Emerging markets are facing a retirement crisis arguably much more serious than in the countries comprising the Organisation for Economic Co-operation and Development, according to a research paper by Nadeem Ahmed Jeddy, executive director of Pakistan-based Magnus Investment Advisors Ltd.

With the number of people age 65 and older in emerging markets nearly double those in OECD countries, major issues with current retirement frameworks are becoming clear, especially in Latin America, noted the paper.

Read: How does Canada’s public pension system measure up globally?

Bearing in mind that speaking about emerging markets as a whole leaves room for serious generalization, Jeddy said the sociopolitical context of these countries differs vastly from what he refers to as the West. Key factors, according to the paper, are the solidified nature of OECD countries’ legal and judicial systems, property rights, a robust media capable of standing up to corrupt leaders and a higher degree of overall transparency.

Where retirement expertise is concerned, it noted, there’s a deeper pool of talented professionals for OECD countries to rely on in the investment management and actuarial spheres.

Jeddy argued emerging markets shouldn’t take on the burden of developing investment organizations in the public domain, given the context of countries that have been preoccupied with spending money to establish fundamental public institutions and resources, from highways to hospitals. Where retirement planning is concerned, simply copying systems from the West isn’t the best way for these economies to move forward, he said.

“The retirement systems in the West evolved piecemeal to address specific needs at different points in their history,” stated the paper. “They were not built on a systematic study of all costs and benefits where at the end of the process best trade-offs were chosen. As a result, the retirement systems in many Western countries today are based on a patchwork of solutions that were designed to address visible problems one at a time, but that collectively fail to deliver the pension promise.”

Read: OECD countries lack adequate frameworks for flexible retirement

While Jeddy said there’s no historical precedent for Western leaders to learn from, current emerging markets do have the advantage of being able to learn from the mistakes of existing systems.

Indeed, when the pension systems were just beginning to take shape in what are now more developed countries, they were built for populations that aren’t the same today, says Hervé Boulhol, a senior economist at the OECD.

Since that time, the population has shifted, with a larger portion of seniors, he adds. Historically, the old-age dependency ratio has worked because there were fewer retirees relying on the contributions of younger workers. In a pay-as-you-go system, benefits are paid by current workers out of contributions, which is easier to sustain when there are more current workers than retirees.

Today, emerging markets are at the early stage of that same demographic shift, so the proportion of those close to retirement, or in it, is growing, says Boulhol.

Read: Canada to still lag behind OECD average replacement rate for typical workers: report

However, the shift hasn’t yet made pay-as-you-go systems unfavourable, he says, though he notes the pace of aging in emerging markets is fast enough that these systems would have to be put in place quickly or it will essentially be too late.

Looking forward, emerging markets shouldn’t view defined contribution and defined benefit pensions as the only options to implement, according to Jeddy. DC plans suffer from members’ behavioural biases, he noted, and the general population isn’t financially literate enough to overcome that issue. In the case of DB, most organizations are no longer willing to underwrite the investment and longevity risks involved.

Jeddy focused his recommendations for emerging economies on plan design, costs, regulations and sustainability.

Where costs were concerned, he noted this must be examined alongside governance and scale. “The pre-requisite for achieving lower total costs is to build scale,” stated the paper. “This requires facilitation and promotion of institutional investing arrangements over retail accounts.”

On regulation, Jeddy argued for consolidation, touting the benefits of consolidating oversight of investment management, labour law, trusts, life insurance, capital markets, pension funds and brokerage houses in a single regulator.

Read: Plan to create a national securities regulator is constitutional: Supreme Court

And on sustainability, he suggested retirement savings should be mandatory, with withdrawals both limited and penalized during the accumulation phase. Employer and industry groups, rather than public stakeholders, should take the lead in scaling up investment vehicles, lowering costs and maintaining governance, said Jeddy.

“A higher-level aggregation under public sector is not feasible given a different sociopolitical context for the emerging markets,” the paper said.

This article was originally published on Benefits Canada‘s companion site, the Canadian Investment Review.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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