sigma 2/2021 - Emerging markets
The drive for sustainable retirements in an ageing world
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Emerging markets worldwide are ageing fast. By 2050, these nations will be home to almost 80% of the world's population aged 65 and above. Yet on average only about 30% of their workers are covered by any sort of formal retirement income scheme. As their old-age-dependency ratios (the population above 65 years old relative to the working-age population of 15 to 64 years old) rise above the global average, emerging markets are at risk of "growing old before they grow rich".
The COVID-19 crisis is making it harder to provide the pensions governments have promised, by stressing fiscal positions and increasing the likelihood of lower interest rates for longer.
Our research estimates the pension savings gap for emerging markets' working populations at USD 5.4 trillion for every year of post-retirement living. This sums to USD 106 trillion over all retirement years, or three times emerging markets' total GDP – as high as estimates for major advanced markets. Per worker, we estimate the pension savings gap per worker at about USD 40 000 over full retirements. This ranges by country from less than USD 9 000 per worker for Indonesia to more than USD 230 000 in Poland.
Individuals will increasingly need to make their own funding arrangements for retirement, but mortality, morbidity, financial market and longevity risks all have the power to disrupt their ability to save. Assurance and protection insurance, including life, medical, disability and critical illness covers can support smoother accumulation and decumulation of assets over a person's financial lifecycle. We consider innovative insurance solutions providing flexible, responsive covers that adapt to changing needs.
Insurers also have an essential role to play in increasing pension system sustainability through strong partnership, complementing public provision with private insurance protection.
"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.
Further key takeaways from this, our annual emerging markets study, include:
- In emerging Asia, we estimate the pension savings gap at USD 3.8 trillion per year, or a cumulative USD 74 trillion over workers' retirements, a reflection of large working populations in the economies of India and China.
- Emerging Europe has a pension savings gap of USD 663 billion annually, accumulating to USD 13.5 trillion over full retirements, but individual countries have high per-worker pension savings gaps.
- In Latin America, the USD 514 billion pension savings gap per year sums to a cumulative USD 10 trillion over all workers' retirements. Brazil has the largest pension savings gap per annum at USD 180 billion.
- Protecting individuals as they grow wealth to fund more of their own retirements is crucial. The pension savings gap illustrates the scale of the opportunity for insurers to provide cover for morbidity, mortality, market and longevity risks to help individuals accumulate and decumulate personal retirement assets.
- For lifetime mortality and health risks combined, we estimate the premium potential for insurers in emerging markets at more than USD 700 billion in 2020.
- Public-private partnership (PPP) can help to secure emerging markets' future retirement needs, for example by embedding life insurance into public pensions to drive up mortality protection coverage.