Asset management in the low-growth world
Money in the bank isn’t what it used to be. Although central banks had begun to raise interest rates from the near-zero levels adopted after the global financial crisis, they have been forced to slash them again in response to trade tensions, geopolitics and – of course – Covid-19.
Low interest rates are one thing. But, as the economic effects of the Covid crisis mount, the Bank of England has been sounding out the prospect of negative rates – an experiment already adopted by the European Central Bank and countries such as Denmark, Switzerland and Japan. So the prospect of paying banks to keep hold of your money is now very real.
That’s terrible news for savers. And it should be a wake-up call to those who collectively have hundreds of billions of pounds sitting in the bank rather than working for them in investments.
Most Gulf central banks tend to follow the US Fed because their currencies are pegged to the US dollar. In March, the Saudi Arabia Monetary Authority (SAMA), the Central Bank of the UAE (CBUAE), the Central Bank of Bahrain (CBB) and the Central Bank of Kuwait (CBK), slashed key interest rates following an emergency move taken by the US Federal Reserve in response to the impact of the coronavirus outbreak.
With debt mounting and the Covid-19 pandemic casting a long shadow, investment returns are also likely to be historically low in the years ahead. Those low returns mean that many people’s expectations of retirement benefits are cruelly misaligned with reality. Most of us simply aren’t investing enough in pensions or other long-term savings vehicles.
While expatriates in the GCC have their retirement needs serviced by the end of service gratuity, citizens have a defined benefit scheme, which pays out a percentage of an individual’s final salary once they reach retirement age.
And while rates and returns are getting lower, most of us are living longer too, meaning the average length of retirement is growing rapidly and therefore becoming more costly. The GCC’s young population means this is not currently an issue, but it is not sustainable longer term as the population as a whole will grow older.
With birth rates falling around the world, a dramatic demographic shift is underway. Today, there are around 600 million people on the planet who are over 65. By 2050, that figure is expected to rise to 2.1 billion. That means there will be only four workers per retiree in that year, compared with eight in 2020.
As a result of all this, the global gap between pensions expectations and actual provision stands at around $70 trillion – and growing. The World Economic Forum’s projections show this gap growing by 5% each year to around $400 trillion by 2050.
So, we all have a responsibility to face up to the future. The aim of this is not necessarily retirement – many of us will find satisfaction in working throughout our lives – but ‘salary independence’: the ability to live comfortably without the need of support from working income.
We can think of our lives as having 250 months of growing, 500 months of working and another 250 months thereafter. The aim for all of us should be to use the 500 months of work so that we are no longer dependent on jobs for our income thereafter – whether we choose to retire or not.
That’s where asset managers come in. The looming pensions crisis demands a three-fold response from the industry. First, asset-manager firms have a crucial role to play in educating the public. Financial literacy may be low, but the asset-management industry has the experience and expertise to help out.
Second, asset managers need to acknowledge the burden that longer lives are putting on the planet. That means embedding sustainability in investment practices – so that returns are future-proofed even as the planet is protected.
Finally, the industry must innovate in response to low expected returns. Diversification is vital, multi-asset solutions are crucial, and costs must be kept low – so that a higher proportion of investors’ money is actually working for their futures rather than risking the real-terms erosion that’s currently on offer from the banks.