Stephen Bird, CEO, Aberdeen Investments PLC, only recently joined the company as its leader in tumultuous times. What is he most concerned about in the investment management industry, and what insight does he have to give on those concerns?
The devastating Covid-19 pandemic has rightly taken up most of our attention this year. We will be counting the cost for a generation. However, as asset managers, it is important that we continue to look at the other major issues facing society. The list is long. But for me, one of the biggest challenges – and opportunities – is our growing lifespans.
Growing older by the year
The world’s population is living longer. Life expectancy is increasing rapidly. On average, it is rising by one year every five years. To put that in perspective, every third child born in London today could live to be 100. The life expectancy in Japan in 2050 is forecast to be 92 (currently 84). The global population of over 65s – the current average retirement age, according to the OECD – will increase from 600 million today to 2.1 billion in 2050.
That means a population that will spend 20-25% more time in retirement than they did in the workforce. While this is good news over all – who doesn't want to live longer? – it does come with sizeable pitfalls. Let’s crunch the numbers.
Today, there are eight workers for every retiree. However, by 2050, this number looks set to fall to just four workers. That means less money to go round for social care and state penisons. The funding burden will fall to younger members of society. Intergenerational tensions could rise as a result.
Mind the gap
Then there is the savings gap. In 2015, the global retirement deficit was estimated to be around US$70 trillion, with the largest shortfall in the US. In terms of GDP, this represents 1.5 times the annual GDP across the nations studied. According to the World Economic Forum, this gap could grow by 5% each year to around $400 trillion by 2050.
The harsh truth is that, in order to pay for our longer lives, we will have to save more, start earlier and work longer. Hardly the stuff to make you leap out of bed in the morning.
A change of mind-set
All is not lost. But to address this situation, we need a change of mind-set. The first step is a dose of realism. For example, in a 2014 BlackRock survey, savers between 25 and 34 said they would like an annual retirement income of £54,000. To achieve that, they believed they needed a pension pot of around £375,500. Not even close. The real figure to realise such an outcome is around £1 million.
This is where we, as asset managers, have a vital role to play in helping change the language and incentives around savings. We want savers to feel they are in charge of their futures. First, this means moving away from the idea of ‘retirement’. After all, what is the retirement age? A figure set decades ago, when life expectancy was shorter. Instead, people should feel that they can work for as long or short a time as they want. The only stipulation is that they must save accordingly. The choice is theirs.
Second, as part of this change in mind-set it’s helpful to view our lives in two phases – ‘salary dependent’ and ‘salary independent.’ The former is that time of your life when you are working and the money you earn pays for your everyday living. The second phase is when you use the money you’ve saved to pay for your day-to-day expenses. So, the more you save when you’re earning, the more you can enjoy later life.
This may all sound rather simple, but the truth is far more complex. The instant gratification of the here-and-now purchase cannot be underestimated. However, this change of thinking may see individuals postpone that unnecessary purchase today, for a more prosperous tomorrow.
Diversify for a brighter future
Which brings us to returns. Many individuals saving for the future have their money in cash or bonds. In the current low-yield environment, that means meagre returns eroded by inflation and taxes.
Therefore, if we are to bridge the savings gap, we must start to encourage younger savers to think about taking on more risk and diversifying their investments.
The harsh truth is that, in order to pay for our longer lives, we will have to save more, start earlier and work longer. Hardly the stuff to make you leap out of bed in the morning.
To do so, we need to show that risk and return are inextricably linked. It’s starts by articulating the basics. The more risk you take, the more money you can potentially make. Similarly, by taking on less risk, you might make less money. The goal, then, is to gauge an individual’s tolerance to risk.
Working closely with clients, we can help map out their financial futures by asking simple questions: when would you like to stop working? How long are you intending to invest? What is your target sum of money? We can then offer them a range of investment solutions that will help them achieve these goals. In other words, through our partnership, we make them the architects of their own futures.
Trust and responsible investing
Lastly, there is trust. There’s no doubt our industry’s reputation suffered in the wake of the financial crisis. Since then though, behaviours have changed and attitudes shifted. Nowhere more so than when it comes to investing responsibly.
Take ESG (environmental, social and governance). Once seen as a nice-to-have, ESG is now the cornerstone – and I believe the future – of investing. It is at Standard Life Aberdeen. Issues like climate change, poverty and inequality were a concern before the Covid-19 pandemic. The crisis has only served to magnify these issues.
Again, asset managers have an important role to play in helping address these challenges. This can be in the way we allocate capital, engage with companies and policymakers, as well as the investment options we offer our clients. Through these, we have the opportunity to build a fairer and more responsible society, while delivering a financial return. What better way to incentivise the next generation to save and invest for their futures?
Stephen Bird recently spoke at IM|Power 2020. Check back to the content home soon to hear his session on demand.