People are living longer; and the impact on the pensions landscape is going to be immense. As a result of longevity, pension schemes do not just have to make members pots go further, but must decide how to manage savings in volatile market economics. And as new government regulations, such as the Mansion House reforms, change the make-up of the sector, are pension schemes prepared?
"The industry has not factored the role that demographics play in a pension scheme as much as you might think," notes Gavin Lewis, Head of UK Institutional Client Business. "We typically think of people living longer in the pension's world as a risk and hence the term, longevity risk.
"What we've seen now is that the rapid rise in interest rates has meant liabilities have shrunk, and there is a whole swathe of pension schemes that are fully funded or in surplus. Suddenly, the role of savers and trustees has changed".
Head of BlackRock's Global Retirement Initiative, Peter Fisher, agrees that the longevity puzzle is going to end up on "someone's balance sheet" if the issue is not addressed. It may even end up on the balance sheet of the pension scheme, in fact.
He links the issue to a "demographic divergence", which has left some countries with a rapidly rising population whilst other countries, particularly in northern Europe, are seeing declining working populations. China has also joined this group.
"Demographics have a much bigger impact on growth than we have recognised. Declining populations become a retardant to growth and influences the returns we can capture when investing on behalf of the beneficiaries. The fewer hours worked, the less income that gets produced in the country, and the less income there is to capture. It is a major challenge we all face."
Looking ahead to 2024, the BlackRock duo note things could be challenging for pension schemes in the short-term too. Volatile events are likely to continue; interest rates could remain high in the short-term, and the issue of pensions consolidation will mean a fundamental question are going to be asked about how large pension schemes can operate efficiently.
Lewis comments: "This issue of consolidation will again crystallise [in 2024], and the fundamental question here is: is bigger better? How does that affect different pension scheme systems? That question has yet to be answered. We will probably see some experiments or initiatives to try and pool or consolidate assets to a much greater degree."
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