Just last week, US regulators gave their approval to a new gene therapy drug that promises to revolutionize the treatment of various cancers. A ‘living’ drug that, if it delivers’ can increase life expectancy dramatically for those with cancer. And, perhaps start a new revolution in the ‘living’ drugs space for a myriad of other illnesses.
Great news for citizens.
But what about pensions?
As populations in the developed world age rapidly, the entire pensions structure is being pushed to the limits.
Zero percent interest rates and below benchmark inflation means that many traditional assets that underpinned pension fund growth are simply way off their mark. And with low growth, pension plans are suffering.
And even with the growing prospect that central banks are again starting to eye the prospect of rolling back many of the quantitative easing programmes of the last few years, this will not herald the rise in asset growth needed to grow pension investments across the developed world. In fact, demand for higher-yield and riskier investments is likely to continue to grow for the foreseeable future.
Pension fund managers are inevitably pushed to take riskier investments on board in order to generate much-needed returns. Otherwise, their clients face the prospect of reduced funds and incomes on retirement and throughout their retirement years.
Aging populations are a global problem. The ratio of workers to retirees is falling and by 2050, some estimates suggest that there will only be four workers per pension compared to eight today. In fact, the situation in some countries is expected to be much greater, including the UK which is preparing to restrict migration. In fact, the World Economic Forum predicts that by May 2050, there will be a combined US$224 trillion pension shortfall in the worlds six leading pension systems; the U.S., the U.K., Japan, Netherlands, Canada and Australia.
To reinforce the point of how badly the situation could be, pension deficits have already forced the bankruptcy of Detroit, Michigan, Central Falls, Rhode Island and Puerto Rico.
Employees here in Ireland have already been subject to the pain of such deficits. At a broad level, the wholesale ending of Defined Benefit plans (a.k.a final salary pensions) has been underway for some years. Today, the financial risk traditionally carried by companies is now carried by employees by way of Defined Contribution schemes.
States have also been forced to change tact with many increasing retirement ages. Taxpayers will now have to work longer before they can claim contributory pension entitlements.
In the UK, Mercer, the pension consultancy estimates that some 55% of U.K. defined-benefit funds are cash-flow negative and, of those that aren’t, nearly 85% are likely to be over the next decade.
According to a report in the Wall Street Journal, corporations are now shifting to riskier bets and shifting away from lower risk government bonds. BlackRock—the world’s largest asset manager found that pension funds are seeking greater private equity and high-yield bonds. IN other words, more risk. It is little wonder the stock markets have been booming.
For now, the game of chase continues in the pension fund markets. But history is not kind to illusionary economics. The harsh reality of aging populations and how to pay for them will eventually come crashing up against the reality of long-term costs and returns. For now, we seem to be keeping the wolf from the door but if the ‘living’ drugs have the impact they could have, if we all live to age 120, it will take a lot more to keep the financial needs to retirees in check. It might take a new deal across the whole of society.
For anybody that is serious about their long-term financial well-being, they need to begin planning for retirement in both a financial and physical way.
Plan early. From a financial perspective, saving, taking employer cash and government tax relief is a must. But workers must also start contributing to their pension accounts as soon as their are entitled to by their employers. This way, they will benefit from the compounding impact of pension growth later in the investment cycle at a far greater rate than they make contributions. This is the power of compound growth!
Cut the fees – management fees on pension performance can have a detrimental impact on long-term pension growth. In fact, it can reduce individual pension pots by €200,000 or more for someone earning €50,000 per year and investing just 10% of their annual income from age 25. Reducing the overall fees (all fee tiers) will also result in more money circulating in the local economy providing an added benefit.
Health – taking a life-long approach to healthy living is now more important than ever. For example, reducing sugars and taking regular exercise are proven to provide many health benefits including weight-loss, blood pressure reduction and positive mental health. These can provide an added level of insurance against expensive medical intervention or even long-term care during retirement.
Frank Conway is a qualified Financial Adviser and founder of moneywhizz.org, the financial literacy initiative.