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Retirement R


bonds, so if the demand for long-term bonds is far greater than the supply, that affects why the price of long-term bonds is very high and the yield of long- term bonds is very low.”


Demographics also has an influence on the real estate market. “Older people are buying more houses and younger people, who are debt-laden, are buying fewer houses,” explains Roy. So where does that put a sector like residential property versus, for example, industries such as pharmaceuticals and bio-tech which, says Roy, are important due to the growing health focus among both young and older individuals? Similarly, one should keep an eye on the financial products, leisure and luxury, and natural resources sectors, he says.


In order to fully understand the long-term projections for these industries, Roy highlights that our understanding of demographics is essential. “Rich people behave very differently from poor people. Ultra-high-net-worth billionaires are even more different from millionaires,” he said in an interview with Morningstar TV in the UK. “We need to understand how gender differences, health differences, education differences [and] access differences all translate into which sectors become important for investors.”


“Long-term interest rates [are affected] largely because pension funds, insurance companies and reinsurers are the people who demand long-term bonds, so if the demand for long-term bonds is far greater than the supply, that affects why the price of long-term bonds is very high and the yield of long-term bonds is very low.”


This level of understanding goes deeper than just understanding how working-age population growth impacts the likes of GDP and labour productivity, explained Roy in The Age of Responsibility. It speaks to our behaviours in the modern economy. “It’s also very important to understand how people consume and how much they save in order to gain better knowledge of how much money will be needed for individuals, so as not to substantially reduce their living standards at older ages,” he wrote.


It is only by understanding these behaviours, and how they evolve over time, that forward-focused


institutions like financial services and pensions firms can help educate all levels of society about the importance of saving and investing. Yes, this applies to young Millennials setting out on their working careers, but also to existing retirees who might need to tailor their spending habits to continue saving into retirement. “We need to incorporate changes in saving behaviour and financial planning during retirement, as increasing longevity means that individuals face a greater risk of outliving their resources,” wrote Roy.


“However, encouraging pensions saving is more than providing tax incentives and a cash pay-out. Behavioural nuances should be exploited in policy design. The benefits of saving long-term are widely recognised. Simply advocating the benefits won’t help, as knowing what’s good may not be translated into doing what’s good,” noted Roy. “How incentives are conveyed plays a crucial part in the take-up rate of financial and pension products, as well as services.”


However, while education has a pivotal role to play in this conversation, Roy stresses that the changeable nature of human beings must always be at the forefront of institutional thinking. In a recent interview with Morningstar, he said: “Your consumption, my savings [and] my risk-taking behaviour all depend on a very complex set of factors, which include family background, gender, education and what our parents did. We’re not super-clones or super-human beings who behave super-rationally, and that needs to be understood by investors, economists and policy-makers. Demographics isn’t predictable. It’s not about the long term – it’s about how we change day to day.”


Roy’s Recommendations


In an article entitled Economics and Demographics in The Age of Responsibility journal, Dr Amlan Roy, Managing Director and Head of Global Demographics & Pensions at Credit Suisse, outlined what he believes must be done to ensure the sustainability of the global retirement sector.


Role of governments


“Governments need to promote macro- markets of securities, which insure against longevity and inflation risk by issuing longevity bonds. They should also actively promote working after retirement age. Individuals should be able to adjust their working time to their capacity and this would have a much more positive impact. Firstly, it will help finance retirement life; secondly, working longer also helps prevent diseases like Alzheimer’s or Parkinson’s, as it keeps your brain active longer, which reduces the health burden posed by the older generation; and thirdly, it could create inter-generational knowledge transfer where older people share their experience with younger people, preparing [them] for working life.”


The need for education


“Education is crucial, as the shift from DB [defined benefit plan] to DC [defined contribution plan] means the risk lies with the individual. She/he needs to be more knowledgeable about the products available and conduct thorough financial planning to meet retirement needs. Better financial education and well-targeted financial communication are necessary to reach different economic and social strata across the entire economy. Among households currently falling short, attaining the necessary saving rate is a much more feasible goal for younger households than for older [ones]. It’s therefore crucial that governments and pension funds act now to enable the current young working generation to have an adequate level of retirement saving.”


Keep it simple


“Behavioural nuances that affect choice evaluations in decision-making suggest that the design of the policy, the simplicity of the product and the communication are all an important part of creating the right incentives that might work. Therefore, there’s a need to co-ordinate and create the right environment for better risk management, asset financing, debt issuance, personal pension plan and regulatory oversight.”


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