How pensions can keep pace with an ageing global population

The issue of how to support citizens following retirement appears certain to be one of the biggest challenges global policymakers will face in the years ahead.

Advances in medicine and declining fertility rates in many regions are expected to lead to a rapid ageing of the population. The global population age 80 and older is expected to grow 227%, from 120 million in 2013 to 392 million in 2050, according to United Nations statistics.

Meanwhile, the population age 25 to 59 – considered in much of the world to be prime working years – is projected to grow just 29% during that same period.

“The increasing importance of pension and retirement systems demands higher-quality regulation, supervision, governance, and transparency,” EY global pension leader Graeme McKenzie said in a news release accompanying a new report, Building a Better Retirement World.

Effects of the shifting population that are rarely discussed, according to the EY report, include:

• Working longer. Workers who are in good health may be able and willing to work beyond traditional retirement ages, and their contributions can become a vital part of the workforce.
• Political and social impact. Because they will be present in larger percentages, older citizens’ priorities can be expected to be reflected more substantially in policy and social decisions.
• Pension implications. Promises for pensions and retirement funding are an important part of employer benefits programmes that are designed to attract and retain talent. Future benefits plans may require more flexibility to keep retirement promises from becoming a devastating long-term liability.

“In an uncertain environment, with many moving parts, much can be learned from global collaboration and the sharing of knowledge and experience,” EY Asia-Pacific pensions leader Josef Pilger said in a news release. “It will take diverse experience and capabilities in the assessment, decision, and implementation phases of pension and retirement reforms to deliver truly sustainable retirement outcomes.”

Seven key areas are identified in the report as opportunities for pension and retirement providers to help develop social policy around pensions:

• Rebalancing benefit expectations with financial resources. Funding long-term pension liabilities is a challenge that providers and policymakers need to address.
• Need for local financial markets to evolve along with growth in pension assets. Pension and retirement assets are stretching the capability and capacity of many markets, according to the report.
• Expanded regulation, supervision, governance, and transparency. The growth of the pension and retirement industry market – and the risks it poses to social and economic stability – merits more attention, the report says.
• Increasing focus on operational excellence. The pension industry has been forced to make overdue improvements in delivery and service, lower costs, and enhance risk management because of lackluster capital market returns, according to the report.
• A recalibration of investment functions and investment management. Systems and providers have been pushed by the financial crisis to re-evaluate their investment strategies, asset allocation policy, and operating models, the report says.
• Finding simplicity in complex systems. Lack of engagement by those who ultimately benefit from plans is an obstacle that must be overcome by greater understanding and informed decision-making from pension plan members.
• Need to connect and become customer-centric. Focusing on customer preferences can improve engagement and understanding, according to the report.

“Discipline, reasoning, and hard decisions will be necessary to make the retirement world better, fairer, and sustainable over the long term to address the financial impact of a global demographic transformation,” McKenzie said.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine editorial director.