Imbalance in system
Retirement trends in the workplace since the mid 1980s have not coincided with demographic trends, Howard Davies, chairman of the Financial Services Authority, the UK’s financial industry’s regulatory body, told the autumn conference of the UK’s National Association of Pension Funds (NAPF) in London.
Speaking as chairman of the Employers’ Forum For Age, he said that the fact that people were living longer but retiring earlier, coupled with the decline in the number of people entering the workforce, was creating an imbalance in the pensions system.
This was particularly true of men, he stated, where the work versus retirement ratio had shifted from 45:10 to 30:30. People were also starting their careers later, because of longer study periods and thus were contributing less to their final pensions. “The problem is that they need to save more to finance longer periods of retirement”. The declines in the state pension provision could only make the situation worse.
He said that there had been reluctance on the part of governments, political and economic commentators, and even employers to acknowledge this as a problem.
France and Germany in particular were expected to feel the strain of an ageing population where pay as you go pension schemes were still the norm. He thought that the UK was in a better position, where people were being encouraged to take out private pension plans and/or invest in tax advantaged equity plans, but the problem here was also far from resolved.
The strain was now also being felt by over-funded schemes as a result of former high unemployment when people were laid off to make way for younger replacements.
The focus had now radically changed. “Flexibility and continued employment have become very topical.”
Davies identified three main areas of influence. He believed that “we will see the intellectual realisation that the figures simply won’t add up”. Many retirees would depend on state pensions as the real value of their private schemes declined. He argued that older people need to be persuaded to continue working, as there was a growing shortage of skilled manpower. Older workers were often discouraged by job advertisements asking for modern educational qualifications they did not possess or recognise whereas they remained perfectly skilled to fill the position.
He stated that pensions had become a political issue, since “the grey vote has grown in importance”.
Governments were also waking up to the fact that people needed to carry on working after retirement age otherwise there would not be enough money to take care of them, whilst employees continued to have unrealistic expectations of when they could retire and how much they would receive.
Alan Pickering, chairman of the NAPF, said that pension schemes needed to be simplified. “A pension scheme that is simple, modern and flexible can be the oil that lubricates the wheels of a dynamic economy.”
This entailed eliminating over-regulation and challenging the culture that left people viewing their pension as a means of tax relief rather than saving for retirement.
He said that concurrency, where people can “mix and match” their pension plans when they changed job, was a big step forward, but not the final solution, although this concept did permit greater flexibility among schemes.
He believed that public/private pension partnerships could help bridge the gap between the different ends of the employment scale as well as between young and old.
He also declared that a modern pension system based on “one size fits all” was no longer viable.
Defined benefit and defined contribution would be equally appropriate depending on circumstance, whilst deregulation would give employers and trustees alike the opportunity and space to find the best schemes to enable members’ confidence to grow.
The corporate bond market had grown phenomenally as an investment area at a time when the government bond market was shrinking, said Helen Farrow, who is a managing director of Merrill Lynch Investment Managers in London.
She stated that the main factor for the attractiveness of this market was the relatively higher yields that corporate bonds offered. The extra risk needed to obtain greater returns was worth taking, despite short-term volatility associated with the credit spread, she believed.
The differences in the property market were highlighted by Iain Reid of London based Aberdeen Property Investors, though it did continue “to generate a stable source of income.”
Property had reached a point where it now offered consistently high rates of return whilst being valued on a comfortable yield basis.
The asset class had benefited from pension funds now experiencing greater hassle-free management and increased liquidity.
Property was no longer “just property,” he said. Alongside the traditional direct investment approach, property funds now also pursued indexation strategies and built corporate bond or private equity style portfolios.
Kanesh Lakhani of State Street Global Advisors in London aimed to convince that hedge funds should be associated with risk control and consistent returns rather than speculation, as tended to be the case. He said that the hedge fund industry was both “diverse and conservative”.
He highlighted two features that were common to all hedge funds which made them an attractive investment.
“Hedge funds have the ability to short sell, thus opening up different return enhancement opportunities,” he said.
They also had an absolute return target, allowing managers to state targets in absolute terms, irrespective of market conditions, unlike stock market driven or index-linked conventional investment management.