29 October 2018
Editor in Chief Richard Edgar talks to Fidelity's Head of Solutions Design, David Buckle, Global Head of Fidelity's Work Place Investing Business, Julian Webb, and Aneta Wynmiko, Portfolio Manager.
Richard Edgar: The pattern of populations is changing. In many places, especially the developed world, people are having fewer children, but they're living longer. Emerging economies have quite another trend though, a boom in the under thirties, sometimes too many for their countries to find work for. You've probably heard all this before. It's not a surprise, but what do these huge shifts mean for societies and for investors? What challenges are there for governments, businesses, and individuals as we work out how to support or employ the old, the young and indeed ourselves? Well, with me in the studio to discuss demographics are three Fidelity experts. First, David Buckle, Head of Investment Solutions Design here at Fidelity. Now, David, part of your job is to think in novel ways about how people can fund their retirement. What's the most significant shift that you've seen in the way the industry is approaching this?
David Buckle: By far the most significant is the notion of needing to invest in the retirement phase as opposed to cashing out at age 65.
Richard Edgar: And in other words that it's not a done deal, you're going to carry on trying to coup some returns for the many years that many people are retired nowadays.
David Buckle: In a pension sense we all live too long and therefore the money doesn't last. So it needs to grow at least through the first phase of retirement to make sure it lasts for the rest of your lifetime.
Richard Edgar: Jolly good. Well with me also is a Portfolio Manager Aneta Wynimko who runs Fidelity's demographic and consumer funds. Now, Aneta, I imagine that both the areas that you cover complement each other: the impact of changing populations and their behaviours. What's the most interesting trend that touches both of those?
Aneta Wynimko: Well, the most interesting and fascinating trend is how people today in their fifties think that they are still young and how they spend their money. So we all talk about ageing and we all talk about the population declining, the spending power declining, but I think psychologically people are younger in their minds.
Richard Edgar: They're younger older in a sense. Jolly good. Okay. And completing our line-up today is Julian Webb, Global Head of Fidelity's Workplace Investing business. Now, Julian, you're responsible for the pension schemes have some 1 million end investors all over the world. How are the needs of those members evolving?
Julian Webb: They are certainly changing in light of what we're seeing in terms of global demographic changes. I think the most fundamental thing is that people now have their own responsibility for their retirements. I think the shift has clearly moved from state to either the private individual or indeed their employers. So I think people are now recognising they need more support and help to save for an adequate retirement income.
Richard Edgar: So a lot of people are having to get their heads around this, it's not just the people around this table. Well Julian, David and Aneta, welcome to you all.
David, could you set the scene for us, please? What challenges do the demographics pose in places which are getting older?
David Buckle: Yes. There's two big ones. The first one is that when you retire, you have to fund until the point of your death. The longer you live, the more the money's got to last. That's the clear driver in demographics and because that phase is actually quite short and in the sense of a lifetime, just a few years extra longevity actually mean quite a big impact to the work your savings have to do. The second thing is there's a question mark about how much the state can provide with the demographic shift of how many young people are supporting how many old people. It's not clear how much pension provision can come from the state in the future.
Richard Edgar: So how do the economics underpin all of this, affect those points that you're making?
David Buckle: They're not helpful actually. Economic growth is how many people are working and how much is each one producing. The population growth of the world is slowing so there's less people, or less growth in people, so we need them to be more productive. And with an ageing population actually typically that corresponds to a lower productivity.
Richard Edgar: In fact, poor productivity is a symptom that we're seeing in many economies, particularly these economies that are growing older.
David Buckle: Indeed so. Yes.
Richard Edgar: Okay. Well, Aneta, all of this sounds very worrying and yet the demographic fund that you co-run looks for the opportunities that these shifts throw up. So you're looking for the good news.
Aneta Wynimko: Yes, always.
Richard Edgar: Radiate some optimism in this discussion, please.
Aneta Wynimko: Okay. So the demographic fund is a long-only fund so obviously we are looking for the good news. And for us the most exciting news is the fact that older people will have to spend money on basically trying to stay younger and healthier longer. And this is a very clear trend; the medicine technology - there are many companies that are coming up with solutions. The baby boomers, retiring baby boomers, have very high spending power. And as I said before, they think they are young, they want to enjoy their life, and their spending patterns are shifting from things which are may be necessary to things which are maybe much more discretionary that allow them to enjoy life and stay healthy and fit.
Richard Edgar: So what are the types of things that you're looking for? Where do you specifically start to pick up on those changing trends?
Aneta Wynimko: Something which is maybe very superficial, but skincare companies are a big beneficiary of ageing because as we know - or as we hope - skincare products help us looking younger and I've seen studies that show a lady in their fifties buys five times more products than lady who is in her twenties. So obviously companies that sell skin care products are quite a clear beneficiary.
Richard Edgar: That's a really good statistic. Have you go the same for men in their fifties and how much that compares with men in their twenties?
Aneta Wynimko: We are now talking about the metrosexual men who care about what they look like a lot, actually. And in Asia we are seeing increasing demand from men for skincare and this is driven partially also by social media where you want to project your image and look young. So we are seeing quite a strong trend of growth, but it's not the baby boomers. I think it will be the generation of millennials. As they get older they will spend more and more on skincare.
Richard Edgar: Interesting. Now, Julian, I'm dying to ask you about your skincare regime and your social media profile.
Julian Webb: We can certainly talk about that.
Richard Edgar: You look fabulous. For those of you who are watching in black and white, Julian looks great.
But we've got people who are living longer, they're feeling younger, as Aneta was explaining they want to look younger. They're also staying longer in work. How are the companies having to adapt to an ageing workforce?
Julian Webb: I think this adds potentially a lot of value and benefit to employers, particularly as the more senior in age their workforces, the more experience by definition they can bring to that organisation. Hiring young talent can be quite challenging into an organisation, so retaining your senior, more experienced talent, I think is also important. So what we're seeing are a lot of large employers in particular having a much more flexible approach in terms of when people would expect to be retiring, they are designing their benefits structures in a way that accommodates an older workforce as well. So I think employers absolutely understand this. However, to David's earlier point, they're probably comes a point in time where the older generation become less productive. So equally employers don't want an ageing workforce that is becoming less productive. So they want to make sure that they are financially secure so they can actually retire at an appropriate age and not just to have to continue working for income purposes.
Richard Edgar: I suppose there's an element of education as well. Not just of the companies but of the employees as well.
Julian Webb: Very much so. Very much so. And one of the big, big trends that we're seeing, particularly in the US, is this concept of financial wellness. So I think historically employers have really focused on retirement savings and making sure that their workforces are adequately catered for - for retirement income. But I think increasingly, whether it's for the older generation or indeed the younger generation, this concept of financial wellbeing - financial wellness beyond retirement - in other words, beyond retirement savings. So whether that's on short term cash flow, debt management, your family's financial wellness as well. So we're seeing employers setting up these programmes to inform and engage with their workforce on this broader topic of financial wellness.
Richard Edgar: David?
David Buckle: Yes, and it extends into retraining as well. It's unlikely - given that this is all at the same time as a technological revolution - it's unlikely that people will have a single career for this force lifespan. So the likelihood of needing to switch gears mid-career is becoming greater and these milestones that are now available for how close are you to retirement point, you will probably need to check those milestones at the same time of potentially shifting gear in your career.
Richard Edgar: How do we pay as countries, as economies? How do we think about paying for people in their retirement? Because that has to change as well.
David Buckle: Yes. There's typically three pillars which people lean on. The first is the state, the second is the company, the third is the individual.
Richard Edgar: And the state's stepping back in many places.
David Buckle: Yes. You just look at the sheer numbers. The number of people retiring, the number of money on the balance sheet and it's likely that that's going to have to shift. Certainly as an individual saver planning for retirement, I don't want to rely on that government piece as a significant part of my retirement.
Julian Webb: I would just quickly add: I think the state clearly plays a really, really important role in retirement provision, but particularly for the less well off. And I think what we're seeing is this shift from governments focused on good quality, adequate state provision for the lower paid, and then for medium to higher paid individuals, putting more emphasis on them to save for their own retirement and become less reliant on the state. So I think that's quite an important shift. But I think overall this is a fact that actually countries do want to backtrack a little bit on this provision - that's either by reducing the absolute amount of retirement income that the state provides or often, and increasingly, increasing the age when you become eligible to take those benefits.
Richard Edgar: So transfer of responsibility to individuals, but at the same time there's a transfer of risk from the companies that were providing defined benefit schemes to defined contributions. So there is an awful lot for people to get their heads around. Are they succeeding in this preparation?
Julian Webb: I think it's just started, in reality. I mean, this move from defined benefit guaranteed retirement income to defined contribution has really been evolving over the last 20 years. But I think the reality is in a lot of the countries, in particular the sort of more mature countries, that actually the concept of defined benefit is more or less disappeared. A lot of people say, well that's a negative thing, but actually it can be a positive thing. So if we bring it back to the demographic changes and the flexibility that the workforce is looking for, actually having defined contribution can be a significant advantage. So for example, in retirement, we know that when you just retire you've hopefully got your health, you need to enjoy your free time, you need more money so you need a higher income at that point in time. And then as you become older, actually you're less mobile and probably have less opportunity to enjoy your free time and you need less money. And then the third and final sort of cycle actually as you go into later life you perhaps have less good health and you need healthcare.
Richard Edgar: So a spike in health healthcare spending.
Julian Webb: That's right, and therefore you need more money at the end. Whereas the defined benefit plan by definition gives you a pretty static level of income throughout your retirement.
Richard Edgar: Okay. And these are the patterns Aneta that you were talking about of how you're trying to a spot where the opportunities are.
Aneta Wynimko: Yes, because we see obviously a lot of the developed countries but also some of the emerging market countries ageing quite fast, but this ageing, at this point in time, is mostly the baby boomers moving to a kind of bit more advanced age - let's not call that old age - and it's a time where they still have a lot of savings, spending power and willingness to spend and enjoy their life. And maybe they are not thinking so far ahead. But also this is the population that has a lot of wealth in their houses. They have experienced the global housing boom and they have quite a lot of money saved in the main asset that they possess. So obviously the question planning forward for them is, when they get into the eighties, will they be able to release the equity from the house and use that to pay for their retirement and for the care that they will need? So I think people in their late sixties are not yet so concerned about the need to actually have savings and maybe that's not very responsible on their part because time flies quite fast.
Richard Edgar: Although that generation, that cohort, have got assets and this is quite different to people who are following them. And they are also the people who tend to vote.
And I just want to bring in governments here, David, because part of the problem in sorting out some of the fundamental issues around here is that the electoral cycle is too fast for anybody really to grasp the nettle and make some of the painful changes that perhaps need to be done.
David Buckle: Yes, that's correct. Yes. The cycle of retirement is way longer than the cycle of an election. And of course as we get an older and older society, they represent a bigger and bigger group that the governments are trying to pander to win votes. But I think the overarching problem here is that pensions, state pensions, actually haven't been around for that long. And when they started you received them when you were 65 and the life expectancy was 49. So it was really designed for people who unexpectedly lived on. So the notion of, you retire with still 15, 20 years of life left and you do cruises and golfing holidays and all of those things, that was never really planned for from the government's perspective.
Richard Edgar: So what is the answer? That we realise that things aren't as good anymore and people like you and me have got to work until their mid-seventies, mid-eighties, or beyond?
David Buckle: Likely we've got to work longer. But more important, if you're able to save, start saving. That’s the most important message.
Julian Webb: Yes. And I think there are particular countries and governments that are a bit more progressive on this.
Richard Edgar: So where is doing it well?
Julian Webb: Well, I think the UK actually is doing it pretty well because when you talk to other governments and policy makers often they are referring back to the UK as a potential model to follow. So for example, in the UK we still have very, very generous levels of contributions that you can make into a pension plan with full tax relief. I mean there are exceptions if you are paid lots of money then it gets scaled back. For the vast majority of people, these are still, on a relative global comparison basis, very high levels of contributions with tax relief. I think I'd also say that the government by introducing auto enrolment has been seen to be very progressive because this has now brought a lot more people into the workplace retirement environment, which they wouldn't have been in prior to that. And then finally, I would just say that these days when you retire in the UK, you have complete flexibility as to how you wish to receive your income. So I think that's had political consensus in the UK, all of the political parties are behind it. It is a very long term strategy. By comparison we see other countries who limit the tax relief or limit contributions because of the cost to the state here and now, rather than taking a longer term view.
Richard Edgar: Aneta, when you're thinking about where to invest, do you take that into account? Do you start looking at where you think people are going to have money to spend in retirement? Another example might be Australia where they've got a well-funded a system there. Does that sort of decision play into your thinking?
Aneta Wynimko: Yes, I do think about it, but I must say it's very hard because at the end of the day it's about how people make their choices and most of consumption globally is actually from wealthy people. So most of the opportunities to invest in consumer facing businesses is catering to wealthy people. As we all know, they control most of the stock equities, they control most of the housing assets. And this is why I think the outlook for their consumption and also for the consumption from the world that they will be passing onto their children is quite healthy. The issue is definitely when it comes to people that have not saved, that are not planning for the future - and this is the majority of the population - and that will have implications for companies that sell products, that cater to that level of population. So I do think about it, but an aggregated basis, it doesn't look as bad as it might seem on average, kind of per capita basis.
Richard Edgar: Once again, a nice positive side to this discussion.
Aneta Wynimko: I clearly come from equity.
Richard Edgar: Give me an example of some of the countries then that are appealing to you at this broad level.
Aneta Wynimko: So in the demographic fund, we are looking at the dependency ratio and that helps us to identify countries where for the long term the opportunity for consumption is very good because the ratio of those who don't work to those who are in the working force is good and stable over time. So there's a number of countries. Vietnam is a good example. India is a very good example. Indonesia. But most of the countries in the developed world - I mean Japan is leading the pack - but the ageing of western European countries is quite fast and obviously the same applies to China. The US actually has quite good demographics. It's being muddled a bit by the anti-immigration policy now, but this country still has quite descent demographics and as a result quite a good outlook for consumption.
Richard Edgar: But some of the countries that you highlighted there, they're basically emerging markets - you picked on some in in Asia. They are a different background, a different type of place to invest with different challenges as well. So how do you factor all of those things in when you're thinking about many years in advance?
Aneta Wynimko: You can look, for example, at a place like Vietnam which has a very young population. A country that today benefits from the fact that a lot of the factories are being moved from China - where labour is becoming too expensive, partially as a result of scarcity of labour in China - to Vietnam. And you can see the creation of jobs at the low end, moving toward more sophisticated, higher value end jobs. And as a result, what we are seeing are companies like Zara going there and opening shops and having a big success. So we've seen that story played out in many countries before and we can see that happening in the next decade.
Richard Edgar: Exactly. So a growing middle class, more spending, and what have you. We've seen it all before. David, the question I want to ask you is the countries that have the demographic dividend at the moment, so they've got a bulge of people in the lower age brackets, are they simply going to be places with a problem in years to come in the same way that Japan is at the forefront now and developed markets like, say Germany - choosing one that's about to have a problem in Europe.
David Buckle: Not necessarily. My personal experience of trying to design products for these differing countries is it's more to do with the cultural expectation of how retirement is managed. So for example, in the western world, it's very common to have some kind of life annuity product which pays you an income through retirement and then when you die the product's over. Whereas in parts of Asia, where I speak to, the response from consumers there is to say, no, we don't need that much money in retirement because there's an expectation that your family takes care of you, but it wouldn't be acceptable to have that nest egg disappear on death. The idea being that that's then transferred to those that have looked after you as part of your estate. So managing the cultural issues tends to be a bigger problem than the demographic that you've referred to for emerging economies versus developed.
Richard Edgar: So what are the products that you then have thought through for those markets?
David Buckle: For those ones I've just described there, something with a lump sum balloon payment at the end, for example, and potentially lower income through retirement to compensate would be more attractive to some of the Asian countries.
Richard Edgar: Julian, you think about this from a global point of view as well, and on the business side. How are employers adapting? Particularly ones that may be operating in lots of countries?
Julian Webb: Yes, we are very much seeing these global, multinational companies wanting to increasingly have a sort of consistent common approach to retirement provision and the broader sort of financial provision for their workforce. So to David's point, it is very different country by country in terms of state provision, but actually these employers want more consistency so they want more fairness, more equality across all of their workforce. I would also add that particularly US-based organisations are actually now putting more workforce and increasing their workforce profile outside of the US. So increasingly they are coming to Fidelity and asking us for help with solutions in these emerging markets where they are now actually employing quite large volume of employees.
Richard Edgar: Is it enough to start bringing about change in those markets, perhaps accelerating some of the developments that are already happening in the developed economies?
Julian Webb: I don't think it's going to be a sudden change, but what I do know is that governments and states pay close attention to what these multinationals are doing. Often they are incentivising these companies to set up businesses in these locations and they watch very closely how they employ their staff and what benefits they provide. So I think this will be very much something which will drive change through these large companies and their changed programmes, delivering change into government and into state as well.
Richard Edgar: So at a government level they're taking notice. What about the changes that you're seeing in the way individuals are able to start thinking about the way that they save? Because certainly right at the beginning of your career it just seems so far away. Most people don't want to think about it. I certainly didn't.
Julian Webb: And I think that is the reality. So I think increasingly both individuals and their employers are giving a lot of thought to this and really thinking - perhaps talking to somebody and engaging with somebody in their early twenties - about a two or even five-year time horizon and certainly not a 30, 40-year time horizon. So for example, it may be about their short term cash flow, they're management of debt - increasingly actually student debt on a global basis is becoming an issue; we often think about it as an issue here in the UK, but it's certainly an issue in the US as well. And I think increasingly what employers are looking for is, what's a simple effective way of engaging with our workforce, whether it's on a short, medium or long term horizon for their financial wellbeing. So as an example, we have come up with some core principles, what we call retirement guidelines. And one of these, as an example, is what we refer to as a savings factor. So what multiple of your annual salary do you need to save at a particular age to make sure that you can retire on an adequate income?
Richard Edgar: To show that you're on track; a milestone that you're going to be okay.
Julian Webb: Exactly right. So if you're, for example, in your twenties, it may be once times your annual salary as a cash equivalent that you need to have already saved for your retirement. If you're in your thirties, it may be four times. If you're in your fifties, it's probably going to be closer to eight or nine times. So a very simple way, as you say, of people just making sure that they remain on track and we can deliver this service and this information in an easy way to access. So for example, through a mobile app or on a website. So the use of technology comes into play because I think increasingly people want just an easy, simple, intuitive way of accessing this information,
Richard Edgar: Real behavioural changes then right across the board. A fascinating topic, Julian, I know that we could carry on talking about this for much longer, but I'm afraid we're all out of time now. So Julian, David and Aneta, thank you so much for joining me and thank you for listening. Bye-bye.
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