By Christopher Deves
“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.
Figure 2 – Defined Benefit / Defined Contribution Split by Pension Market(4)
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)
|Aging||Aged||Super-Aged||Aging to Aged||Aged to Super-Aged|
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)
Figure 5 – Overall Corporate Pension Plan Adoption Rate(7)
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)
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)
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:
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
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.
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.