The World Economic Forum is best known for its annual meeting in Davos every January. But in between that week in the spotlight, lots goes on at this multilateral institution, including a great deal of groundbreaking research. The release of a WEF report on retirement funding last week delivered a wake-up call for governments, companies and retirees – for the vast majority, their savings will expire long before their life force. On Rational Radio, I chatted with Han Yik. co-author of the report who said solutions exist, but none are easy. Over-riding all of them, however, is the need for each of us to take responsibility for our own financial future. – Alec Hogg
A warm welcome to the head of institutional investors at the World Economic Forum Han Yik. Han, lovely having you on the program. You guys have just put together a very detailed report looking into the future of savings and retirement in the major economies around the world. It’s a pretty gloomy outlook. Just before we go into the details of it, what motivated you to do this report in the first place?
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Sure Alec Thanks for having me. The genesis of this report is part of an ongoing initiative looking at how global retirement investment systems reform, looking at the challenge that longevity has on pension systems all around the world. It’s great in general that we’re all living so much longer but retirement plans simply weren’t designed to handle that strain and it’s put a lot of burden on retirement systems all over the world including many countries where pension systems seem to be quite well funded. That’s what motivated us to look at this problem. The forum occupies a unique place because we work with both governments and businesses on these large pressing issues.
When you unpack an issue then you might be able to find a solution to it, but just just to go back a little. In South Africa we used to have defined benefit plans where people would be paid a certain amount when they retired based on the years of service and that could continue until they died. Those were phased out mostly – not in government but in most other parts over the past couple of decades, but the few that are still around, employees are kicking back not wanting to go into defined contribution plans as they are now. Is this a worldwide phenomenon?
Absolutely Alec. And that’s unfortunate but I’ll add to the doom and gloom a little bit. But that’s the trend that we’ve been seeing worldwide – this shift away from defined benefit plans onto defined contribution plans. The reason why I say it’s a little bit gloomy is because it’s shifted burden of risk away from governments – if it was government sponsored defined benefit plans and away from employers if it’s employer sponsored defined benefit plans. And the reason that it is for defined contribution plans, we as individuals have to be our own financial planner, our own actuaries, our own investment advisers, because the accounts are now ours and we’re expected to do all of those things. In a former career I happened to be a pension actuary and also a pension portfolio strategist, so I’m equipped to do that for myself. But it’s one of those things that you know friends who are doctors and lawyers, you know they’re just not equipped to be able to handle these kinds of really important decisions.
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The headline results of what you brought out is that most retirees believe that they’re not going to be able to look after themselves, or rather that their life is going to last longer than their savings by quite a few years. So what happens now?
Just in terms of that graph, what we’re trying to illustrate there is how far individual savings can take you and when you look at that you can see that it’s only so far. When you see that gulf, you see the importance of government provided pensions as well as employer provided pensions because individuals – if you just look at average savings patterns and average investment returns in those six major pension markets, you can see it only takes you so far. Now you know not very far in terms of those average results. So in order to be able to last through the expected lifetime you really need those other sources of pension. I think South Africa is very similar. If I remember correctly, having a government provided means tested age pension as well as employer provided plans on top of individual savings. But as I mentioned, this is really a problem that requires all three stakeholders to act together in order to solve.
So people are living longer and their savings are getting used up quicker, there’s a an entitlement – I recently returned home to South Africa from the UK and it’s almost an entitlement in the UK that you’re going to have national health until the day you die, which could be when you’re 103 the way people are living nowadays. How does all of this get paid for?
That’s the million dollar or trillion dollar question. There is no easy answer. There’s no magic bullet. I wish I had a complete solution to offer but the simple answer is it requires action from all three parties – government, employers as well as individuals and an acknowledgement of what’s happening, namely that we’re all living longer and then the shift that occurs because in effect the problem itself is quite simple. We are living longer. So either we have less in terms of pensions or we find money from somewhere or we retire later and start our pensions later, or we work longer. There’s only so many levers that we can push. So the problem itself is actually quite simple to quantify. It’s just that the solutions there are not. None of them are extremely palatable or attractive but we’ve put forth some recommendations in terms of what can be done now that the burden has shifted on defined contribution plans. One of the big things is making sure that individuals are armed to be able to manage their own assets with a more long term frame of mind and so we have some recommendations in the report for that.
As as a potential retiree which I guess every single person on earth is, you better start educating yourself about your investments because nobody looks after your money as well as you do and you’re going to need to look after your money if you’re going to outlive your savings.
That’s a very good point. Actually one of the reforms we have, is that there should be stronger fiduciary rules available so that individuals don’t have to have that burden fully placed on them and that there should be strong regulated unbiased sources of advice to help people manage the accumulation and devaluation of their pension assets.
