on a global average in social pension schemes of 16% of GDP per capita). The adequacy challenge is exacerbated for some by low coverage of social pensions because of tight targeting rules. Well-targeted social pensions are a win-win. If designed well, such schemes direct funds to those that need them; and because they are more fiscally affordable, they impose fewer distortions across the economy. Two simplified forms of social pension targeting already in place across the region include: pension-testing (where formal scheme benefits exclude individuals from eligibility for social pensions) and age-based targeting (where eligibility age is substantially above age 65). These provide for more inclusive targeting in the face of large contributory coverage gaps and are administratively straightforward. As digital technology and financial inclusion advances, there is potential to leverage broader online cross-checks of means which can provide more comprehensive means-testing while reducing/avoiding some of the shortcomings of current targeting methods such as PMT. Coverage in contributory schemes remains a major concern, but can be improved. While pension system designs vary, coverage of contributory schemes is a common challenge because of stubborn informality. The contributory coverage challenge is unlikely to be overcome in most economies in Asia and the Pacific in the foreseeable future. At the same time, regional and global experience suggests potential for some coverage expansion at the margin by focusing on (i) formal sector workers not yet covered by design (e.g., self-employed, business owners, and those in enterprises below a certain size); (ii) better enforcement (e.g., where employers offer higher wages for noncompliance); (iii) informal sector workers with formal characteristics and/or monitorable income (e.g., gig/platform contract-for-service workers); and (iv) mandating contributions for migrants and deepening transnational portability and reciprocity of pension rights. 44 Getting more from voluntary schemes. Coverage can also be expanded among informal workers by incentivizing voluntary pension savings in contribution matching schemes (MDCs). There is much experience in the region to inform design of such schemes, though coverage increases to date in most MDCs suggest they will not bridge the coverage gap on their own. Design strategies for MDCs include (i) ensuring adequate and sustained matching on contributions; (ii) ensuring flexible design to accommodate the low and volatile incomes of informal sector workers; (iii) bundling retirement savings with short-term benefits to increase product appeal; (iv) simplification of know-your-customer requirements for bank and mobile money accounts; (v) use of auto-enrollment/auto-deductions/autoescalation; (vi) reliance on contribution aggregators; and (vii) expansion of contribution channels, in particular use of mobile payments, platforms, and merchants. Parametrization of benefits in contributory schemes needs monitoring. Beyond the common challenge of coverage, the key challenges of contributory systems vary according to their structures and design parameters. DC regimes across Asia and the Pacific tend to be sustainable from a fiscal perspective, but typically provide poor adequacy because of low contribution density and generous early withdrawal rules and, in many cases, provide only lump sums at retirement which are quickly exhausted. In contrast, most DB schemes provide adequate benefits across old age, but in many cases, face sustainability challenges because of demographic aging. To ensure sustainability and maintain integrity of DB/NDC pension systems, automatic adjustment mechanisms need particular attention and are often lacking in Asia and the Pacific (with some exceptions, such as in NDC schemes in several economies of the former Soviet Union). Contributory schemes can play a role in internally redistributing benefits to low-income earners and women, but social pensions are best placed as the main, redistributive, poverty alleviation lever because of partial contributory coverage in many economies in Asia and the Pacific. Rule-based indexation of parameters is essential to maintain adequacy and sustainability over time. While standard in OECD systems, many economies in Asia and the Pacific lack formal indexation rules, which threatens adequacy and increases uncertainty for older people. Clear indexation rules, applied within contributory and social pillars, are vital to maintain the real value of pensions (ideally based on community standards), including by adjusting eligibility thresholds for benefit receipt. Women would benefit from a gender lens on pension design. Women have lower formal sector labor force participation and lower average wages, and more career interruptions even when working formally. These factors combine to reduce their pension contributions and earnings-related pensions. They would benefit most from an expansion in social pensions. In addition, a range of contributory 45 pension design parameters could be better designed to address gender issues, including (i) generosity and form of survivor benefits; (ii) vesting periods and benefits that take better account of career interruptions; (iii) use of mortality tables on annuities that do not disadvantage women for their longer life expectancies; (iv) internal redistribution in contributory schemes; and (v) reviewing differential pension access ages by gender that result in shorter careers, fewer savings, and longer retirements. Mainstreaming digital payments. Benefit payment programs in developing economies are increasingly making use of digital and biometric identification, information dissemination, and digital or mobile payment mechanisms. These need to be mainstreamed in pension collection and payment. Advances in fintech could allow innovative consumption-based pensions where people micro-save at points of sale as they make purchases using digital payments platforms. Pensions can be designed to not discourage work. Evidence suggests where older workers can retire early on pension-boosted incomes, many choose to do so. To ensure that this does not encourage early retirement, policymakers need to make sure that pension access ages are not too low and that future increases are automatically linked to life expectancy at retirement age. Other measures should include the abolition of the requirement to retire to claim pension benefits. Pension system governance is challenging, but good guidance can help. Promises and preservation of pension rights must survive for long periods, straining governance in any economy. In emerging economies, weak regulatory capacity, shallow capital markets, lack of competition in the fund management sector, or poorly managed financial institutions increase the governance challenges in pension systems. Pension schemes should be designed with due account of these governance shortcomings. ISSA, IOPS, and OECD guidelines are helpful in this regard. The guidelines include detailed and actionable principles that are related to accountability, transparency, predictability, participation and engagement, and dynamism with ongoing improvements, as well as pragmatic advice on licensing of funds, risk management practices, fund projections, use of alternative investments and derivatives, and integration of environmental and social principles in investment. While the long-term private sector contracts required for pensions are a risk, evidence suggests that, in general, the population trusts private business more than it trusts governments “to do the right thing.” COVID-19 pandemic challenges will be dwarfed by the challenge of demographic change. Many economies temporarily adjusted their pension systems to mitigate the impact on contributors and firms, including reductions, holidays, and deferments in pension contributions. DC schemes also allowed for special early withdrawals. While short-term pressures for special measures in the face of crises are understandable, emergency policies need to better factor in long-term impacts on systems and individuals as societal aging accelerates and crises of different forms become more frequent. 46 New behavioral insights can help policymakers guide better financial decisions of savers. 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