A neat symmetry: Opportunity for Australia-Korea bilateral cooperation in Financial Services
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By Christopher Deves

AMP Capital

christopher.deves@ampcapital.com

 

“Australia’s pension system.”

It is always my first response when asked to provide an example of an area of real opportunity in the Australia-Korea bilateral business relationship. It is an area where one can find that all-important confluence – a genuine Australian competitive advantage and a genuine Korean need.

 

A world beater

For any millennial who entered the Australian workforce in recent years, it is easy to take for granted. We see it discussed often and with vigour in the financial press on a regular basis. But the reality is that Australia has one of the best pension systems in the world, as evidenced in four key areas.

  • Size – Australia has the fourth largest pension market in the world, with around A$2 trillion in assets(1). This equates to around 110% of GDP, which compares favourably to the OECD weighted average of around 85%(2). In addition, the continued growth of Australia’s pension assets is underwritten by compulsory contributions.
  • Experience – it has been over two decades since the introduction of compulsory superannuation. As such, there are countless lessons learnt by Australian policy makers and industry participants alike over that time and a large body of intellectual property forged on the back of first-hand experience.
  • Robust – Australia is a global leader in terms of the adequacy, sustainability, and integrity of our system, as depicted in Figure 1.

 

Figure 1 – Pension System Assessment (Melbourne Mercer Global Pension Index)(3)
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  • Type – In a world that is shifting towards defined contribution schemes (DC) over defined benefit schemes (DB), Australia is uniquely positioned amongst the largest pension markets in the world by virtue of the fact that it is overwhelming a DC market, as shown by Figure 2.

 

Figure 2 – Defined Benefit / Defined Contribution Split by Pension Market(4)

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So, on this basis, if we believe that Australia does indeed have a modern, world beating pension system, what about the notion of a genuine Korean need?

 

An age-old story

The Korean pension discourse, particularly outside of Korea, tends to immediately centre on the National Pension Service (NPS), and understandably so. NPS is one of the largest pension funds in the world with over A$400 billion in assets and has been growing steadily as Korea passes through a so-called demographic sweet spot(5). However, it is not often recognised that NPS, according to the projections of its own research institute, will be entirely exhausted by 2060 – thanks again to the force of demographics in one of the most rapidly aging societies in the world, as depicted in Figure 3.

 

Figure 3 – Korea’s aging population(6)

Country Year Years Taken
Aging Aged Super-Aged Aging to Aged Aged to Super-Aged
Korea 2000 2018 2026 18 8
Japan 1970 1994 2006 24 12
France 1864 1979 2018 115 39
Germany 1932 1972 2009 40 37
Italy 1927 1988 2006 61 18
USA 1942 2015 2036 73 21

 

To be fair, 2060 might seem like a long way off. However, to the fresh-faced Korean graduate who just got his or her first job it means that despite the expectation that they spend their career contributing to this fund, there will be nothing left for them upon retirement. Clearly, that presents a challenge that reverberates across Korean society.

 

Rising to the challenge

Korea’s policymakers responded to this challenge in 2005 by introducing a legislative framework for externally-funded defined contribution and defined benefit schemes. This legislation, known as the Employment Retirement Benefit Security Act (ERBSA), did not immediately make the adoption of these new schemes compulsory and therefore saw a slow and limited take-up, mostly by large corporations with the resources to do so. However, over the course of the following decade, a range of tax-related and other incentives were introduced to encourage take-up, and coverage was expanded to include small and medium enterprises (SMEs). This led to a meaningful uptick in the adoption rate and the asset base from 2010 onwards, as shown in Figures 4 and 5.

Figure 4 – Growth & Evolution of Korea’s Corporate Pension System(7)

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Figure 5 – Overall Corporate Pension Plan Adoption Rate(7)

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It is also expected that in 2016, take-up will become mandatory for large corporations and eventually extended to smaller employers by 2022, which will assist further in driving up the adoption rate and by extension, the asset base.

Interestingly, Figure 6 demonstrates that the source of future growth for ERBSA schemes is unequivocally from the SME segment.

 

Figure 6 – Corporate Plan Adoption Rate by Company Size(7)

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There is a clear positive correlation between company size and the adoption rate, which in part speaks to the economies of scale that larger companies can achieve in implementing ERBSA schemes for its employees. The notion of multi-employer master trusts, which can significantly reduce implementation costs for SMEs, remains relatively new in Korea.

 

Finally, perhaps as a function of the nascent nature of Korea’s corporate pension system and a range of regulatory restrictions that have been in place, the average asset allocation is very highly skewed to principal protection investments. This sits very much in contrast to the average of the world’s seven largest pension markets (the “P7”) as well as Australia itself, which show greater allocation to return-seeking or growth investments. This is shown below in Figure 7. 

 

Figure 7 – Corporate Pension Average Asset Allocations(8)

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So what?

Australia’s pension system is certainly not perfect, but Australia and Korea are clearly on a similar evolutionary path when it comes to pensions, just at different points in time. As such, Australia’s lessons learnt are meaningful and relevant in a Korean context.

 

This is perhaps best demonstrated by the following table:

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I believe that the experience of Australia’s leading pension providers is of potential interest to Korean counterparts, and that it applies across a range of areas, which are summarised in Figure 8 below.

 

Figure 8 – Potential Areas of Interest based on Australia’s Experience

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In closing

There are numerous examples in recent years of leading Australian financials partnering up with Asian counterparts that are in search of experience in pension management, asset allocation, or access to investment management capabilities. Typically, we see the trade-off as being intellectual property for assets under management and/or an equity stake or joint venture arrangement in the counterpart’s home market. As such, whilst it is my personal view that Australia’s experience and Korea’s future show sufficient overlap in the area of pensions to make this a very interesting area, it’s certainly not a new idea.

However, I do believe that the rather neat symmetry in this particular case in terms of a genuine Australian competitive advantage and a genuine Korean need makes it an especially compelling and real opportunity for greater bilateral business cooperation between our two nations.

 

REFERENCES

  1. As at 31 December 2014. Source: Towers Watson Global Pensions Asset Study, 2015
  2. As at 31 December 2014. Source: OECD Pension Markets in Focus, 2015 Edition
  3. Source: Melbourne Mercer Global Pension Index, 2014
  4. As at 31 December 2014. Source: Towers Watson Global Pensions Asset Study, 2015
  5. As at November 2015. Source: National Pension Service, Korea
  6. Source: Korea National Statistical Office
  7. Source: Korea Ministry of Employment and Labor, June 2015
  8. Source: Source: Korea Ministry of Employment and Labor, June 2015; Towers Watson Global Pensions Asset Study, 2015

 

Christopher Deves

Associate Director, AMP Capital

 Christopher Deves joined AMP Capital in 2009 and is responsible for representing the firm’s Global Listed Real Estate business to clients and investors. Prior to his current role, Christopher was based in Hong Kong and managed AMP Capital’s business development initiatives in Asia ex-Japan, during which time he worked closely with Korean financial institutions and brought on the firm’s first Korean clients. Christopher holds a Bachelor of Commerce and Bachelor of Arts from the University of Sydney. He also previously spent over two years studying in Asia, including at Beijing International Studies University in China and Korea University in Seoul, Korea.