Global Demographics & Pensions: Investment Implications

Transcription

1 Research Materials for Client Discussions Only Global Demographics & Pensions: Investment Implications Amlan Roy, PhD Senior Managing Director, Global Chief Retirement Strategist Global Pension Dialogue Amsterdam (May 30, 2018) Research materials used for SSGA Institutional Client use only and is not intended for public dissemination. All the information contained in this presentation is as of date indicated unless otherwise noted EMEA.INST

2 Demographics: A Different Perspective WHAT IT CONNECTS TO & INFLUENCES D: Discount rates, Debt E: Economic Growth, Efficiency, Structure M: Mortality O: Organisation Behaviour, Structure G: Geography, Geopolitics, Governance R: Robotics, Real Estate A: Asset Prices, Asset Allocation P: People, Pensions, Politics H: Heterogeneity, Households I: Inflation, Inequality, Institutions C: Consumers, Culture, Cities S: Sustainability, WHO DOES IT PERTAIN TO? All the People in the world and their characteristics. From an economic perspective, we restrict attention to them as consumers and workers in the world. It affects all Income Statements & Balance sheets in the world for Individuals Households Corporates Nations Unless otherwise stated, all data and all data sourced to "UN" is the most current data attributable to the United Nations Population Division. Data shown beyond 2015 is a UN projection EMEA.INST 1

3 All population numbers in millions Super-old (80+) Age Group Fastest Growing World Population: 1970 versus ,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Source: UN, SSGA Demographics ,115 1, ,937 1, ,701 Total Population 7, Growth 442% 204% 133% 41% 104% Share of 80+ Population (%) (%) UK 2 5 US 2 4 Germany 2 6 Japan 1 8 Italy 2 7 Netherlands 2 5 Australia EMEA.INST 2

4 Changing Life Cycles in a Changing World 0 5 Years 5 18 Years Years Years Years 80+ Years Increased Socialisation More Tech Savvy Delayed entry into labour market Late marriage & Delayed parenthood Increase in Longevity Growing number of 80+ Early exposure to Digital & TV experiences Multi-taskers Frequent job changes Long & uncertain post retirement periods. Coping with an uncertain future Increased years in education Long distance workers, Remote workers Increase in wealth Increased use of technology & training Increase in travel, leisure & luxury Source: Longer Lives, Changing Life Cycles: Exploring Consumer & Worker Implications, Credit Suisse (2011) EMEA.INST 3

5 No. of 65+ per 100 aged Years % p.a Children per woman Core Demographics: Developed Countries Annual Population Growth Fertility Rate Life Expectancy at Birth Old Age Dependency Ratio Source: UN, SSGA Demographics EMEA.INST 4

6 The Demographic Manifesto (2000) Radical Policy Actions to mitigate the Ageing Time Bomb Abolish Mandatory retirement ages. Adopt Flexible retirement. Close gender gaps to better utilise female work potential Rethink & implement immigration policies Outsource and off-shore non-core jobs based on costs and benefits EMEA.INST 5

7 Retirement Ages: Effective & Official (2016) Men Women Retirement Age (Years) Effective Official Effective Official Korea Mexico Turkey Japan Australia Switzerland United States United Kingdom Italy Netherlands France Germany Source: OECD, SSGA Demographics * Red Cells: Effective retirement age > Official retirement age EMEA.INST 6

8 % Gender Differences: Participation & Income Gender Labour Participation Differences Ratio of Male GNI per capita to female GNI per capita 2015 in 2011 PPP FLFP 2015 MLFP Source: ILO, World Bank, SSGA Demographics EMEA.INST 7

9 Average annual growth rate (%) Demographic Components of GDP Growth Average annual growth rate (%) Working-age Population Growth working-age population = population aged Labour Productivity Growth labour productivity = real GDP/ hours worked G6 GDP growth rate has fallen dramatically. Main cause is declining labour productivity growth. Labour Utilisation Growth labour utilisation = hours worked/working-age population Japan Real GDP growth: Contributions US Real GDP growth: Contributions Labour productivity growth Labour utilization growth Working age population growth Real Real GDP growth Source: SSGA Demographics, GGDC, UN EMEA.INST 8

10 Unsustainable Fiscal Strains (Ageing Related) EU28, 2014, % of total benefits Others 7.6% Disability 7% Survivors 5.5% Family & Children 8.2% Unemployment 4.9% Sickness/Healthcare 28.1% Old Age 38.7% In most EU countries, age related expenditures currently account for 20% + of GDP This is unsustainable currently and in future without radical reform EU28 Pension (%) Health Care (%) Long-term Care (%) Source: EC, Larry Kotlikoff s speeches at LSE and Bank of England (2014), SSGA Demographics EMEA.INST 9

11 Demographics & Policy Priorities: Asia s Big 3 China s 13 th 5-year plan ( ) India s 12th 5-year plan ( ) Japan s Three-arrows Abenomics Objective: Improve quality & efficiency of growth and transform and upgrade the economy Objective: Stronger growth with improved inclusiveness based on indicators & sustainable growth too Objective: Improve market expectation & real economy through monetary, fiscal policies & structural reforms Key policies Land rights transition & Hukou reform Raise living standards, access, job training health insurance and pension. Rural education reform. Health access improvement Centralize pension system Key policies Improve health inclusivity, health efficiency moving towards UHC Enhance agricultural productivity Improve Education & Gender balance Increase pensions coverage & access to public healthcare Key policies Agricultural reforms Increase labour flexibility Reduce pensions & health government expenditure Enhance Skills, promote innovation Close gender gap in employment Sources: NDRC, Planning Commission, OECD EMEA.INST 10

12 Sectors Demographically Advantaged Changing consumers and workers in a global and technologically advancing world. Not just people numbers, but groups and behaviours impact these sectors. INFRASTRUCTURE NATURAL RESOURCES LEISURE & LUXURY EMERGING MARKETS PHARMA & BIOTECH FINANCIAL SERVICES EMEA.INST 11

13 Demographics & Asset Pricing Fundamentals Research including ours has shown demographics to affect the following which are fundamentals of asset prices. GDP growth Inflation Sovereign Spreads Sovereign Ratings Long-term interest rates Equity premia Credit spreads Real Estate Therefore it is essential to understand the dynamics of both behaviour and fundamentals in asset allocation EMEA.INST 12

14 % Multiple of mean earnings Pension Replacement Rates & Wealth, Old-Age Poverty Gross pension replacement rates, Average Male earners (2016) Gross pension wealth, Average Male earners (2016) Poverty Rate in age group 66+ (2015 or the latest) 30% 25.7% 25% 20.9% 19.0% 20% 13.8% 15% 9.5% 10% 5% 3.1% 3.7% 0% Germany and Australia data refer to Japan data relate to Others refer to 2015 Source: OECD, SSGA Demographics EMEA.INST 13

15 Pension Fund Asset Allocation Trends: 2017 vs Equities (%) Bonds (%) Cash Other Equities Bonds (%) (%) (%) (%) Australia Canada Japan Netherlands Switzerland UK US Source: Willis Towers Watson (2018) DB - DC Asset Split (2017 vs 2001) * DC (%) DB (%) DC (%) DB (%) Australia Canada Japan Netherlands UK US Cash (%) Other (%) * DC assets in Switzerland are cash balance plans and are excluded from the analysis EMEA.INST 14

16 Conclusions Understanding of demographics, behaviour, market and institutional evolution will be critical to understand the economy, its drivers and performance Growth, inflation, public debt, asset returns are affected by underlying demographics. So are living standards, inequality, quality of life etc. Pensions strategic asset allocation & ALM must holistically take into account the macro drivers of inflation risk, interest rate risk, longevity risk and market risk EMEA.INST 15

17 Biography Amlan Roy, PhD Dr. Amlan Roy is the Global Chief Retirement Strategist and Senior Managing Director at SSGA since April He is an experienced Global Macro Researcher specializing in Demographics & Pensions related to Economics, Investments and Public Policy. He highlights structural issues related to gender disparity, youth unemployment, system risks due to policy interactions with ALM & SAA. He is a Senior Research Associate at the London School of Economics and Guest Finance Professor at LBS. Prior to joining SSGA, he was Head of Global Demographics & Pensions Research and Managing Director at Credit Suisse having joined there in At Credit Suisse, Amlan was a client facing Researcher presenting to clients in 25+ countries and speaking at 60+ global conferences/events. In a prior role he developed global risk and asset allocation models serving as an international expert on Financial System Architecture. His big-picture macro strategic research in Global Demographics & Pensions is used by policy makers and investors and draws on the fields of Macroeconomics, Portfolio Theory, Behavioral Economics, Statistics, Derivatives and Econometrics. Prior to joining Credit Suisse, he spent over a decade in academia with a distinguished teaching career in the US and the UK. He was UK ESRC Research Fellow, Ponders Fellow, a Boston University Doctoral Scholar and a Government of India National Scholar. Amlan has a PhD and an MA in Financial Economics from the University of Iowa, an MBA from Indian Institute of Management Ahmedabad and a BA Honours in Economics from St. Stephen s College, University of Delhi EMEA.INST 16

18 What Retirement? Nigel Aston Global Head of DC Proposition and Strategy EMEA.INST 17

19 Solving the Global Retirement Puzzle? Image from EMEA.INST 18

20 Source: SSGA Global Retirement Survey EMEA.INST 19

21 Not pleasant Fine No idea Do not know nice uncertain reasonable Not engaged good

22 Source: State Street Global Advisors Global Retirement Survey 2018 Source: SSGA Global Retirement Survey EMEA.INST 20

23 Living Longer Life Expectancy for Individuals is Increasing Members have been living longer United Nations, Department of Economic and Social Affairs, Population Division (2013). Life expectancy for individuals at age EMEA.INST 21

24 Getting Older World s Older Population is Growing Dramatically Percentage of workforce % 8.5% Source: An Aging World: 2015, International Popluation Reports by Wan He, Daniel Goodkind, and Paul Kowal. Issued March EMEA.INST 22

25 What are You Going to do with Your Life? 218,000 PRODUCTIVE HOURS 156,000 PRODUCTIVE HOURS 124,800 PRODUCTIVE HOURS Source The 100-Year Life by Lynda Gratton and Andrew Scott. The information contained above is for illustrative purposes only EMEA.INST 23

26 Longer Lives Mean New Roadmap to Retirement CHILDHOOD Education ADULTHOOD Employment OLD AGE Retirement Source: SSGA. The information contained above is for illustrative purposes only. THE BETWEENAGER EMEA.INST 24

27 Retirement has Changed Already Retirement is uncertain and more gradual Unsure 44% Do you know when you will retire? 17% 25% 14% Know exact year Know within 2 years Know within 5 years 67 % Somewhat or very likely to work part-time in retirement EMEA.INST 25

28 One Year On How have lives changed? Child got married Given up work Reduced working hours Partner promoted to a new role Children moved back home Changes to personal circumstances Started a new job Received an inheritance Partner made redundant and cant find a new job Source: Research & findings provided by Ignition House Dealt with a health crisis Started a new pension Sold a business EMEA.INST 26

29 Members are Underestimating Longevity Say there are 10 men who are retiring at 65 in good health. How many of these will live to? 70 years old 80 years old 90 years old Survey Response ONS data for life expectancy of a 65 year old male 93 % 73 % 39 % 100 years old 9 % Source: Ignition House research for the Pensions Policy Institute. The information contained above is for illustrative purposes only EMEA.INST 27

30 Cognitive Decline in Later Life Crystallized intelligence Performance Fluid intelligence 53 Age EMEA.INST 28

31 Retirement Income Design Framework Default Funds to Focus on Accumulation and Decumulation The above is for illustrative purposes only. Source: State Street Global Advisors Defined Contribution. Source: SSGA Defined Contribution team, December All calculations made using mortality rates from the Society of Actuaries RP-2014 mortality tables for healthy annuitants using a 50/50 blend of male and female mortality and ISG capital market forecasts for Q4/2015. The median life-expectancy at age 65 in these tables is 85. Drawdown assumptions include a 2% cost of living adjustment and a retirement age of 65. Self-managed drawdown: we assume the participant has all their retirement assets in a 35/65 portfolio with an expected return of 4.5% and a risk level of 7.3%. The drawdown rate is the annual rate at which a participant could draw down their assets with a 95% probability of not exhausting their assets during their lifetime. Hybrid: we assume the participant uses 25% of their retirement assets to purchase a 50% joint and survivor annuity with a return of premium benefit and a 2% COLA which starts payments at age 80 and invests the remainder of the assets in a 35/65 portfolio with an expected return of 4.5% and a risk level of 7.3%. The hybrid drawdown rate is the continuous annual rate at which the participant could draw down their assets between the ages 65 and 80 and use the remainder of their assets to supplement their annuity income after the age of 80. Annuity: The annual payment that the participant would receive if they used all their retirement assets to purchase an immediate 50% joint and survivor annuity with a 2% COLA and a return of premium benefit starting payments at age 65. Calculations for the self-managed drawdown and the drawdown portion of the hybrid solution are based on simulations (simulation count = 100,000) and do not reflect the effects of unforeseen economic and market factors on decision-making. Annuity prices are based on MetLife quotes for December Expected returns are based upon estimates and reflect subjective judgment EMEA.INST 29

32 Solving the Global Retirement Puzzle? Image from EMEA.INST 30

33 Biography Nigel Mark Aston Nigel is a Senior Managing Director of State Street Global Advisors (SSGA) and the Global Head of DC Proposition and Strategy. He helps define the strategic direction of the global DC franchise and leads a team focusing on research, product, public policy, marketing and client engagement. Nigel is a member of SSGA s Senior Leadership Team. Nigel is a frequent commentator on long term saving and investment issues, as well as a regular speaker at conferences and in the media. He is a key company liaison with industry, government and regulatory bodies. Nigel has extensive experience in leading distribution and marketing teams and driving proposition design. He has been involved with workplace investment products for his whole career and is passionate about helping to give savers a more confident retirement. Prior to joining SSGA, Nigel has worked at large enterprises such as Standard Life where he was head of DC proposition and at AXA as investment strategy director. He was also a director at a technology start-up robo-adviser, focused on understanding investor behaviour and outcomes through data analytics EMEA.INST 31

34 Important Disclosures Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA s express written consent. Netherlands: State Street Global Advisors Netherlands, Apollo Building, 7th floor Herikerbergweg CN Amsterdam Amsterdam, Netherlands. Telephone: SSGA Netherlands is a branch office of State Street Global Advisors Limited. State Street Global Advisors Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. This communication is directed at professional clients (this includes eligible counterparties as defined by the Netherlands Authority For the Financial Markets who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication. The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor's or potential investor s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Diversification does not ensure a profit or guarantee against loss. Unless otherwise noted, the opinions expressed are those of the author who is a researcher at State Street. Views and opinions are subject to change at any time based on market and other conditions. Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions. Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss EMEA.INST 32

35 Important Disclosures Diversification does not ensure a profit or guarantee against loss. Asset Allocation is a method of diversification which positions assets among major investment categories. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable. SSGA Target Date Fund are designed for investors expecting to retire around the year indicated in each fund s name. When choosing a Fund, investors should consider whether they anticipate retiring significantly earlier or later than age 65 even if such investors retire on or near a fund s approximate target date. There may be other considerations relevant to fund selection and investors should select the fund that best meets their individual circumstances and investment goals. The fund s asset allocation strategy becomes increasingly conservative as it approaches the target date and beyond. The investment risks of each Fund change over time as its asset allocation changes State Street Corporation All rights reserved. Tracking Number: EMEA.INST Expiration Date: 28 February EMEA.INST 33