Pensions is one of the five global challenges we all face; it’s up to us to solve it.
The first challenge facing the planet is global security. We are spending trillions of dollars trying to keep the bad guys at bay. Vast resources and effort are being deployed to keep ourselves safe.
The second challenge is how to live sustainably; in other words, how to minimise and control the world’s ever-growing carbon footprint.
Third, we face a global health epidemic. The four non-communicable diseases – Alzheimer’s, cancer, coronary heart disease and diabetes – are bearing down upon us like a steam train. And the tunnel remains pretty dark.
Fourth, is the economy. Since 2008 and the global financial crisis, it has been obvious that the global economic eco-system is fragile and highly unstable. Anti-government protests in Brazil and Turkey are a stark reminder that this thing isn’t over.
And finally, the fifth global challenge: inadequate retirement resources – a.k.a. the pensions crisis. We’re living much longer than our parents and grandparents. Some 40 per cent of girls born today will live to be 100 years of age. And, by 2060, the UK expects to have half a million centenarians. But we’re also contracting chronic illnesses in old age, and the cost of being elderly is high and climbing. In London you can expect to pay around £1,700 a week for full-time care for a parent with advanced Alzheimer’s. For the foreseeable future, the government is unlikely to be in a position to provide more than a bare minimum of assistance.
After all, it is spending vast amounts trying to safeguard its citizens at home and abroad, keep a badly damaged economy afloat, and maintain the basic welfare of its citizens. Unsurprisingly, the nation’s public finances are in a desperate state.
Time is running out. As Rudyard Kipling inscribed on his sundial: “It’s later than you think”. Many pension schemes are following a “Recovery Plan”, but success is far from assured. The markets have done them no favours, and the outlook remains one of continued pessimism. Some recovery plans are founded on assumptions that are beginning to look heroic.
Underfunded pension plans are a global scourge: witness the bankruptcy of the City of Detroit. Detroit’s pension shortfall accounts for about $3.5 billion of the $18 billion in debts that led the city to file for Chapter 9 last week. A New York Times article quotes William Shine, a retired police sergeant: “Does Detroit have a problem?” he asks. “Absolutely. Did I create it? I don’t think so. They made me some promises and I made them some promises. I kept my promises. They’re not going to keep theirs.” Not every pension plan faces a Detroit style challenge, but every pension plan does need a strategy to become fully funded.
So, what does that look like in practice? Are there particular assets to be avoided and others to be cautiously embraced? How do you measure risk and return? What is the latest thinking on asset allocation and manager selection? To what extent should the liabilities drive the asset strategy?
In such matters, it is no longer sufficient to rely exclusively on the pension plan’s investment consultant. In today’s super-demanding and hostile investment environment, it is important for every trustee and CIO to form opinions and views. In my experience as an investment adviser, pension schemes that have prospered during the last decade, have mainly been those at which every member of the board has contributed meaningfully to this critical area: investment strategy.
Please note that all opinions expressed in this blog are the author’s own and do not constitute financial legal or investment advice. Click here for full disclaimer