Pensions at a Glance Asia/Pacific 2022

Mandatory earnings-related pensions

Key results

The second tier of the OECD’s taxonomy of retirement-income provision comprises mandatory earnings-related pensions. Key parameters and rules of these schemes determine the value of entitlements, including the long-term effect of pension reforms that have already been legislated.

Earnings-related schemes can be of four different types: defined benefit (DB), points, notional defined contribution (NDC), or defined contribution (DC). The accrual rate shows the rate at which benefit entitlements build up for each year of coverage. The accrual rate is expressed as a percentage of the earnings that are “covered” by the pension scheme.

For points systems, the effective accrual rate is calculated as the ratio of the cost of a pension point to the pension-point value. In notional accounts schemes, the effective accrual rate is calculated in a similar way; it depends on the contribution rate, notional interest rate and annuity factors. In Thailand and Viet Nam, the accrual rates are not constant, in contrast to all the other economies that have DB systems. In Thailand the first 15 years of contribution give 20% with each subsequent year giving 1.5%. In Viet Nam the accrual rates have been different for men and women but these have being equalised from 2018.

Earnings measures used to calculate benefits also differ. Three economies solely use lifetime earnings to calculate benefits, China, Indonesia and Viet Nam, with the Philippines using the higher of lifetime earnings the final five years. Thailand also uses the final five years for the calculation of benefits whilst Pakistan just uses the last year of salary.

Closely linked with the earnings measure is valorisation, whereby past earnings are adjusted to take account of changes in “living standards” between the time pension rights accrued and the time they are claimed (sometimes called pre‑retirement indexation). The uprating of the pension-point value and the notional interest rate in points and notional-accounts systems, respectively, are the exact corollaries of valorisation in DB plans. The most common practice is to revalue earlier years’ pay with price inflation, used in four economies compared to the growth of average earnings, which is used in only two.

One key parameter for defined contribution (DC) plans is the proportion of earnings that must be paid into the individual account, as this is directly linked to size of the pension pot at retirement. Seven Asian economies have defined contribution systems, and the average contribution rate is 17% across the economies, ranging from a high of 37% in Singapore to a low of 5.7% in Indonesia.

Some economies set a limit on the earnings used to calculate both contribution liabilities and pension benefits. The average ceiling on public pensions for the three economies is 175% of average economy-wide earnings, though this excludes the other eight economies that do not have a ceiling.

Indexation refers to the uprating of pensions in payment. Price indexation is most common, being applicable for three economies. Viet Nam uses wage indexation with both China and Thailand having a discretionary indexation to a combination of wages and prices.

Table 1.3. Future parameters and rules of mandatory earnings-related pensions, latest legislation

At the normal retirement age of a full-career worker who entered the labour market at age 22 in 2020

	Type of scheme	DB schemes	DB, points or NDC schemes			FDC or NDC schemes	Ceiling for pensionable earnings (multiple of average earnings)	Effective accrual rate of a male full-career average earner (% of earnings)
		Nominal accrual rate (% of individual pensionable earnings)	Earnings measure	Valorisation rate	Indexation rate	Total contribution rate (%)
East Asia/Pacific
China	NDC + FDC	1.00	L	w	d	20.0/8.0	3.00	1.00/0.88
Hong Kong (China)	FDC					5.0‑10.0	1.54	0.82
Indonesia	DB + FDC	1.00	L	p	p	5.7	3.15	0.77/0.56
Malaysia	FDC					23.0‑24.0		1.24
Philippines	DB	2.00	max (f5,L)				1.20	1.86
Singapore	FDC					37.0	1.51	1.20
Thailand	DB	1.33/1.5	f5	p	p		1.03	1.37
Viet Nam	DB	2.0/3.0	L	p	p		4.28	1.47
South Asia
India	DB + FDC	1.43	f5		p	15.67	0.84/None	0/1.46
Pakistan	DB	2.00	f1	p	p		0.54	1.08
Sri Lanka	FDC					20.0		1.13
OECD Asia/Pacific
Australia	FDC					12.0	2.51	0.70
Canada	DB	0.83	L	w	p [c]		1.02	0.73
Japan	DB	0.55	L	w	p or w [a]		2.37	0.50
Korea	DB	0.51	L	w	p		1.31	0.51
New Zealand	None
United States	DB	1.23 [w]	B35	w or p	p		2.29	0.87
Other OECD
France	DB / points	1.16	B25 / L	p / w	p / p		1.08 / 8.62	1.02 / 0.35
Germany	Points		L	w	w – x		1.59	0.92
Italy	NDC		L	g	p	33.0	3.41	1.52
United Kingdom	FDC					8.0		0.61

Note: Empty cells indicate that the parameter is not relevant. [a] = varies with age, [c] = valorisation/indexation conditional on financial sustainability, [w] = varies with earnings, B = number of best years, f = number of final years, L = lifetime average, d = discretionary valorisation/ indexation, g = growth of gross domestic product; p = price inflation, w = growth of average earnings. Germany: x depends on changes in both sustainability and contribution factors. Italy: indexation is to price inflation for low pensions and 75% of price inflation for high pensions. Japan: indexation is to earnings growth until age 67 and to price inflation after age 68. United States: valorisation with earnings growth to age 60, no adjustment from 60 to 62, valorisation with price inflation from 62 to 67. Accrual rates applied to average earnings measure at retirement rather than annual earnings in the years of contribution. In some countries accrual stops after a certain number of contribution years or when a certain total accrual rate is reached. This is the case in Canada (40 years) and the United States (35 years). In other countries a maximum pension or a late retirement age may stop accrual too.

Source: Chapter 4 for Asian economies, OECD “Country Profiles” available at http://oe.cd/pag.