The retirement time bomb: retirees risk outliving their nest egg by a decade or more

Saving gaps around the world vary from 10 years in Canada and Australia to 15 to 20 years in Japan

A hopeless retirement concept jar with coins and dried plant
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Retirement funds heavily invested in equities at a risky time

Pension funds in growing economies in Asia, Latin America and the Middle East have a sharply higher percentage of assets parked in stocks, just at a time when trade tensions threaten to derail markets.

Retirement money managers in 14 geographies now allocate 40 per cent of their assets to equities, an 8 percentage-point climb over the past five years, according to a Mercer survey released last week that canvassed government, corporate and mandatory pension funds with almost $5 trillion in assets under management. That compares with about 25 per cent for pension funds in Europe.

The escalating trade spat between the US and China has heightened fears that stocks are ripe for a downturn. With tensions mounting and outcomes driven more by politics than economics, the S&P 500 Index will be on course for a “full-scale bear market” without Federal Reserve interest-rate cuts, Citigroup’s global macro strategy team said earlier this week.

The increased allocation to equities by growth-market pension funds has come at the expense of fixed-income investments, which declined 11 percentage points over the five years, according to the survey.

Hong Kong funds have the highest exposure to equities at 66 per cent, although that’s been relatively stable over the period. Japan’s equity allocation jumped 13 percentage points while South Korea’s increased 8 percentage points.

The money managers are also directing a higher portion of their funds to assets outside of their home countries. On average, foreign stocks now account for 49 per cent of respondents’ equity investments, 4 percentage points higher than five years ago, while foreign fixed-income exposure climbed 7 percentage points to 23 per cent. Funds in Japan, South Korea, Malaysia and Taiwan are among those seeking greater diversification in stocks and fixed income.

• Bloomberg

One of the toughest problems retirees face is making sure their money lasts as long as they do.

From the US to Europe, Australia and Japan, retirement account balances are not increasing fast enough to cover rising life expectancy, the World Economic Forum warns in a report published last week. The result could be workers outliving their savings by as much as a decade or more.

“The size of the gap is is such that it requires action” from policymakers, employers and individuals, said report co-author Han Yik, head of institutional investors at the WEF. Unless more is done, older people will either need to get by on less or postpone retirement, he said. “You either spend less or you make more.”

In the US, the WEF calculates that 65-year-olds have enough savings to cover just 9.7 years of retirement income. That leaves the average American man with a gap of 8.3 years. Women, who live longer, face a 10.9-year gap.

The forum assumed retirees would need enough income to cover 70 per cent of their pre-retirement pay, and did not include Social Security or other government welfare payments in the total.

The retirement savings gap is about 10 years for men in the UK, Australia, Canada, and the Netherlands, according to the report. Longer-living women in those countries face an extra two to three years of financial uncertainty.

Most of the world’s retirees are doing well compared with those in Japan, where the retirement savings gap is 15 years for men and almost 20 years for women.

While Japanese workers save no less than others, they tend to invest in very safe assets that produce few gains over time, Mr Yik said. As a result, average savings in Japan are only enough to cover 4.5 years of retirement.

Meanwhile, life expectancy at birth for Japanese women is 87.1 years – the highest in the world, according to the Organisation for Economic Cooperation and Development – and 81 years for men.

Across the world, governments and employers have pushed more responsibility for retirement onto individuals, by shifting from traditional pensions to defined contribution plans.

Here in the UAE, for example, the government is pressing ahead with plans to create a savings retirement fund for non-Emirati employees that will complement the existing end-of-service gratuity system.

The Federal Authority for Government Human Resources (FAHR) said in May that setting up investment funds for the retirement benefits of UAE expats "will help employees and officials to properly plan for the future".

The proposed fund will collect end-of-service contributions from employers or institutions that will then be invested to generate financial returns. When an employee later retires or resigns, they will receive the benefit with the investment returns on top, "making the employee a partner in investment decisions".

FAHR said the savings system would be optional for government or private institutions; they can either choose to participate in the new retirement fund or stick with the existing gratuity scheme.

Under the current system, employees leaving a UAE organisation are entitled to a gratuity payment after completing at least one year of service with the amount calculated on their basic salary and length of service.

Meanwhile, the Dubai International Financial Centre, the biggest on-shore financial hub in the Middle East, has committed to replacing expat workers' end-of-service gratuity with a funded, trust-based savings scheme on January 1, 2020 that will offer employees a choice of up to 12 passive investment funds.

“All the risks that governments and employers used to have, we’ve shifted that onto workers,” Mr Yik said.

The size of the world’s collective retirement savings gap could exceed $400 trillion by 2050, up from $70tn in 2015, according to the WEF report. The US’s savings gap will be the largest at $137tn, followed by China at $119tn and India at $85tn.

Among the forum’s recommendations are making sure more workers are covered by retirement plans on the job. Employers should be doing more to improve investment options while pushing workers to save a sufficient amount of their income, the report added.

Fewer than half of the 1,900 retirement plans served by Vanguard Group automatically enroll workers, according to the firm's How America Saves 2019 report released Tuesday. That number has risen quickly, however, doubling to 48 per cent last year from 24 per cent in 2009.

Retirement funds heavily invested in equities at a risky time

Pension funds in growing economies in Asia, Latin America and the Middle East have a sharply higher percentage of assets parked in stocks, just at a time when trade tensions threaten to derail markets.

Retirement money managers in 14 geographies now allocate 40 per cent of their assets to equities, an 8 percentage-point climb over the past five years, according to a Mercer survey released last week that canvassed government, corporate and mandatory pension funds with almost $5 trillion in assets under management. That compares with about 25 per cent for pension funds in Europe.

The escalating trade spat between the US and China has heightened fears that stocks are ripe for a downturn. With tensions mounting and outcomes driven more by politics than economics, the S&P 500 Index will be on course for a “full-scale bear market” without Federal Reserve interest-rate cuts, Citigroup’s global macro strategy team said earlier this week.

The increased allocation to equities by growth-market pension funds has come at the expense of fixed-income investments, which declined 11 percentage points over the five years, according to the survey.

Hong Kong funds have the highest exposure to equities at 66 per cent, although that’s been relatively stable over the period. Japan’s equity allocation jumped 13 percentage points while South Korea’s increased 8 percentage points.

The money managers are also directing a higher portion of their funds to assets outside of their home countries. On average, foreign stocks now account for 49 per cent of respondents’ equity investments, 4 percentage points higher than five years ago, while foreign fixed-income exposure climbed 7 percentage points to 23 per cent. Funds in Japan, South Korea, Malaysia and Taiwan are among those seeking greater diversification in stocks and fixed income.

• Bloomberg

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