Over the past few decades we have seen that improved education and growth in wealth is delivering a higher standard of living to a growing Asia middle-class. In an effort to retain that improved standard of living over increasing life expectancy, workers and families are taking a more holistic view to maintaining that standard; through life, health, accident and even funeral insurance. This trend is evidenced in the emerging economy of Vietnam, where life insurance experienced double-digit percentage growth in 2013, and the same or better is expected in 2014.

Moreover, governments have been involved in the effort to ensure a standard of living is maintained, and to lessen the burden of support during retirement. As a result, retirement saving schemes have been introduced by mature economies in Asia and neighbouring Australasia.

Whether mandatory or voluntary, governments recognise that retirement saving schemes ensure that funds are put aside on a regular basis during working life, to be drawn down in retirement. Ultimately this will allow governments to focus aged pensions on supporting low-income earners who are less capable of contributing to their own retirements.

Both governments and workers are increasingly aware of the benefits of participation in these savings schemes during the early years of employment, and gaining the advantage of maximised returns over time. Ultimately, the introduction of these schemes is necessary to ensure workers take responsibility for funding their own retirement to maintain their standard of living. Only then can governments afford to fund pensions for those without the capacity to do it themselves.

Singapore was an early adopter with a Central Provident Fund introduced in the mid-1950s, which has since been used as a pillar for national development and financial independence. Australia introduced a Superannuation Guarantee in 1992 by expanding superannuation to universal access beyond just executive, trade union, and public sector employees. Hong Kong successfully introduced Mandatory Provident Fund (MPF) in 2000, and New Zealand introduced the KiwiSaver voluntary retirement savings scheme in 2007. More recently, Vietnam has implemented a voluntary pension insurance scheme.

A centralised basic pension scheme is also being considered by China (which according to official CNCA figures has over 200 million people in retirement age, accounting for 14.8 per cent of the population and growing at over eight million per year!). The one child policy has influenced the retirement model in China, necessitating a shift away from the traditional filial support model, and creating the demographic challenge of a rapidly shrinking working-age population, with recent speculation that the retirement age will increase.

So what might the new Chinese system look like? Some industry commentators have suggested the possibility of merging state and private sector employee pension schemes, resulting in a consolidation of funds. Others suggest a scheme similar to the Hong Kong MPF model, where a small mandatory deduction is taken, perhaps initially from government workers and then extended out to other salaried workers over time. As the necessity for income taxes grows over time, and access to funds becomes more available, it could then reshape into something like the Australian superannuation model where it is common (as well as tax wise) to make non-deductable personal contributions.

Only time will tell what the new Chinese pension scheme could look like and the opportunities that may arise. The only thing assured is that the new scheme will make a dramatic impact on the Chinese economic landscape, not to mention becoming one of the largest financial initiatives ever introduced globally.

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Michael McCauley

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