Retirement savings: A massive opportunity hiding in plain sight

Infographic: TBS

Bangladesh is known for its youthful population. Suggesting that policymakers should prioritise building retirement wealth is, therefore, counter-intuitive. Surely there are more pressing issues to focus on as we build Bangladesh 2.0?

On the contrary, I argue that reforming the retirement industry should be a priority. Acting now could unlock much-needed capital to catalyse economic growth, underpin the development of a vibrant capital market, and enhance financial security for all. Moreover, the payoffs may be immediate and impactful. I say this because Bangladesh already has a sizeable and growing retirement benefits industry.

While industry statistics are hard to come by, the country's provident, gratuity, and pension fund industry could be worth over $15 billion. Such employer-sponsored funds number in the thousands and support more than two million employees. 

Employers will also be contributing well above $0.5 billion each year. The recently launched Universal Pension Scheme, if redesigned and implemented with expert input, could quite easily accumulate more than $1 billion annually as retirement wealth for millions more individuals. This scheme could become a significant part of national wealth within a few years.

The lack of statistics means these estimates are necessarily back-of-the-envelope calculations. However, they are based on more than a decade of engaging with over 100 retirement funds in Bangladesh. The point is that there is a significant and growing pool of wealth to be managed for retirees.

Another way to gauge potential growth is to look at the ratio of private retirement wealth to GDP. For our close neighbour India, with similar demographics, this ratio is 6.5%. Reaching this level would mean an industry size of $30 billion. For developed countries, this ratio can be well above 100%. 

For example, the US has the largest retirement benefit market in the world, where the ratio stands at 132%, amounting to a staggering $36 trillion. Incidentally, Malaysia is at 64.5%!

A dedicated pension regulator is sorely needed—one whose primary objective is to safeguard retirement outcomes for millions of individuals. Alongside this crucial objective, there is a real opportunity to transform the economy and capital markets. The key to achieving this is improving how fund assets are invested.

Retirement funds in Bangladesh typically invest 50% to 80% in cash (bank accounts), with the rest of the portfolio in government bonds. While there are a few exceptions, governance around asset allocation decisions (as with most other decisions) is largely absent. This is despite the funds being set up as Trusts with named Trustees. The assets are not managed by professional money managers. This is not how retirement wealth is invested or managed globally.

Elsewhere, typical funds hold less than 5% in cash, mainly for day-to-day liquidity, and less than 20% in government bonds to manage risks. A substantial part of the portfolio is then invested to earn higher returns in equities, corporate bonds, property, infrastructure, private equity, venture capital, and various other 'alternative' asset classes.

The asset classes to invest in and their proportions may be determined through an asset-liability modelling exercise that seeks to maximise returns for the risk taken. The management of underlying assets would be delegated to professional money managers, who could be either in-house personnel or third-party asset managers.

Given pension assets of over $55 trillion globally and the wide range of asset types invested in, it is no exaggeration to say that pension funds are key, if not dominant, players in capital markets worldwide. They provide capital that fuels the global economy. The Bangladeshi economy should be no different.

A significant amount of capital, if invested professionally and more in line with global best practices, could be transformational. To illustrate, let's imagine $2 billion becomes available to invest in the stock market over the next 12 to 18 months, and professional investment managers are mandated to invest for their retirement fund clients.

A modest 1% per annum increase in returns could reduce the cost of promised benefits by 20%. These cost savings for employers could be used to support business and economic growth. For provident funds, the payout to members would be higher—potentially as much as 25% for those savers in their early 30s.

Professional fund management ensures that funds are allocated to businesses that demonstrate good governance and credible plans to provide a return to shareholders (noting that this includes individuals investing in equities via their retirement savings vehicle). Fund managers would also have more influence in bringing discipline to the companies in which they invest.

Over time, retirement assets could be invested in other asset classes, spurring the development of corporate bond, real estate, private equity, and venture capital markets. Talented money managers, currently starved of capital—the mutual fund industry is valued at approximately $1 billion—would finally have funds to invest. 

This would help them build sustainable businesses and a robust fund management industry. Employment opportunities would be created for the thousands graduating each year, helping to curb and eventually reverse the brain drain. The capital markets would now better serve a wider range of participants.

Retirement funds have long-term liabilities, making them better suited than banks (which rely on short-term funding) to finance long-term investments. These investments include infrastructure and renewable energy projects that will be critical to building a sustainable and productive economy. 

The long-term investment horizon also means retirement funds can bear the higher risks associated with investing in early-stage companies. This diversification of capital sources reduces reliance on bank balance sheets and creates a more resilient economy.

These outcomes are entirely plausible. Importantly, retirement funds could attract foreign direct investment. What better way to instill confidence in foreign investors than by having respected local institutions invest alongside them?

The retirement industry remains a hidden sector in Bangladesh. Despite being significantly larger than the $4.4 billion life insurance industry, retirement funds are not recognised as important financial institutions. Regulation that protects the millions relying on this industry while mobilising retirement wealth is urgently needed.

There is a virtuous circularity to this opportunity. Bangladesh will be earning the so-called demographic dividend. If invested well, these dividends will fuel economic growth now while building wealth for the future. 

A society's ability to look after its retired population is a marker of success. It signals economic prosperity, good governance, and a healthy society in which to live, work, and retire. There really is no time to lose in building this future.

Sketch: TBS

Shahjahan Alam is a Fellow of the Institute and Faculty of Actuaries of the UK.  He is a senior investment professional based in London and Chairman of AIR Consulting Ltd, a Dhaka-based actuarial firm.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.