Emerging economies continue to adopt lifecycle fund structures largely inspired by developed markets, particularly the United States, but this is creating a significant mismatch
For years, lifecycle funds and target-date strategies have been promoted as one of the most effective default investment options for defined contribution pension systems. Their logic appears simple and intuitive: younger investors, with longer investment horizons, should allocate a large share of their savings to equities, while older investors should gradually transition toward safer assets as retirement approaches.
This framework has worked remarkably well in countries such as the US, where lifecycle funds have become the dominant default option in retirement plans. Yet an increasingly important question is emerging for policymakers and pension providers outside developed markets: should emerging economies simply import US-style target-date fund structures?
The answer is increasingly becoming no.
“Lifecycle structures designed for developed markets may expose pension savers in emerging economies to risks that are frequently underestimated”
The pension industry often assumes that long-term investing principles are universal. However, demographic structures, labour income dynamics, financial market volatility, inflation regimes, institutional trust, and investor behaviour differ substantially across emerging economies. As a result, copying lifecycle structures designed for developed markets may expose pension savers in emerging economies to risks that are frequently underestimated.
The role of human capital
One of the most important assumptions behind traditional lifecycle investing is the idea that young workers possess “human capital” that behaves similarly to a stable bond-like asset. Because younger individuals are expected to receive decades of future labour income, they are generally assumed to have a higher capacity to tolerate financial market risk. This assumption supports the aggressive equity allocations commonly observed in US target-date funds, where allocations to equities often remain close to 90–100% until investors reach their fifties.
However, this assumption becomes considerably weaker in many emerging markets.
In economies characterised by labour market instability, high inflation, political uncertainty, volatile exchange rates, and informal employment structures, future labour income may itself become highly uncertain. In other words, human capital is no longer a stable asset. Instead, it becomes risky, volatile, and sometimes strongly correlated with broader economic downturns.
This distinction is critically important because pension systems in emerging markets are increasingly relying on automatic enrolment and defined contribution structures. In many countries, participants are automatically placed into default funds and remain invested in these portfolios for years without actively making investment decisions. Consequently, the design of default investment strategies plays a major role in determining long-term retirement outcomes.
Yet many emerging economies continue to adopt lifecycle fund structures largely inspired by developed markets, particularly the United States.
This creates a significant mismatch.
A glide path that may be appropriate for a highly developed financial system with relatively stable labour income dynamics may not necessarily be suitable for economies characterised by higher market volatility, weaker social safety nets, lower financial literacy, and greater macroeconomic uncertainty.
This has major implications for pension design.
If workers already face unstable earnings during their careers, exposing them simultaneously to highly volatile pension portfolios may significantly increase overall lifetime financial risk. More importantly, large investment losses at early stages of participation may discourage long-term engagement with pension systems altogether.
This behavioural dimension is often overlooked in pension policy discussions.
Retirement investing is not purely mathematical. It is also psychological. Individuals who experience severe volatility early in their savings journey may reduce contributions, exit pension systems, or lose confidence in long-term investing. In emerging economies where pension participation and trust remain fragile, default investment design therefore becomes not only a portfolio optimisation problem, but also a behavioural challenge.
This issue may become even more important for younger generations entering labour markets shaped by gig work, temporary employment, digital platforms, and non-traditional career paths. In many emerging economies, future earnings may become increasingly uncertain compared to previous generations. As labour markets evolve, pension design may also need to evolve accordingly.
In my recent research examining lifecycle fund design under human capital risk and parameter uncertainty in countries such as Chile, Mexico, and Turkey, I found that labour income profiles and capital market structures significantly shape optimal portfolio allocations. While younger investors in Chile and Mexico may still justify relatively high equity allocations due to stronger labour income growth and more moderate stock market volatility, countries such as Turkey require significantly more conservative approaches because of higher market volatility and different labour income dynamics (see figure).
The findings also show that parameter uncertainty plays a particularly important role in countries where stock market volatility is high. In these environments, future return expectations become more difficult to estimate, making aggressive long-term equity allocations riskier than standard models often assume.
A locally tailored and flexible approach
These findings suggest that lifecycle investing should not be treated as a “one-size-fits-all” model.
Instead, pension defaults in emerging economies may need to incorporate several additional dimensions beyond age alone. These could include labour income volatility, sector-specific employment risk, inflation uncertainty, contribution behaviour, and even behavioural characteristics of participants.
At the same time, pension systems may need to rethink how they define “risk” itself. Traditionally, risk in pension investing has largely been associated with portfolio volatility. However, in emerging economies, the risk of inadequate retirement savings, contribution interruptions, and participant disengagement may be equally important.
The rise of AI and advanced pension technologies may further accelerate this transformation.
Traditional lifecycle funds rely on static glide paths that apply broadly similar investment rules to large populations. Yet future pension systems may increasingly move toward dynamic and personalised default structures. Rather than allocating assets solely based on age, future pension solutions could integrate real-time information on income stability, contribution consistency, market conditions, and behavioural patterns.
This shift could become particularly important for emerging economies, where economic conditions can change rapidly and standardised investment models may fail to reflect local realities.
Moreover, advances in pension technology and data analytics may eventually allow pension providers to move beyond broad demographic assumptions and toward more adaptive retirement solutions. In the future, default strategies may become increasingly personalised, flexible, and responsive to changing economic environments.
The future of pension design in emerging markets will therefore likely depend on a more flexible and locally adapted approach. Policymakers and pension providers may need to move beyond imported models and instead develop solutions that reflect the unique demographic, financial, and behavioural characteristics of their own economies.
Lifecycle funds remain powerful tools for long-term retirement investing. But their success in emerging economies will depend not on how closely they resemble US models, but on how effectively they address the realities faced by local pension savers.
In the coming years, the most successful pension systems may not be those with the most sophisticated imported products, but those capable of designing behaviourally informed, technologically enhanced, and locally tailored default investment solutions.
Seda Peksevim, PhD, is founder and managing director at Pensión Research & Consulting
