The impending global pension crisis is well known, the numbers are staggering, and will worsen dramatically from here unless something is done.

Nevertheless, the well-known demographic problem is only one third of the story.

Increasingly the risks of the pension shortfall are residing squarely with the individual, who typically lack the time and expertise required to make such complex financial decisions. Furthermore, there is a lack of appropriate investment products to meet post-retirement challenges.

Addressing the retirement savings gap requires several responses. For the individual, more sophisticated and robust investment solutions and greater tailoring of the investment advice is required.

New Zealand is not immune from these global trends. Appropriately, the lack of post-retirement investment solutions in New Zealand has been identified and has had increased coverage recently.

To my mind, not just in New Zealand but globally, Goals Based Investment solutions with a focus on delivering a more stable level of income in retirement are a fundamental part of the retirement solution. Importantly, the investment knowledge and capabilities are available now to meet the challenges ahead.

 

The global savings gap is highlighted in the infographic from Raconteur, which illuminates a growing problem attached to an aging population.

As this article by Visual Capital highlights, the World Economic Forum (WEF) estimates that the combined retirement savings gap, for the following eight major countries: Canada, Australia, Netherlands, Japan, India, China, the United Kingdom, and the United States, is growing at $28 billion every 24 hours!

“The WEF says the deficit is growing by $28 billion every 24 hours – and if nothing is done to slow the growth rate, the deficit will reach $400 trillion by 2050…..”

The size of the global retirement savings gap is very well presented in the Raconteur infographic

As we know, we are all living longer, “life expectancy has risen by three years per decade since the 1940s”……. “The population of retirees globally is expected to grow from 1.5 billion to 2.1 billion between 2017-2050, while the number of workers for each retiree is expected to halve from eight to four over the same timeframe.”

As noted in the article, the WEF has made clear that the situation is not trivial, likening the scenario to “financial climate change”

 

In short, this is a major issue that needs to be addressed, and with a high degree of urgency, otherwise the effects are likely to be overwhelming.

This is not just a global issue, but also here in New Zealand.

The range of initiatives include raising the retirement age and likely cuts to benefits.

Specially for the individual, more sophisticated and tailored investment solutions are required. Goals Based investment solutions to be specific.

 

But wait, there is more!

Research by EDHEC Risk Institute builds on the view provided above. As they note, the three pillars of the retirement savings system are under duress.

The first pillar is the State/Government pension, as noted above. Nevertheless, this is only a third of the story.

The Second and Third Pillars are as follows.

The Second Pillar is the shift globally from Defined Benefit (DB) schemes to Defined Contribution (DC) e.g. Super Funds, Retirement Accounts, KiwiSaver. This shift takes the risk of delivering retirement income from the employer to the employee. Under a DC scheme the investment decision has been squarely placed with the individual. A default option is often provided if no investment decision has been made.

The Third Pillar is the growth of private savings, given the erosion of the above two Pillars. This is for those that can make additional savings and for those in retirement. Quite obviously the investment decision(s) rest with the individual, who typically lack the time and expertise required to make such complex financial decisions.

The key point with the Third Pillar is the lack of investment solutions globally to appropriately provide a secure and sustainable level of replacement income in retirement.

As EDHEC highlight:

Insurance companies, asset managers and investment banks offer a variety of so-called retirement products such as annuities and target date funds, but they hardly provide a satisfactory answer to the need for retirement investment solutions. Annuities lack flexibility and have no upside potential, and target date funds have no focus on securing minimum levels of replacement income.

 

The Solution

Luckily, there are appropriate investment solutions to help address the growing retirement shortfall.

Goals Based Investment solutions can help address the shortcomings of both Pillar Two and Three.

This Blog is filled with Posts on Goals Based Investing and the short comings of many Target Date Funds. For New Zealand readers I have outlined what a Goals Based investment solution would look like as a Default Fund option within Kiwisaver.

To recap, the modern day investment solution requires “flexicurity”. This is an investment solution that provides greater flexibility than an annuity and increased security in generating appropriate levels replacement income in retirement than many modern day investment products.  #EDHEC

The focus on generating replacement income in retirement should be considered during the accumulation phase.

The concept of Goals Based Investment solution is not radical, the investment frameworks, techniques, and approaches are currently available. The implementation of which can be easily handled by any credible fixed interest team.

Goals Based Investment solutions have been shown to increase the likelihood of reaching retirement income objectives. They also achieve this with a more efficient allocation of capital. This additional capital could be used for current consumption or invested into growth assets to potentially fund a higher standard of living in retirement, or used for other investment goals e.g. endowments and legacies.

Lastly, Goals-Based Investment strategies provides a better framework in which to access the risk of not meeting your retirement goals.

 

Happy investing.

 

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Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.