Retirement problems aren’t limited to Canada

(May 2008) I recently had the opportunity to travel and meet with colleagues in Fidelity’s Asia-Pacific offices. A week-and-a-half spent in Tokyo, Hong Kong, Bangalore and Sydney certainly opened my eyes to the similarities and differences in how these countries and cultures view retirement. While there are many marked differences in how retirement is changing, the similarities were equally compelling.

Financial advisors in Canada can take some lessons from what is happening on a demographic scale in Japan, where the population is aging considerably faster. While financial advisors here are becoming increasingly aware of the looming demographic issues in Canada, with the first wave of baby boomers reaching the median retirement age of 61 last year, Japan is already in the middle of its “retirement wave.” It is estimated that by 2050, Japan’s senior population (65 years plus) will account for almost two-thirds of the working-age population. On top of that, Japanese investors are also dealing with interest rates of less than 1%; yields that make Canadian rates seem relatively rewarding.

This means that in the search for yield, Japanese investors are going offshore for their investments. At the same time, similar to the situation in Canada, investors are facing a rising currency against the U.S. dollar, a trend that complicates offshore investing.

Another interesting aspect is that only employers contribute to defined contribution pensions — employees do not. This helps alleviate the issue of plan participants not enrolling in their company pension plan, a problem faced throughout the world. The U.S. addressed that issue with the Pension Protection Act in 2006. Finally, the main similarity between Japan and Canada is around the appropriate retirement income replacement rates. Experts in both countries are suggesting that target retirement income replacement rates should be raised. Interestingly, of the five countries examined by Fidelity for its 2007 Retirement Index (Canada, U.S., U.K., Germany and Japan), Japan was the only one that scored lower than Canada. The index, which measures how financially prepared working households in these countries are for retirement, showed that Japanese households were on track to replace only 47% of their pre-retirement income versus 50% for Canadian households.

Hong Kong presents a much different set of challenges for financial advisors. The biggest challenge by far is the investing mentality of Hong Kong investors. In general, investors there take a much shorter view of the investment time horizon, and have a much more benign view of risk, to the point that some people describe investors in Hong Kong as gamblers. Overlaying this is the fact that the concept of retirement is new to Hong Kong — new in the sense of a person taking individual responsibility for preparing financially for retirement. Traditionally, older people were taken care of by their children. As the concept of saving for retirement becomes more ingrained in Hong Kong, the financial services industry will need to adapt.

Our meetings in India were among the most eye-opening. The Indian economy is rapidly expanding and it was fascinating to see the extent to which U.S. and European companies have set up offices there. In the same business park as Fidelity, I saw Microsoft and Goldman Sachs among many others. While there is daily news of India’s growth, actually being there gives one a much more dramatic understanding of the soaring economic growth rates there than do all of the statistics on a computer screen. As with Hong Kong, the concept of retirement is changing.

The one compelling difference when it comes to Australia that stood out is its compulsory private pension system whereby employers are required to contribute 9% of their employees’ annual salaries to a central pension scheme. In turn, employees have a certain degree of choice in how these savings are invested. On a broader scale, Australia is experiencing a similar commodities boom to Canada, which should provide greater opportunities for advisors there to provide value-added services like tax and estate planning to an emerging wealthy segment of the market. On a side note, advisors in Australia are large users of online financial tools, including many retirement planning methods that I have not seen in Canada. Fidelity in Australia does a great job of developing innovative tools for advisors, and while I can’t say that all of them will make it over here, we are certainly thinking of importing a few.

Overall, there were some common themes among these markets. Regardless of how well the national economy is doing, there is concern about the financial issues in the United States and how they will play out in economies and markets around the world. There is constant discussion about what is the best asset allocation and geographic diversification to best prepare people for retirement. There are a variety of state-sponsored pension schemes in these countries, each with its own specific characteristics such as age and other criteria for entitlement. The same is true of private pension schemes. But the most consistent theme that emerged is that in each of these countries, no matter how well-thought-out the public and private pension schemes, no institutional pension arrangement can replace the value of the personal financial planning advice that only advisors can provide.

Peter Drake is vice-president, retirement & economic research, for Fidelity Investments Canada. With over 35 years’ experience as an economist, he leads Fidelity’s research efforts in examining retirement in Canada today. He can be reached at peter.drake@fmr.com.