BY CLICKING ON “I AGREE”, I DECLARE I AM A WHOLESALE CLIENT AS DEFINED IN THE CORPORATIONS ACT 2001.
What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity:
Investors need to rethink their entire views about demographics because the current pensions system is unsustainable, says population expert Amlan Roy.
“It is not about counting people, and it is not about age,” says Roy, Head of Global Demographics and Pensions Research at Credit Suisse. “Even if we are all the same age, we are all different. Women are different from men. People spend money differently. Age is not the most important component of demographics because other things are important too.”
“Just counting people also does not give you a demographic solution, as in my native India, more than 400 million people are uneducated, in ill-health, unskilled or poor. That’s not a demographic promise, that’s a demographic burden, or curse,” Roy told a recent Robeco conference on the subject.
Roy says he is fond of a quote by the American human behavioral expert Peter Drucker, hailed as the founder of modern management, who said in 1999: “Demographics is the single most important factor that nobody pays attention to, and when they do pay attention, they miss the point.”
'Consumers are revenues and workers are costs on each side of a balance sheet’
So what is it about? “Demographics is about consumers and workers,” says Roy. “The most important characteristic of everyone in the world is from the time you are born until the time you die, you are a consumer. As workers we make the GDP and as consumers we consume the GDP. Consumers are revenues and workers are costs on each side of a balance sheet in every household, company and country… and that’s why it affects growth in asset prices.”
“But it’s not predictable, because you cannot predict where you will work, or what you will consume, in five years’ time. We all have the same information, but we don’t consume the same goods. We are very heterogeneous and no-one can predict how we will change as consumers and workers.”
Roy warns that retirement planning should be related to life expectancy, not by moving the goalposts on the retirement age. “Using age doesn’t work, as an 80-year old can cost double in healthcare what a newly retired 65-year old costs, and the number of octogenarians has risen by 400% in the world since 1970 while the global population has only doubled during that time. This means that the oldest and most expensive part of the population is growing at four times the rate of the rest of the population.”
“That’s why every country has made the mistake of viewing retirees above 65 as one homogenous group; it’s a big blunder made by pension funds, insurance companies, asset managers, academics and quant people. A 65-year-old is very different to an 85 or 90-year-old.”
“On a national level, the five countries with the oldest populations in 2010 were Japan, Italy, Greece, Germany and Sweden, yet all are dramatically different, with different public finances. We used to have mortality models that predicted someone would retire at 65 and die at 72. In Japan, 8% of the population is now over 80. We have been throwing darts when dealing with longevity, and getting it badly wrong.” The high number of octogenarians in Japan led to the country’s credit rating being downgraded due to the high cost of looking after them.
Roy says the biggest mistake of corporate governance is to give workers a pay raise without thinking through the long-term consequences of what it will mean for pension or healthcare commitments, particularly in societies which still pay defined benefit (final salary) schemes. “A USD 1,000 pay rise given to US auto workers in 1985 translates today into USD 17,937 in post-retirement health obligations,” he says. “Long-term promises which were made by GM, Chrysler and Ford for defined benefit pension plans are the biggest travesty and the biggest mistake of corporate governance. That’s what has driven down DB pension plans.”
A better use of corporate governance would be for companies to be more flexible about how they view, and use, older workers, says Roy. He says people will probably have to work part-time after official retirement ages because they cannot predict how much money they will need. And it would be in companies’ own interests to retain these older but experienced workers as numbers of young people entering the workforce drops due to declining birth rates. Remote working is also likely to increase, particularly for women in an attempt to improve female participation rates, he believes.
‘If we increase the retirement age to 68, what percentage of people could actually work?’
And the answer does not lie in blindly raising the retirement age, currently 67 for state pensions in most European countries, he says. “Flexibly enabled retirement means the retirement age should be a function of life expectancy at birth, at 60, at 80,” says Roy. “If we increase the retirement age to 68, what percentage of people could actually work? Less than 10% could do the exact job that they did. Nurses cannot lift patients out of bed like they used to when they were younger, so just mechanically changing the retirement age does not solve the problem anywhere in the world.” Proposed changes to UK laws requiring fireman to work after 55 when they may not have the physical ability to run up ladders or rescue people from burning buildings has already led to strike action.
Roy says that due to longevity, the parents of someone retiring at 65 may still be alive. “Now we have two generations of retirees, and we have not even started thinking about this. We are putting an inordinate burden on the young people who are being asked to fund it.”