The much-publicised pensions time bomb will hit banks hard unless they put in the ground work now. Chris Skinner advises that they consider how their future customers will behave before the rug is pulled out from under their feet.
Developed economies are facing huge challenges due to changing demographics with people living longer and having fewer children. The effect is a disproportionate number of retirement groups and fewer people to repopulate the workforce.
So what effect is this going to have on banking and the world’s capital markets? The core business of many banks is dependent upon gaining new business and cross-selling pension and investment products, mortgages, loans and credit cards. In a world where the majority of consumers are retired, this dependency will be starved. Grey consumers are savers rather than borrowers, and prefer low-risk products with guaranteed income.
In the future, customers will not be buying mortgages and loans, but seeking equity release and liquidation of assets. Pensions and funds will be switched to secure investing in bonds. The current “live for today” society of highly geared borrowers will switch to a less volatile world of low-risk transactions. This will starve new investment into equities and pull the rug from under the stable range of financial products we see today – specifically, the credit, loan and mortgage suite of products.
Many bankers feel this well-publicised trend will be a slow shift, to which banks will adapt. However, this view is already beginning to show cracks. Governments are expressing concern over unfunded pension liabilities. Workers are also worried. In May this year, workers shut down Paris in protest over French government plans for pension reforms and if you enter “pension strike” into an internet search engine, you get back similar headlines from the UK, Austria, Germany, Brazil.
The bottom-line is that the ageing society will have a profound effect upon all of us, and banking will be hit heavily. As workers lose more of their wages to fund pension liabilities, they will not be able to afford to place their money into other investment vehicles. Added to which there will be fewer workers anyway.
The result is a world where banks will be unable to feed their hunger for new business and cross-selling. The banks with foresight to survive will be those that innovate services to the grey consumer. These banks will build a comprehensive product for retirement, similar to the all-in-one account being sold today. The next generation account will be one that integrates the pension with guaranteed income bonds, equity release and healthcare.
So far, I have not seen many financial institutions responding to this issue in that manner. The thought is there but the product remains the same.
Chris Skinner is founder of Shaping Tomorrow and chief executive of Balatro Ltd. Find out more at www.ShapingTomorrow.com or e-mail Chris at chris.skinner@shapingtomorrow.com
