Globally, the number of people over the age of 60 will more than double to 2 billion by 2050, according to the UN. People are tending to live longer across most parts of the world, something that by most measures is a cause for celebration. But plummeting birth rates in both developed and emerging countries are bringing with them a problem. The UN expects that, for the first time ever in human history, people over 65 will outnumber children under the age of five by 2047. Sales of adult nappies already surpass those of baby nappies in Japan, according to estimates by research firm Euromonitor International.
In economic terms, in just a few decades, the world’s youth will struggle to support the retirement of older generations – longevity-related costs are estimated to be 50% of 2010 global gross domestic product by 2050, according to the International Monetary Fund. In financial terms, there will be an estimated $30,000bn inter-generational transfer of wealth in the US alone in the next 30 to 40 years, forcing financial institutions and markets to drastically adapt to the new demographic norm.
Wealth generation
The gravity of the issue is explained by the nature of the previous demographic shift. So-called baby boomers – who were born between the end of the Second World War and the mid-1960s, particularly in the US and Europe – are now moving into retirement. These babies have grown into adults that have accumulated significantly larger assets than the previous generation. The $30,000bn expected to change hands by 2050, as estimated by research firm Cerulli Associates and Bank of America Merrill Lynch, as the baby boomers pass financial and non-financial assets to their children and grandchildren, is effectively about three times what they would have originally inherited.
Challenges for wealth managers are significant. Younger generations inheriting assets are likely to manage them in a radically different way from how baby boomers did, and may decide to replace their financial advisors for self-directed investment platforms. In June 2014, Bank of America Merrill Lynch produced a thorough review of longevity risk. Beijia Ma, one of the two authors of the report, says: “You’re going to see roughly 10% of total wealth in the US changing hands every five years between 2031 and 2045; that’s very significant. If you’re a bank, you risk losing those assets unless you’re willing to adapt.”
Even before assets are passed on to the next generation, baby boomers entering new phases of their lives may sell some of their investments. The fact there are fewer younger people – and savers – at home means they will have to look to the emerging markets for buyers. Demand for those assets is not guaranteed.
Unprecedented sales
Karen Ward, global economist at HSBC, is concerned that markets will not be able to absorb such an unprecedented sales of assets. “When baby boomers were in their working years, they were accumulating assets and savings. As they start to decumulate, you go from lots of demand for assets to supply of assets,” she says. “They all bought their family home at the same time and they now all try to downsize at the same time. In simple terms, our baby boomers will be fine as long as they can sell [their investments] to the Chinese or Indian savers, or to any rising middle classes moving into their peak saving years in the emerging world. That’s a big ‘if’.”
Ms Ward notes that the emerging world has, over the past 20 years, bought Western assets largely because of a lack of options at home, where financial systems tend to be underdeveloped and property rights shaky. This, however, is changing as governments in developing countries grow their local markets.
Furthermore, emerging economies are ageing too. By 2050, more than 20% of China’s population will be over 65 years of age, as opposed to fewer than 10% now, which means that the pool of savers will be smaller. Most of eastern Europe is also dealing with ageing because of either longer life spans or lower fertility rates. The issue of getting old before getting rich has widespread ramifications, says Emily Sinnott, senior economist at the World Bank, who is currently writing a report on the subject.
Italian target
Ageing is indeed a global issue, with estimates that see many emerging markets changing their demographic chart from pyramid-shaped figures to ovals, indicating that older age groups, placed at the top half of the chart, will soon be more populous than younger ones. But the starker imbalances remain in developed countries. Japan has the oldest population in the world: more than 22% of Japanese people are now over 65. Europe hosts the world’s second and third oldest countries – Germany and Italy – where silver citizens represent more than 20% of total in each.
Seniors are the typical target of Italy’s wealth managers. “If there’s an area of banking that is specialised in older customers, that’s [the Italian] private banking sector,” says Dario Prunotto, chief executive of UniCredit’s wealth management in the country, who adds that private banking clients are typically 60 years of age or older. “It’s rare to find cases [of young wealthy individuals]; generally people get an inheritance very late. Even with family companies, new generations get control of the firm late in life; it’s a characteristic of this country,” he says.
Products that facilitate asset decumulation have become more popular, pushed also by the need to supplement income because of deteriorated economic conditions. In 2013, UniCredit launched a product that allowed holders to cash a fixed coupon every few months independently of the performance of the principal, which proved very popular.
A change in risk appetite as investors approach retirement age also means that a lot of capital will likely be transferred to ‘safer’ products. Ms Ma says: “Normally, when people move from working age to retirement, they have a tendency to become more risk averse and move towards yielding assets such as fixed income. You see that proportion of the market becoming more prominent. You can also see a higher demand for derivative products to protect portfolios or for derivative products and structured products that mimic higher yielding assets, such as equity-linked notes. If you’re a bank, that’s one area that you should be focusing on.”
Lack of awareness
These types of products could have great benefits for older clients, as well as for banks’ bottom lines. Awareness of the significance of the phenomenon, however, varies. In Germany, for example, Deutsche Bank does not seem inclined to look at age segmentation. Head of private clients in the country, Michael Ost, says the bank tends to focus on individuals rather than on grouping demographic needs. Other banks contacted by The Banker for this article felt they “did not have much to say about older customers”.
It seems that conversations on ageing need to be had if banks are not to miss the larger inter-generational transfer of wealth ever recorded, and to adapt to the needs of older clients.
“The average household headed by someone over 50 in the US is worth roughly $740,000, but if you look at the numbers, only four out of 10 retirees use some kind of financial advisor,” says Ms Ma. The situation is similar in the UK, she adds, where the average household headed by a 50-year-old or older is worth about £540,000 ($845,000), a figure that jumps to more than £720,000 for the 60 to 64 age group, according to a study by the University of Bristol’s Personal Finance Research Centre and think tank International Longevity Centre UK (ILC).
“People are getting very little help in terms of dealing with their finances, which is something that we really think [banks] need to change,” says Ms Ma.
Silver surfers
Of course, ageing populations also have an impact on retail banks. If online and mobile services are now the bread and butter of banking for young generations, they are often viewed with suspicion by older customers. A number of initiatives have popped up across Europe to solve this. In Germany, HypoVereinsbank’s in-branch ‘concierge’ service sees staff help customers to use the branch’s online facilities or to video-call specialised advisors located elsewhere in the bank.
In the UK, Barclays' Digital Eagles promotes online channels and sensitises staff to the physical challenges of old age by getting them to try a suit that restricts movement. Staff are trained on how to communicate more effectively with older customers, focusing on the security of the digital networks. The speed of service is not mentioned as this is not of interest to older customers, the bank has found.
Alex Letts, chief executive of Ffrees, a digital-only current account provider, admits that in theory, the low-cost services offered by his firm to the young should also appeal to the old. Indeed, the company’s self-declared biggest fan is an 84-year-old, says Mr Letts. But, in practice, seniors tend to stick to what they know, which rarely includes online banking and invariably excludes mobile apps.
“Ffrees is very much positioning itself as being a smartphone-type app,” says Mr Letts. “Older generations are computer users but may not be so smartphone orientated. If you look at national statistics on smartphone usage, it falls off when you get into the over-60 age groups.”
Tough choices
Ageing populations are, foremost, economic and political challenges as they threaten national output levels and require structural change. This impacts upon the financial sector too – there will not be as much wealth to manage or to channel through banking networks if economies slow down and the reforms needed to deal with ageing populations are delayed.
As countries grow older, electorates’ focus will more likely be on pension policies than on education and training for the young. Governments may be tempted by easier, short-term solutions such as keeping interest rates low in an effort to increase output, rather than spending to improve worker productivity. “You get stuck in bad politics, low interest rates and a very fragile, uncertain economic environment," says HSBC's Ms Ward. "You can trace a lot of those roots back to ageing populations and political choices made by ageing populations.” The world has already had a preview of this scenario, she adds.
“Japan teaches us some pretty disastrous lessons about [this]. You can quickly get into a vicious cycle where the economy is slowing because the population is ageing and you constantly need low interest rates to keep the economy moving. It ultimately doesn’t work because what you really need is to increase the productivity of the younger generations and that has nothing to do with monetary policy.”
Retirement age
Professor Axel Boersch-Supan, director of the Munich Centre for the Economics of Ageing, notes that while the negative effects of population ageing on growth in Europe can in principle be compensated by reforms, these may be offset by public resistance. This is exemplified by Germany’s recent decision to lower the retirement age to 63 for some citizens in response to public outcry, overturning measures planned by the previous government coalition to increase the retirement age from 65 to 67 by 2029. “Population ageing in Europe is less an economic problem than a problem of populist policies,” says Mr Boersch-Supan.
According to the UN, people in the most developed parts of the world will live to an average age of 83 by 2050, up from 65 in the 1950s. Working longer will be a natural consequence, but the speed of change needs to be faster if governments are to square their finances. One positive example comes from Sweden, according to ILC, which has used the Nordic country as a benchmark for some of its research.
In ILC’s report Rising from the Ashes: the Role of Older Workers in Driving Eurozone Recovery, published in November 2014, authors Ben Franklin, Helen Creighton and Brian Beach note that Sweden has the highest labour force participation rates for older workers of anywhere in the EU: 73.5% of people aged between 50 and 64 in Sweden are employed, compared with a regional average of just 50.2%. It appears that Sweden’s success was based on “its ability to encourage life-long learning, whereby adult learning and on-the-job training courses are encouraged which can help to keep older workers productive”, say the authors.
Furthermore, Jessica Lindbergh of the Stockholm Business School stresses the importance of financial education to help the age issue. Ms Lindbergh has reported on the phenomenon in a paper she co-wrote in 2007, Population Aging: Opportunities and Challenges for Retail Banking. “Financial literacy can drive the development of well-suited financial solutions for an increasingly ageing population,” she told The Banker.
This is an area where financial institutions can play a significant role. “At a political level, we do have a problem if people don’t have enough assets to take care of themselves. [As for banks], if they want to be part of a stable financial system [they ought to get interested in] increasing long-term saving alternatives for the elderly,” says Ms Lindbergh.
The world is ageing and the challenges this brings are overwhelming – but not unsolvable. But bankers, investors and politicians may need to make some tough choices regarding how to solve them and avoid falling into the trap that has beset Japan.
