Responsible Investor

schemes, such as the Mandatory Provident Fund in Hong Kong, which has increased coverage to 99% of employees and 75% of self-employed people. Many less developed countries have incorporated a mandatory “pillar” into their retirement schemes. Efforts to encourage voluntary pensions savings have been patchy. In China, for example, contributions to enterprise annuities schemes remain low. Critics say that without meaningful tax incentives for companies and employees, savings levels are unlikely to increase significantly.
Pension funds throughout the region are beginning to outsource management of their portfolios (albeit only small percentages of the total) and even lesser developed countries are experimenting with diversifying into higher yielding markets. In the Philippines, for example, the Government Service Insurance System decided this year to hire global fund managers for overseas investments representing up to 12% of total assets. However, most Asian funds remain very conservative in their investment strategies: most funds have no exposure to alternative asset classes and very few would consider an absolute return approach.
Challenges for the pension systems remain in even the most sophisticated markets. Japan’s Social Insurance Agency recently revealed that it could not identify 50 million computerised payment records and that it may have lost millions more. The resulting scandal created huge political trouble for the government. A less dramatic, but still controversial, argument is ongoing in Hong Kong, where there are calls to reform the Mandatory Provident Fund in order to drive down management fees.

In other markets transparency is often highlighted, including the lack of clarity in relationships between funds and other areas of government. In Korea, critics claim that the National Pension Fund is used to support the government’s desire to defend domestic companies against foreign takeover bids.
In some countries, social security funds are greatly affected by corruption. China’s National Audit Office recently announced that it had identified 478 billion yuan that had been abused or embezzled by government officials since 2000. The government has made high profile efforts to tackle corruption, including removal of funds from management by local social security officials after a major scandal in Shanghai in 2006. Nevertheless, it is likely that China’s already under-funded system will continue to be weakened by such abuses.
As Asia’s pension funds become more sophisticated, they are likely to consider incorporating sustainable investment practices into their structures and policies. Some individual funds already have detailed SRI policies. Thailand’s Government Pension Fund, for example, is very active and has signed up to the UN Principles of Responsible Investment (UNPRI), a recent initiative encouraging investors to integrate environmental, social and governance (ESG) factors into their investment decisions. The UNPRI encourages “active” ownership and engagement, but pension funds in Asia will encounter a unique set of challenges and opportunities in this area.
Shareholder activism is not common in Asia, although it is beginning in Korea and Japan. Furthermore, practises that work in Europe cannot necessarily be directly

Not a member? Register here »