SYDNEY, AUSTRALIA —Retirement funds are an important feature of Pacific financial systems and often play a wider social protection role but they must be well-run financial institutions to be effective, says a policy paper published today by the Pacific Private Sector Development Initiative (PSDI)—an Asian Development Bank technical assistance program undertaken in partnership with the governments of Australia and New Zealand.
The paper, Pacific Retirement Funds: Anchoring Social Protection in Good Finance, argues that clarity is needed on the social protection and financing roles retirement funds are expected to play in the Pacific and the implications for wider financial sector development in each country.
“Often, retirement funds in the Pacific are expected to provide more services than simply financing members’ retirements,” says Peter Dirou, Finance Sector Expert with PSDI. “Policymakers should focus on clarifying the role of a retirement fund—whether that is a narrow focus on providing for retirement, a wider social protection role, or somewhere in between.”
The paper acknowledges the expectation for many Pacific funds to allow for withdrawals for household contingencies or offset the constraints members experience when attempting to access finance from other credit providers. Noting this, the paper argues that policymakers must ensure that the ability to finance members’ retirements is not compromised and that the development of other financial institutions is not impeded through these activities.
“While many retirement funds provide a wider social protection role—such as allowing early withdrawals in an emergency, as many have done during COVID-19—this is often incompatible with their primary purpose,” says Dr. Dirou.
“While these additional activities are important, the questions policymakers need to address are whether this is balanced against the need for members to finance their retirements and whether retirement funds are the best institution to deliver these non-retirement protections.”
To be the best providers of finance for retirement, retirement funds must provide a superior long-term savings product than a low return bank term deposit. To achieve this, some funds need to reassess their risk tolerance and asset composition, potentially increasing their share of foreign equities and using their pool of savings to provide income-generating and much-needed longer-term domestic finance. However, this must be accompanied by a robust risk management framework to protect the interests of contributors.
“Retirement funds have the potential to be important providers of long-term domestic finance in the Pacific. But they manage large sums of money, and investment decisions are complex,” said Dr. Dirou. “Strong investment and risk management policies are critical to both maximizing and protecting members’ retirement savings.”
The paper provides recommendations to help Pacific policymakers clarify the role of these funds—and highlights the need to examine the compatibility of a fund’s primary role of financing retirement with any additional financing roles it undertakes. It argues that once this role is clear, decision-making on other issues, such as asset composition, benefits, and contributions, will be more straightforward.
Pacific Retirement Funds: Anchoring Social Protection in Good Finance is the second in a series of papers PSDI is publishing to stimulate discussion around how to better equip Pacific financial systems to provide business finance. Upcoming papers in the series will address opportunities for alternative financing models and the design of a finance sector architecture that meets Pacific economies’ financing needs. The first paper in the series, Government-Owned Banks: Their Role in Pacific Financial Systems, was released in September.
PSDI supports ADB’s 14 Pacific developing member countries to improve the enabling environment for business to achieve inclusive, private sector-led economic growth.