term care. Europe can ill afford it, the United States can ill afford it… so we need to cut these benefits gently for people who are working, but will retire in the next 10 or 15 years, so that we give a more responsible future to the younger people.”
As a result of these trends, along with issues such as lower fertility rates, ageing populations and high levels of government debt, it is becoming increasingly apparent that a “business as usual” approach will no longer work. As Daniel Houston, CEO of Principal Financial Group in the United States, noted in a recent article: “Many call this a retirement security crisis, but in my mind, it’s only a crisis if we – governments, employers, providers, asset managers and individuals – fail to come together and act.”
By “act”, Houston refers to solutions such as pension reform and embarking on educational campaigns (supported by the financial services sector and governments), as well as looking to systems that are working. Citing the 25-country Melbourne Mercer Global Pension Index, he noted: “Five nations (Australia, Denmark, the Netherlands, Singapore and Sweden) were assigned a ‘B’ grade or better for both the adequacy of retirement income for workers and sustainability of that country’s existing system. The common thread: each of these countries has a mandatory, privately-funded programme.”
This requires asking some very tough questions about how the retirement industry will deal with a world where growth is lower, taxes are higher and the call to spread wealth and ensure each generation gets its slice of the economic pie is stronger. As Roy asked: “How do we spread the circle of affordable, responsible living across generations, so that one generation doesn’t get inordinately rich (the 65-74 age bracket) compared with the 0-20-year-olds?”
The bigger picture
To answer these questions, we need to understand the pressures on the current status quo.
Several factors are putting a strain on existing global retirement systems, according to the WEF. These include a lack of access to pension products, the fact that long-term investment returns are significantly lower than historic averages, low levels of financial literacy, inadequate savings rates (in the order of 15% of earnings should be saved throughout a typical working life) and the high degree of responsibility being transferred to individuals to manage their retirement savings (with individuals in defined contribution plans required to be their own investment manager, actuary and insurer).
While investigating how other countries are tackling the problem is one avenue worth pursuing, Credit Suisse’s Roy has become renowned for putting into context the “why”. Why is the world of pensions and retirement going through such a rapid transformation? Rather than focusing on solutions and products, Roy takes a broader view of the demographics and economics at play, attempting to see where we are going.
Deconstructing demographics
Writing in The Age of Responsibility journal, Roy noted that over and above increased longevity, the point often missed in the discussion is how the life-cycles of consumers and workers are shifting. “They’re getting married [and] having children later; multiple generations co-exist, thus changing the behavioural paradigm of economic and social interactions, productivity and the impact on output. These changes are occurring within each generation and also across generations, with advances in technology and globalisation,” he wrote.
Speaking at the 2016 STOXX Innovat:Invest conference, Roy added: “Demographics is a vastly misunderstood and misinterpreted subject, yet it’s so important that it affects growth of countries… it affects inflation, taxes, asset prices, generational conflicts … [and] high youth unemployment.” People tend to regard demographics simply as an indicator of age, rather than looking at the individual characteristics at play – such as the difference between men and women, migrants compared with home-grown citizens, rural compared with urban populations and private vs public educations.
Because the reach is broad, so are the implications of any study of global demographics. This includes having profound impacts on the world of investing. “Demographics affects what’s happening in the equity world. It affects what’s happening in the bond world, because demographics tends to affect interest rates both in the short and long term,” said Roy. “Long-term interest rates [are affected] largely because pension funds, insurance companies and reinsurers are the people who demand long-term
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An Absa Investment publication
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