New Global Report Finds Advantage with Funded Pension Schemes

Emerging markets with funded government pension systems will enjoy important advantages over those with pay-as-you-go systems, according to a report from the nonprofitGlobal Aging Institute and sponsored by the Principal Financial Group®.

In order to realize their potential, funded pension systems must be well-designed because inadequate contribution rates, restrictive portfolio allocation rules, early retirement ages or the failure to provide for annuitization of account balances can all undermine the model’s adequacy, the report found.

Global Aging and Retirement Security in Emerging Markets: Reassessing the Role of Funded Pensions explores how today’s emerging markets will encounter many of the challenges that now confront developed economies, such as rising fiscal burdens, aging workforces and declining rates of savings and investment.

“If the challenge for most developed countries is how to reduce the rising burden that government retirement systems threaten to place on the young without undermining the security they now provide to the old, the challenge for many emerging markets is precisely the opposite,” said Richard Jackson, president of the Global Aging Institute and author of the report. “How do they guarantee a measure of security to the old that does not now exist, without at the same time placing a large new burden on the young?”

The design challenges can be addressed though relatively straightforward policy measures, according to the report. While emerging markets have much greater flexibility to design retirement systems that adapt to new demographic realities, failure to rise to the challenge could result in a humanitarian aging crisis of immense proportions.

“It’s clear that policymakers need to address the aging challenge and make it a priority,” said Luis Valdes, president and CEO of Principal International. “Unfortunately, regulations can get in the way of creating the right environment for retirement plan providers to be able to offer the right solutions. We continue to be proactive and advocate for further reforms around the globe.”

Funded pension systems alone do not add up to a complete solution, the report cautions. Emerging markets also need to support citizens by having a noncontributory old-age poverty protection program. This comes into play for workers who retire with inadequate benefits from their contributory pension system or with no benefits at all, which in some countries is the majority of workers.