As with the rest of the financial services industry, pension funds are responding to an array of challenges, including keeping up with the rising tide of technological advances and managing a dramatic shift in global demographics. However, last year the value of retirement savings soared to record heights.
Assets managed in institutional pension funds across 22 major markets reached $41.3trn at the end of 2017, up 13 percent on the previous year, according to investment consultant Willis Towers Watson. Last year’s $4.8trn increase in the total value of pension assets was the largest annual increase in dollar terms in two decades.
The number of retirees requiring state and private pensions continues to skyrocket, resulting in fewer working-age citizens for every older person
Measured as a percentage of GDP, pension assets varied between countries; the highest proportion was found in the Netherlands, where retirement fund assets rose from 126 percent of GDP in 2007 to 194 percent of GDP last year. Assets in Australia, Switzerland, the US and Canada all rose, but not every nation was so lucky. In Japan, a rapidly ageing population led to a rise in retirement benefit payments and a drop in pension fund assets, from 66 percent of GDP in 2007 to 63 percent last year.
The World Finance Pension Fund Awards 2018 celebrate the industry’s best and brightest, and those firms that have demonstrated an ability to innovate and adapt, all while maintaining a standard of excellence.
Demographic crunch
Japan is not the only country grappling with a demographic crisis. In virtually every nation in the world, the number and proportion of older people in the population is growing, according to the UN. The issue is set to become one of the most significant social transformations of the 21st century, the organisation said.
Advances in medicine, nutrition and sanitation have boosted life expectancies in 2018 to highs of 84 years in some countries. This paired with falling birth rates has caused the proportion of pensioners in societies around the world to swell.
The number of people aged 60 and over is expected to more than double by 2050 and to triple by 2100, outpacing growth in all younger age groups. According to the UN’s 2017 data, the number of people aged 60 and over is set to rise from 962 million globally in 2017 to 2.1 billion in 2050, and finally to 3.1 billion by the next century. Meanwhile, the number of people aged 80 and over is set to triple by 2050 compared with 2017.
The Organisation for Economic Cooperation and Development (OECD) said in a report last year that in the future people will have to postpone their age of retirement to ensure a decent pension, as the pace of public spending on pensions for the OECD as a whole is expected to slow substantially. Under legislation currently in place, by 2060, the normal retirement age will increase in about half of OECD countries, by 1.5 years for men and 2.1 years for women on average, reaching just under 66 years. In addition, expected advances in longevity mean the time people spend in retirement will also increase.
As the number of retirees requiring state and private pensions continues to skyrocket, resulting in fewer working-age citizens for every older person, the global pensions system is coming under immense pressure. Governments around the world are challenged with ensuring pensions remain financially sustainable and workable through the transformation.
Technological breakthrough
In its annual report, Willis Towers Watson said the uptake of new technologies in the pensions industry has been “surprisingly light” so far, as evidenced by legacy systems that rely heavily on spreadsheets. The prioritisation of technological innovation has not changed much over the past 20 years, the firm said, but it picked tech as one of the key trends to watch over the next five to 10 years, suggesting a breakthrough is in the industry’s near future.
“Technology will challenge business models and human capital, requiring adaptation. The ‘people plus technology’ model should ultimately emerge as dominant,” said the Willis Towers Watson report.
One way pension funds have already embraced tech is through the rise of robo-advisors. These services provide customers with a more effective and less costly alternative to a human advisor by programming artificial intelligence systems to guide retirees through the pensions system. A report by consulting firm Mercer said robo-advisors have gathered around $225bn in assets under management as of 2017 due to a strong uptake in the wealth advisory industry. That figure is set to rise to more than $1trn by 2021.
Mercer also hinted that blockchain could come into the picture for pension funds, as more and more administrative tasks are being automated. Blockchain technology could remove the need for third-party intermediation and, Mercer said, smart contracts could be established so that when a member reaches retirement age, the smart contract automatically releases
the member’s pension.
Accountancy giant KPMG has also thrown its weight behind blockchain technology, saying it could provide a more reliable and easier-to-use database compared with current administration systems, creating a “true financial passport”.
But according to a report in The Times, pension funds still need to invest more in fintech in order to engage savers and help them understand their investments. Workplace pensions in the UK started adopting cloud-based platforms in the run-up to the February 2018 deadline for compulsory pension auto-enrolment. Three quarters of employers said they use a cloud-based platform or off-site hosted software. The industry is now looking to adopt more advanced technology to improve income modelling and encourage staff to increase contributions, the report said.
Refocusing the models
Pension fund trustees are starting to understand that incorporating environmental, social and governance (ESG) considerations into their standard investment processes is part of their fiduciary duty, HSBC said in a report last year. The lender noted: “Historically, fiduciary duty was viewed as being applicable only to the financial interests of the funds’ current beneficiaries, rather than those of future generations. This is now changing, with a growing recognition among regulators, law courts, institutional investors and individual scheme members that the interests of future beneficiaries are as relevant to the governance of pension funds as those of current members.”
Willis Towers Watson listed sustainability and long-horizon investing as one of its key issues for pension funds to consider over the next decade. “Opportunities are being missed in the overlapping areas of sustainability, ESG, stewardship and long-horizon investing. Investors need to combine both investment beliefs and wider sustainability motives in their strategy,” it said.
The consultancy said another area where traditional ways of thinking must change was culture. It said firms should shift from a model of “male, ethnocentric, economics-educated with limited culture” to “multidisciplinary, diverse spectrum of backgrounds with stronger culture”, saying investment organisations increasingly differentiate themselves by referencing
their values or culture.
Another area to watch is governance. “The governance of pension funds has been a growing source of attention fanned by successive industry reviews,” Willis Towers Watson said, though it noted pensions governance is a lot stronger than it was 20 years ago. Despite this, there is a “big governance challenge” to build the resources required to manage a complex organisation.
With this myriad of challenges come winners and losers. The World Finance Pension Fund Awards 2018 identify the companies to watch by highlighting those that are setting higher standards in the pensions industry around the world.
World Finance Pension Fund Awards 2018
AUSTRALIA
Asgard
AUSTRIA
APK
BELGIUM
KBC
BOLIVIA
BISA Seguros y Reaseguros
BRAZIL
Itaú Unibanco
CANADA
RBC
CARIBBEAN
NCB Insurance
CHILE
AFP Capital
COLOMBIA
Banco GNB Sudameris
CZECH REPUBLIC
KB Pension Company
DENMARK
Danica Pension
ESTONIA
Nordea Pensions Estonia
FINLAND
Elo
GERMANY
Allianz
GHANA
Pensions Alliance Trust
GREECE
Alpha Trust
ICELAND
Arion banki
IRELAND
Allianz
ITALY
Fonchim
JAPAN
Government Pension Investment Fund
MACEDONIA
KB First Pension Company
MALAYSIA
Gibraltar BSN
MEXICO
Afore XXI Banorte
MOZAMBIQUE
Moçambique Previdente
NETHERLANDS
Zwitserleven
NIGERIA
Fidelity Pension Managers
NORWAY
Nordea
PERU
Prima AFP
POLAND
ING
PORTUGAL
Banco Santander Totta
SERBIA
Dunav
SOUTH KOREA
KEB Hana Bank
SPAIN
Ibercaja Pension
SWEDEN
Alecta
SWITZERLAND
Zurich
THAILAND
Kasikorn Asset Management
TURKEY
AK Asset Management
UK
Pension Protection Fund
US
Arkansas Teacher Retirement System
