There is no quick fix to the global pensions crisis. Many people simply do not save enough for their old age, while government pension schemes face unprecedented strains. A new World Economic Forum report gives examples of fresh thinking from around the world, showing the financial services industry and policy-makers how to step up.
A senior moment
We’re getting older. For the first time ever there are more people over the age of 65 than there are under the age of five. And life expectancy for senior citizens has never been better.
The gap between what people currently save and what they need for an adequate standard of living when they retire points towards a financial black hole for younger generations.
In just eight countries with some of largest pension markets or biggest populations – Australia, Canada, China, India, Japan, Netherlands, UK and USA – the retirement savings gap is projected to balloon to $400 trillion by 2050, unless remedial measures are taken. It already stood at $70 trillion in 2015.
Can new thinking defuse the ticking pensions time bomb?
We must ensure our retirement systems are inclusive and sustainable, and that they provide adequate income for all
New pensions for new pensioners
The financial choices facing individuals can be baffling, but governments can step in to help, for example by promoting “dashboard” reporting of savings using modern technology.
With the average person likely to work for multiple employers and potentially ending up with numerous retirement accounts, pooling information about pensions and state benefits in one place can be invaluable. The idea is already up and running in Australia, Denmark, the Netherlands and Sweden.
Systems must also adapt to the life choices facing 21st century retirees, many of whom are a new breed of healthy seniors still leading active lives. This may mean more deregulation. Britain and the Netherlands have gone down this road by removing requirements to purchase annuities with pension savings.
And the financial services industry needs to improve its retirement products and understand the demand for more flexible offerings that provide greater asset diversification. Technology can help here by reducing costs and improving customization, although the arrival of robo‐advisers in several countries may not appeal to all.
An unexpected legacy
Only 32% of people expect to completely stop working at the point of retirement
Otto von Bismarck, who introduced the first pensions for workers over 70 in the 1880s when life expectancy in Prussia was just 45, could hardly have anticipated his social innovation would lead here.
Today, his successors face a dual challenge not only to raise savings rates but also to devise ways for pensions to be accessed more flexibly as individuals rely increasingly on personal saving plans rather than old-style guaranteed payouts. Particularly in an age when only around a third of people expect to stop working entirely on retirement.
The technical bit
“Decumulation”, or the process of drawing down savings, is gaining in importance alongside accumulation.
Underpinning the need for reforms is the global shift from reliance on defined-benefit (DB) pension plans, promising a fixed amount in retirement, to less certain defined-contribution (DC) schemes, where the risk falls on the individual.
Policy-makers can also help encourage default solutions to DC investing, although this may not be suitable for everyone. Target-date funds, common in the US, represent one broadly successful default accumulation system. Such schemes are targeted to a specific retirement date and seek to optimize balanced returns by reducing exposure to market risk as an individual gets older.
Four ways to beat the pensions timebomb
Create an easy-to-use savings "dashboard" which pools information about multiple pensions and state benefits in one place
Use technology to reduce costs and improve product and advice customization
Pursue deregulation to help systems more easily adapt to the life choices facing 21st century retirees, many of whom are a new breed of healthy seniors still leading active lives
Press the financial services industry to improve its retirement products and better understand the demand for more flexible offerings that provide greater asset diversification.