Given much of the debate on population aging has been in the context of the developed world, it is refreshing to read a collection of papers that focuses on the challenges of demographic change from the perspective of emerging economies in Central, Eastern, and Southern Europe (CESE). The need to develop financial markets in CESE countries is at the heart of the challenge faced by CESE countries. Robert Holzmann's introduction serves to provide meaningful context; he notes that, as in developed countries, CESE countries are aging rapidly – declining fertility rates and net outward migration have outweighed the impact of lower life expectancy. In response, many CESE countries have implemented reforms that have reduced the generosity of publicly provided pensions and increased the importance of privately funded retirement schemes. Against this backdrop, he argues the development of financial markets is critical – improving transparency, liquidity, and access to a variety of financial instruments.
The first section explores the development of financial markets in CESE countries. Holzmann, Feher, and von Gersdorff assess the “readiness” of CESE countries to successfully manage multi-pillar pension reform. They find that financial sector development is behind other countries with similar levels of income. For example, the majority of pension funds are concentrated in bank deposits and bonds: a survey of 10 CESE countries reveals on average only 12% of funds are invested in stocks. The authors conclude further development of capital markets is important to providing the access to financial assets the pension fund industry needs.
Bebczuk and Musalem suggest that while rapid development of capital markets is unlikely, the growing banking sector (largely driven by foreign banks) may provide a viable alternative. They flag financial innovation (securitization, leasing, and factoring) and privatization of public services as potential ways to increase the volumes and varieties of financial assets. However, given the origins of the recent financial crisis, improved regulation and transparency of the pension must precede these developments – a difficult task that developed economies are currently grappling with. Questions are also raised about whether CESE countries are prepared for the decumulation of private pension fund assets. Rudolph and Rocha note that while evidence from Chile suggests that developing a market for retirement products is achievable, it is a difficult task given that a functioning annuity market is hampered by the fact that capital markets do not offer the instruments required to effectively manage longevity risk.
The book's second section is dedicated to broader questions regarding the capacity for financial markets to generate sustained returns. Bebczuk and Musalem analyse international pension fund data for 1970–95 and find returns (net of transaction costs) are 1.4% higher than GDP growth among developed economies. They find higher returns, 2.8% in excess of GDP growth, among emerging economies but note that this is largely explained by greater risk and a pattern of reliance on publicly issued debt. In a different chapter, Bebczuk and Musalem explore the impact of international diversification and investing in emerging markets on rates of return. However, their results are inconclusive. While the data suggest there are benefits from international diversification, it is unclear whether these benefits remain after adjusting for risk.
In the final chapter, Holzmann explores the potential impact of aging on asset returns. After surveying the literature on whether Baby Boomers will cause an asset meltdown, he concludes that such a decline in asset prices is unlikely. He posits a decline in returns of 50 to 100 basis points among CESE countries. Yet his tone is positive, since despite the challenges that lie ahead, CESE countries have time on their side. The full impact of aging will not be felt for another two decades. The author urges policy makers to focus on four issues: developing capital markets, driving financial innovation and increasing capital flows, creating the procedures and mechanisms to develop a market for annuities, and improving the financial literacy and education of financial sector participants.
This book is a cohesive collection of papers that is highly readable, the result of collaborative work by a group of researchers and consultants at the World Bank. It should be noted that this book is not aimed at academics: the research does not build on the theoretical or empirical frameworks referenced in the population aging literature. What this book offers instead is a clear and robust discussion of the challenges of multi-pillar pension reform in the context of the emerging economies of CESE. Each chapter clearly presents major findings and conclusions in a consistent manner. These observations and accompanying data will prove valuable to policy makers and practitioners in the field. Population aging is a phenomenon fast becoming an issue for emerging economies. Given the literature has largely focused on the developed world, this book provides a valuable discussion of the issues of aging and pension reform from the perspective of emerging economies.
