Big changes are coming soon

Big changes are coming soon

Yesterday we looked at some of the challenges that the world will face over the next three decades and beyond…

The world’s population is set to balloon to 9.7 billion by 2050 and during that period the number of adults aged sixty or greater will rise by around 130%.

In countries such as Japan and Germany an ageing population and a declining birth rate will combine to diminish both the total population and the numbers of people at a working age.

But this decline in birth rates isn’t just confined to mature, developed economies…

Data from the Bank of America report into ageing I was discussing yesterday found the birth rates in 83 countries – that between them account for 46% of the world’s population – have fallen below replacement rates, meaning their populations will naturally be subject to decline.

Overall the so called “support ratio”, which calculates the number of youngsters and working age individuals  to retirees, will fall from a current rate of 12:1 to a figure of 8:1 by 2050, a reduction of 33% on a global basis.

There are some countries which will experience an overall population growth however, and in certain cases it will be explosive…

The prime example being Nigeria whose population will grow to 300 million, from the current 186 million, becoming the most populous country in Africa as a result.

Note: that these forecasts are based on current birth rates and will be achieved if this status quo is simply maintained.

By as early as 2030, the growth in the global labour force will have fallen by more than a third to just 1% per annum.

Though in truth that may help to offset a rise in automation, which is thought likely to start reducing the number of jobs available around the globe over a similar time frame.

Of course, all of this change creates opportunity…

In fact, Bank of America describes it as a multi-trillion dollar silver lining for sectors such as pharma and healthcare, as 4/5 elderly people have a least one chronic condition requiring treatment (and often many more).

The financial sector will have an increasingly important role to play in preparing our finances for an extended old age, whilst the aged care sector will see significant growth in demand for its services, which over time will become longer term in nature.

Consumer facing sectors will also benefit, as the older generation accounts for as much as 60% of current consumer spending  in developed markets.

Bank of America flags three groups who are most vulnerable (i.e. financially unprepared for these changes): Women, the young, and the poorly educated.

The first group is something of a worry as we will see a rise in number of elderly women, who currently naturally outlive their male counterparts (a trend that will continue in the future).

The chart below shows the expected changes in the global elderly population between 2015 and 2050:

Source: Bank of America. Click image to enlarge.

Japan offers some hope and potential guidance for the rest of the world in the way it has learned to cope with increasing numbers of elderly and a dwindling workforce, via the increased use of technology and a change in working patterns.

For example, one in three of Japan’s care home workers are themselves over 60, though despite this almost 15% of Japanese job vacancies are in the care sector.

There is no simple answer to these demographic hurdles, they will only be resolved through long-term planning and collaboration.

Some of the framework that has created many of the financial challenges faced by an ageing population is being formed in the here and now.

Indeed a perfect example of this will take place later today, when the US Federal Reserve announces its decision on the level of US interest rates, at its last meeting of summer 2017.

The artificiality low interest rates that have prevailed for most of the last decade have been a double edge sword for those saving towards a pension and those that manage those schemes.

Quantitative easing and cheaper money have buoyed asset prices and in some cases sent them sharply higher.

That’s been good news for those who are early on in the pension journey and who are looking for capital growth to boost the overall size of their pension pots.

But it has, at the same time, created something of a nightmare for pension fund managers and retirees.

The scheme managers need to match their investments against their future liabilities. This has historically been accomplished via significant allocations of capital into bonds, which should in theory provide a source of income with considerably reduced risk to the sums invested, when compared to equities.

However the yield or return that bonds produce has been substantially reduced by low or even negative interest rates, and the aggressive asset purchase programs under taken by central banks (quantitative easing).

What’s more, those who are retiring typically need to buy an annuity. This is a policy which pays a fixed return over the remainder of your life time. But the return that an annuity pays is directly linked to prevailing interest rates and the price of Government bonds.

The net result is that pension pots of even a few hundred thousand pounds will often not provide a living income to retirees, based on today’s miserly interest rates.

If we get back to normalised monetary policy and levels of interest rates over the next decade, then current systems of retirement planning may have a chance of survival.

But if interest rates remain perpetually low, we may have to completely rethink the way we save and plan for retirement.

After all, our pensions may have to fund our lives retirement for much longer than we ever thought possible…