– Emerging markets face a USD 5.4 trillion pension savings shortfall for every year of their workers’ retirements, or USD 106 trillion in cumulative terms.¹
– This gap between emerging markets’ pension assets and pension income need is about USD 40,000 for every worker – about 8.5 times the average annual worker’s income.
– Latin America has a pension savings gap of USD 514 billion per year, or USD 50 000 per worker on average. Brazil has the region’s highest gap due to its large working population.
ZURICH, June 29, 2021 /PRNewswire/ — Workers in emerging markets are retiring without sufficient assets to cover their pension needs, creating a total pension shortfall of about USD 106 trillion, Swiss Re Institute estimates. This pension savings gap is roughly three times emerging markets’ GDP, as high as estimates for major advanced markets such as the US and Australia.2 The costs of under-funded pensions may return to governments through higher risk of poverty, ill-health and strain on younger generations, but facilitating sustainable retirements can unlock numerous opportunities to strengthen resilience in families and societies. There is an imminent need for action.
“Funding for pensions in Latin America has historically been low. We expect the current COVID-19 crisis, combined with ageing populations and increasing fiscal demands on governments, to widen the pension savings gap. Many individuals face the prospect of falling short on the funding they need for a comfortable retirement,” Kaspar Mueller, President Reinsurance Latin America, Swiss Re says. “More can be done to ensure people are well-protected.”
Individuals in emerging markets will increasingly need to make their own funding arrangements for retirement. Pension reforms are shifting onto individuals both the responsibility for saving for a pension and the management of lifetime risks such as mortality, morbidity, longevity and investment performance. These risks inhibit a person’s ability to provide for their retirement, since a period out of work due to sickness, family care or even death will impact a household’s savings. This challenge is acute in emerging markets, where personal resources tend to be lower and social safety nets weaker. Individuals will need more tailored insurance protection, in the form of life, medical, disability and critical illness covers, to manage these risks. Swiss Re Institute estimates that to protect the global population fully against mortality and health risks would require an extra USD 1.2 trillion in premium equivalent terms, 60% of which would be in emerging markets.3
Integrating protection insurance into mandatory pension systems is one proven solution. In Chile, compulsory life protection embedded in the national pension scheme has achieved strong protection against mortality risk. Other insurance solutions can include bundling biometric covers such as mortality, morbidity and long-term care with a savings component, to provide flexible, responsive life-long coverage. Insurers can work with trusted retirement savings platforms to make distribution easier.
The emerging markets pensions savings gap has many causes. Population ageing is putting increasing pressure on national pension systems as a shrinking labour force supports a growing older population. Public pension spending is rising sharply as a percentage of GDP, challenging government finances, while declining interest rates are adding to the long-term challenge of pension funding. The COVID-19 crisis has exacerbated these trends in the short term.
Latin America: a USD 514 billion-per-year pension savings gap
Concern about mortality risk is rising significantly in Latin America as the COVID-19 pandemic continues to impact the region. The economic downturn is also heightening financial security fears. In Latin America, the USD 514 billion pension savings gap per year sums to a cumulative USD 10 trillion over all workers’ retirements, highlighting the need for individuals to protect their capacity to save and accumulate assets for retirement. The region’s savings gap per worker is about USD 50 000, equivalent to about 6.2 times the average annual wage income.
Brazil has the largest pension savings gap per annum at USD 180 billion, a reflection of its large working population. Workers in Chile face the largest pension savings shortfall in the region, at USD 133 000 per worker, from the combination of relatively high wage income and a low pension contribution rate (10%). This also creates low pension adequacy, as estimated assets and savings cover only 42% of the retirement income that Chilean workers need. Brazil has highest pension adequacy, with estimated funds able to provide about 50% of income needed.
Pension coverage – the proportion of the working population covered by pension provision – is low in Latin America, partly reflecting large informal sectors in the region’s economies. Peru has the lowest pension coverage rate at 24%, reflecting its high degree of informal labour force. More formalisation of work would help to increase pension coverage.
Stronger partnership is needed to ensure pensions sustainability
Emerging market governments should support a sustainable pension system, with strong foundations in a sound regulatory framework, commitment to education, incentives to participate, such as tax exemptions, and solid partnership between all parties. Partnership can also provide routes for insurers to invest in long-term, public-private projects that are a good match for their liabilities, such as infrastructure finance.
“The shortfall in saving for adequate and sustainable retirements cannot be bridged solely by government resources. Strong partnership between the state, the private sector and individuals will be key,” Jerome Jean Haegeli, Group Chief Economist, Swiss Re, says. “Protecting people throughout their saving lifecycle has the potential to reduce poverty, ill-health and even social unrest, and should form a core building block of emerging markets’ long-term economic growth.”
Notes to editors
The Swiss Re Group is one of the world’s leading providers of reinsurance, insurance and other forms of insurance-based risk transfer, working to make the world more resilient. It anticipates and manages risk – from natural catastrophes to climate change, from ageing populations to cybercrime. The aim of the Swiss Re Group is to enable society to thrive and progress, creating new opportunities and solutions for its clients. Headquartered in Zurich, Switzerland, where it was founded in 1863, the Swiss Re Group operates through a network of around 80 offices globally. It is organised into three Business Units, each with a distinct strategy and set of objectives contributing to the Group’s overall mission.
How to order this sigma study
sigma 2/2021, “Emerging markets: the drive for sustainable retirements in an ageing world”, is available in electronic format to download here: https://www.swissre.com/institute/research/sigma-research/sigma-2021-02.html
1 As of 2019 value, based on the average worker. The calculation factors in the economic impact of the pandemic through use of forecasts.
2 The pension savings gap is the unfunded gap between pension funds available and the retirement need of emerging markets’ working populations. It is calculated as all pension contributions (mandatory and voluntary) and expected returns on pension funds and accumulated savings during working years, subtracted from the sum of money required to fund 65% of pre-retirement income during retirement years.
3 sigma Resilience Index 2021: a strong growth recovery, but less resilient world economy, Swiss Re Institute, June 2020.
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