Goodbye, Dorian Gray Learn how baby-boomers will transform aging – and the marketplace ...

# 24 3/2016

Multiplying investment and retirement knowledge

MICRO A radically altered age structure will profoundly affect everything, from healthcare to pensions to the economy

MACRO Restore long-term horizons so that insurance companies no longer measure solvency on a one-year basis

META Esther Béjarano first sang at the camp gates in Auschwitz. Now she’s enjoying a late career as a hip-hop artist

#24 GOODBYE, DORIAN GRAY THE BABY-BOOMER GENERATION WILL TRANSFORM AGING – AND THE MARKETPLACE

CHART ART

Bottom 25% Average income at age 50–54: $9,104; expenditure: $32,131

Quartile 2 Average income at age 60–64: $32,710; expenditure: $44,111

Quartile 3 Average income at age 65–69: $55,118; expenditure: $53,729

Top 25% Average income at age 80–84: $76,236; expenditure: $54,427

AGE:

TARGET GROUPS:

50–55 years

Quartile 2 Expenditure exceeds income throughout lifetime, most markedly from age 60

Quartile 3 Income exceeds expenditure only until 65, then drops

Top 25% Income comfortably exceeds expenditure throughout lifetime, falling from age 60

MAKING OF THE COVER PROJECT M cover art is created using special software that transforms raw data, images and figures into aesthetic clusters using special rules and parameters. For this issue, the program was fed data showing the average income and expenditure of households in the US from four social classes, aged 50+. Each letter of the word “PLAN” represents a different social class. The letters are formed from a white frame, standing for expenditure. A semi-liquid, soft mass, standing for income, adheres to the frame. In places where income exceeds expenditure, more mass is visible. Where expenditure exceeds income, the bare frame can be seen, showing the shortfall.

AV E R AG E A N N UA L H O U S E H O L D I N C O M E A N D E X P E N D I T U R E , 2014 , I N U S D O L L A R S IN CO M E V. E XPE ND IT UR E

50 – 54

IN CO M E BOT TO M 25%

E XPE N D IT U R E BOT TO M 25%

IN CO M E QUA RT ILE 2

E XPE N DIT UR E QUA RT ILE 2

IN CO M E QUA RT ILE 3

E XPE N DIT UR E QUA RT ILE 3

$9,10 4

$32 ,131

$37,989

$43,6 42

$70, 591

$57,683

IN CO M E TO P 25%

$16 4 ,117

E XPE N DIT UR E TO P 25%

$97,4 0 6

55 – 59

$8,4 02

$30,791

$34 ,757

$41, 832

$72 , 558

$6 0, 552

$169,013

$93,933

60 – 64

$10, 246

$34 ,437

$32 ,710

$4 4 ,111

$6 4 , 39 0

$57, 227

$154 , 250

$86 ,467

65 – 69

$12 , 522

$32 , 222

$29,746

$45,937

$55,118

$53,729

$128, 853

$80,425

70 –74

$13,191

$28, 520

$27, 212

$4 0, 581

$47,148

$51, 876

$112 ,921

$73,923

75 –79

$12 ,451

$27,6 03

$23, 581

$35,189

$39,472

$47,748

$9 0,4 49

$68,034

80 – 84

$12 ,0 47

$23,036

$22 ,0 62

$31,654

$35,141

$42 , 501

$76 , 236

$54 ,427

85 – 89

$10,432

$23,165

$18, 553

$29,79 0

$28, 846

$4 0, 314

$58, 391

$49,074

$9,0 01

$20, 808

$15,178

$28,10 0

$23,70 6

$32 ,134

$54 , 305

$53,750

90+

Source: Health and Retirement Study – Consumption and Activities Mail Sur vey (HRS-CAMS), waves 2003 to 2013

Artwork/Generative Design: Peter Riedel – www.peterriedel.com

Bottom 25% Income fails to cover expenditure throughout lifetime

90+ years

OPENING BELL

BRIGITTE MIKSA Head of International Pensions

GOODBYE, DORIAN GRAY Roger Daltrey, lead singer of the English rock band The Who, used to sneer from the stage, “I hope I die before I get old,” during the song “My Generation”

JOIN THE C O N V E R S AT I O N Want more? PROJECT M is also available online. Visit projectm-online.com or follow @ProjectMOnline on Twitter for more updates and news

Fear of old age was a common thread that ran through youth culture of the 1960s, perhaps most stridently summed up in the catchphrase, “Never trust anyone over the age of 30.” Today Daltrey – rich, famous and with a loving wife, five grown children and a hearing aid – shows few regrets at having made it out to 72. Like Daltrey, many baby boomers are currently reassessing attitudes to aging. Data shows that as baby boomers hit their later years, they report a far more positive view of aging than previous generations. Given the absolute numbers of baby boomers now in or within striking distance of retirement, we can expect the notion of aging to be transformed under their influence. This is already happening, as interview partners and contributors in this edition of PROJECT M note. Gradually, it seems, society is losing its “Dorian Gray fixation,” where youth and beauty are prized above all else. Though this is unlikely ever to be completely overturned, we are opening up more to the rich possibilities offered by each phase in life.

As we become societies of longer lives, we also need to be aware of the greater necessity to plan to enjoy those extra years. Financing retirement is far from the simple act it may have once been in the Western world, when defined benefit occupational plans and generous social security existed. And as Asia rapidly ages, it too is confronted with these issues. In this edition of PROJECT M, we examine not only how attitudes are changing and must change if societies are to best handle population aging, but also how baby boomers can decumulate, that is best spend down their savings in retirement. We also look at the strategies that following generations can use to plan for retirement. Because as Louis Prima, a band leader from another era, sang: “The years go by as quickly as a wink.” I hope you enjoy this edition of PROJECT M. Yours sincerely,

Brigitte Miksa, December 2016

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CONTENTS

FOCUS (I s s ue s in d e pt h)

GOODBYE, DORIAN GRAY 06 –11

When Sgt. Pepper taught the band to age With an iconic song turning 50, the Beatles’ audience is reassessing attitudes to old age 12 –14

Conference call: all about the numbers? 70–80% is a rule of thumb used by financial planners – but has it met its use-by date? 15 –17

Overcoming the ‘Guinle catch’ After years of grand living, the millionaire playboy had to scrape by on a government pension 18 –20

Ditch the demographic gloom Europe isn’t dying, yet: the demographic outlook is better than previously thought 21

Q&A Ursula Staudinger on changes driven by the graying of the baby boomer generation 22–23

The missing retirement income mind-set An alarming number of people have unrealistic expectations of their future income in retirement 24 –25

Gulliver’s time travels How older societies will transform the process of aging and our perception of it

26 – 27

Overprotecting the public Regulatory authorities may be going too far in their desire to protect consumers 28 –29

What price good health? Will an aging population strain our healthcare systems and our wallets? 30 –31

Customers need freedom and opportunities Innovative concepts are addressing the woes of customers in the low-interest rate environment 32– 34

Holding back the years What will an aging society mean? The Future Elderly Model takes a peek into our future 35

The best of both worlds Combining annuities and capital market investments brings liability matching within reach 36 – 37

How much do I need to retire? Grappling with the question of how much is one of the toughest relating to pensions 38 – 40

Stop worrying about asset value Volatility and valuations are the wrong measures for retirement savings, says Robert Merton

THOUGHT LEADERS IN THIS ISSUE

Ursula Staudinger talks about building strong images of mid- and later life Page 21

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Dana Goldman has developed a model designed to predict future costs Page 32

Robert C. Merton on how income stream should be seen as a benchmark Page 38

Olivier Rousseau asks how we can return dynamism to European markets Page 44

CONTENTS

MICRO ( Local kn ow l edge)

41– 43

Pillars of reform So, how’s your retirement looking? Good news if you’re worried about the state pension system 44 – 46

Suspicious minds holding back Europe Suspicion is the guiding principle in the postfinancial crash era – and it’s hampering recovery 47– 49

Why we retire when we retire What drives workers’ decisions to retire when they do?

MACRO

( G l ob al op p or tu n i ti es )

50 –51

Increasingly thirsty Disparity between water supply and demand is a growing international concern 52 –54

Mega-failures It’s time to count the cost of the sporting extravaganza known as the Olympic Games 55 –57

A watery end An ice-free North Pole could soon become reality – and the consequences reach far beyond the Arctic

META

( Th e ou ts i der ’s v i ew )

58

Esther Béjarano raps against hate An Auschwitz survivor with a successful late career as a hip-hop artist 59

Masthead

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Is sues in depth

Fifty years ago today, one of the greatest music phenomena of the last century released an iconic song. With that song now turning 50, the Beatles’ audience – the then youthful baby boom generation – is reassessing attitudes to old age

The baby boomer generation has transformed almost every aspect of the modern world

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lthough Paul McCartney sang “When I’m 64” over the top of three rooty-tooty clarinets, lyrically it still sounded like a lament. It was as if that future birthday, as described by a young man to a lover, marked a dread milestone beyond which life would lose all excitement and sense of purpose. Perhaps this was true 50 years ago, back when the Beatles released the Sgt. Pepper’s Lonely Hearts Club Band album. However, many people on the cusp of retirement today look forward to more than the “scrimp and save” contentment depicted by McCartney as consisting of digging the garden, Sunday drives and renting a summer cottage in the Isle of Wight. STATISTICAL ILLUSION It is said that people are living up to 40 years longer than a century ago, but this is a statistical sleight-of-hand. In 1900, global average life expectancy, as estimated by the WHO, was 31 years and in 2015 it was 71.4. This may seem like a dramatic improvement, but until the mid-20th century, large numbers died in infancy or early childhood. Medical breakthroughs like germ theory, antibiotics and vaccination programs, as well as publichealth advances in sanitation, have sent infant mortality rates (and those of pregnant women) plummeting. Life expectancy has skyrocketed because more people now live well beyond childhood. In comparison, advances in the later years seem modest. Life expectancy at age 60 in 1967 was 15.2 years for men in the UK and 19 years for women. In 2015, it was 22 years and 24.8 years respectively, according to the UN Population Prospects (2015 Revision). But what makes this small six-year improvement impressive is the fact that far greater multitudes than ever before now have the opportunity to win life’s longevity lottery. Where the demographic impact on society is being felt is in the absolute numbers living into a ripe old age. ILL PREPARED FOR AGING Figures surrounding population aging are astounding. According to UN forecasts, the share of the global population aged 60+ could almost double by 2050, from 12% to 21.5%. This is a worldwide trend stemming not only from improved longevity but also declining birthrates. The result is a radically altered age structure across countries that will have profound impacts on everything from health care (see pages 28–29) to pensions and the economy. This is a challenge that societies, companies and individuals

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Doing the garden, digging the weeds – baby boomers are asking more from retirement

Individuals now have to take far more responsibility to plan and save for their retirement

FOCUS

REFORMING SYSTEMS DOES NOT MEAN MORE MONEY As increasing numbers enter retirement to be supported by a declining pool of workers, governments will struggle to meet the pension pledges of the past. The latest version of the Allianz Pension Sustainability Index (PSI) shows a large number of the 54 countries studied in need of reforms to ensure the long-term sustainability of pension systems (see pages 41–43). However, reforms typically involve trimming benefits to maintain public finances in face of significant demographic developments. Future retirees expecting generous retirement benefits based on what was paid to previous generations will be disappointed. To compensate, governments have sought to spread the retirement income of citizens across a wider base. This involves promoting a multitiered structure for retirement provision, including through occupational schemes and private savings. The result is that far greater responsibility is now placed on individuals to plan and save for retirement. Today, this means far more than simply “knowing one’s number,” explains Stacy Schaus in “How much do I need to retire?” (pages 36–37). It involves setting strategies to create an income stream sufficient to maintain the individual’s lifestyle in retirement. Failure to do so, even if the individual starts out with unbridled possibilities, could mean being snared in a “Guinle catch” later in life (pages 15–17). OVERCOMING THE DORIAN GRAY FIXATION Yet despite the challenges that population aging presents to society, aging itself should surely be treated as an opportunity. A much older Paul McCartney, still actively recording and touring at the age of 74, would probably

be one of the first to agree that aging may not be as scary as once feared. Increasingly, his peers are agreeing. Data extracted from ELSA, the English Longitudinal Study of Ageing, shows that the percentage of men and women reporting a positive view of aging increases from age 50 to age 65 (see graph). Ursula Staudinger, a life span psychologist from Columbia University, is not surprised. She notes that society is losing its “Dorian Gray fixation” on youth. She traces it to around 2000, when the sheer numbers of graying baby boomers forced marketers to begin to portray more and more midlife people in advertisements. This is positive, she argues, because as a society of longer lives (she rejects the term “aging society” as it is only the population that is aging), “we need to put a limelight on the strengths and weaknesses of each phase in life” (see page 21). Ken Dychtwald, president and CEO of Age Wave, a consultancy specialized in aging research, sees it similarly. For businesses, he believes aging populations will present some of the greatest market opportunities and industries poised for growth. While many still expect the youth market to expand, aging populations are in fact pulling the marketplace in new directions, he argues. He points out that the 111 million Americans today over 50, many of them part of the baby boomer generation, have transformed almost every aspect of the modern world, including everything from food and fashion to the workplace and leisure time. He told PROJECT M that “they won’t just fade away – they will transform aging and the market place that serves it.”  ON THE WHOLE , HA S GROWING OLDER BEEN A POSITIVE OR A NEGATIVE E XPERIENCE? The % of both men and women repor ting a positive view increases from 50 to 65. Af ter 65, men are more positive. % of r e sp ondent s “ver y p ositi ve” or “mainl y p ositi ve”

are only beginning to face. Health, education systems and labor markets all have to transform to deal with this new reality, yet few countries have implemented the changes necessary to ensure that a society with an aging population can remain useful and innovative. For example, as increasing numbers of workers retire, companies will face human-resource challenges. This will increase competition for top talent and labor costs, while the age composition of the remaining workforce will become older. By 2035, the German workforce will be smaller by more than 7 million workers – 20% of the 2012 labor force. Countries like China, Italy, Japan, the US and the UK all face similar issues, yet retirement ages – both official and actual – are only rising slowly.

70%

Men

Women

60% 50% 40% 30% 20% 10% 0%

50 – 54 55 – 59 60 – 64 65 – 69 70 –74 75 –79 80 – 84

85+

Source: O w n c alculations base d on dat a from English Longitudinal Stud y of Ageing: Wa ves 2 and 7, 20 0 4 –2014. [dat a colle c tion]. 24th Edition. UK Dat a Ser v ice. SN: 5050

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CONFERENCE CALL: IS IT REALLY ALL ABOUT THE NUMBERS? 70–80% is a rule of thumb used by financial planners to set an income replacement rate for individuals to maintain the same standard of living in retirement as they had while working – but has it met its use-by date?

LEIDEN THE NETHERLANDS

MUNICH GERMANY

N E W P O R T B E AC H UNITED STATES

Marike Knoef Associate professor at the Department of Economics, Leiden University Marike was recently granted a subsidy of the Network for Studies on Pensions, Aging and Retirement (Netspar) for the research project “Uncertainty over the life cycle: implications for pensions and savings behavior.” Previously she worked as a member of the secretariat preparing the advisory report of the Social and Economic Council on the future of the Dutch pension system

Michela Coppola Senior economist, International Pensions, Allianz Before joining Allianz in 2014, Michela was head of the Research Unit Social Policy at the Max Planck Institute for Social Law and Social Policy, Munich, where she analyzed individuals’ retirement and saving decisions with a special focus on occupational pensions. Prior to that, she was head of the Research Unit Macroeconomic Implications of an Aging Society

James Moore Head of Investment Solutions Group, PIMCO In addition, Jim is a managing director in the Newport Beach office and leads the global team of pension solutions strategists. Prior to joining PIMCO in 2003, he was in the corporate derivative and assetliability strategy groups at Morgan Stanley. He also taught courses in investments and employee benefit plan design and finance while at the Wharton School of the University of Pennsylvania, where he earned his PhD

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Coppola: Welcome to you both. Marike, ladies first, the 70% and households, so no one rule covers them all. In this sense, income replacement rate is of little use. In the to 80% rule – is it still valid? Knoef: On average it is a good approximation. However, Netherlands we find that the self-employed have very low there is a lot of heterogeneity. Some people have paid off income replacement rates, but relatively high savings and their mortgage, others have not. Some people have children housing wealth. It is important to take this into account. and spend relatively more money during their working life, A second point is that while replacement rates show the others don’t. Some people have a low income and will need situation at retirement, the period after is also important, a 100% replacement rate to be able to fulfill their basic as Jim mentioned. Pensions may decline after retirement needs, while others have a high income and can do with because of cuts or because people opt for a high pension at less than 70%. the beginning and a lower pension later in retirement. Expenditures can also change during retirement, for Moore: It’s a heuristic and if you are a retirement planner example after one spouse is widowed. Expenditures also dealing with laypeople without knowledge of the life-cycle model, you want something they can anchor on. The 80% increase when health problems emerge or when the house rule allows you to make certain behavioral assumptions. needs maintenance. There is a lot of variation that the rule First, when you go from pre- to post-retirement, you no does not capture. longer save for retirement, so the replacement ratio can be Coppola: Jim, you mentioned the life cycle. Some reduced by that amount. So, if people were saving 10% preeconomists, such as Scholz and Seshadri, or more recently retirement, that brings you down to 90%. Second, if you Hurd and Rohwedder, suggest using a closer approximation pay down a home mortgage during your working years, of the life-cycle consumption model to judge retirement you prefund a portion of your shelter preparedness of households, which might imply lower optimal replacement rates for consumption. That is 20%–25% of expenditure  T HINK ABOUT you can reduce. Third, differential tax many groups. What do you think of the merits THE INDIVIDUAL of this? treatment of retirement earnings as opposed HOUSEHOLD AND to pre-retirement earnings plays a particular Moore: It depends on the audience. Eighteen WHY YOU WANT years ago, when I was doing research I found role in the US. So it is pretty straightforward to TO DEVIATE FROM understand the rationale why 70% to 80% is a that roughly a third of the population was on THE RULE good indicator. track for retirement, a third was drastically JAMES MOORE Coppola: Recently some economists have undersaving and a third oversaving. As Marike concluded the income replacement rate is of little use in the noted, there is heterogeneity and any heuristic is not going modern world. While it may have been suitable when to be appropriate for everybody, but it should be a first-order retirement income came largely from social security and approximation. The work of a good financial planner is to DB schemes, it is ill suited for a time of DC and where people think about the individual household and why you want to use other assets, such as savings or housing, to finance deviate from the rule. Furthermore, there is heterogeneity in the workforce. At retirement. Is this too harsh? Moore: Its weakness concerns how consumption bundles the lower income end, social security and other programs change during the life cycle. Consumption needs change may replace more of my income. If I’m wealthier, I may have to save more to replace more of my income. The question is, towards and into retirement. Early in retirement, retirees no longer have work-related expenses; time is substituted for at what point do you make decisions based on an absolute expenditure, so needs are fewer. But the further and further level of consumption needs versus a relative level of into retirement you go, increasing demand for medical care consumption needs. The problem is that no model provides can raise that fraction of the mix substantially. So, the the golden answer for every household. For those who can interesting question is whether 80% makes sense. There deal with sophisticated life-cycle models then the approach needs to be more research done on what the consumption is good. I am thinking here of Larry Kotlikoff’s planning software as an example: it’s incredibly sophisticated, but bundle looks like 15 to 25 years into retirement. Knoef: Well, the strength of the rule is its simplicity, but it is unfortunately conceptually beyond the grasp of many who also a weakness. The world is full of very different people could benefit from it, without some guidance.

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Knoef: I like that the work of Scholz and the others takes long-term care, but a lot of insurances offering long-term heterogeneity into account because, as Jim rightly says, care 10 to 20 years ago have pulled back dramatically from there is no one measure for everyone. But assumptions still doing this because of the actuarial uncertainty associated have to be made with regard to the parameters of the model with forecasting demographics, costs and technological and with regard to whether spending patterns of the future advances on the medical side. To me, this is the biggest wild elderly will follow a similar path to that of current retirees. card in discussing retirement over the next 10 to 20 years. Since we haven’t developed a crystal ball, we can’t do In most phases of the economy, technology is a deflationary without assumptions. force, but in medicine, technology tends to be an Coppola: Marike, I know in your work in the Netherlands inflationary force: the bundle provided is always changing, you’ve examined subjective “minimum” and “preferred” in that if you have new technological advances they get target replacement rates. How do your results compare added to the standard course of treatment. This could with the “rule of thumb” and the “life-cycle” approaches? create uncertainty in two ways. It could reduce the costs of Knoef: On average, subjective “minimum” and “preferred” care and volatility, but if it increases the standard of care target replacement rates are comparable with the 80% rule, procedures it could work the other way. but there is a lot of variability. Subjective target replacement Coppola: Marike, you mentioned that the strength of rates range from about 100% in the lowest income quintile the 80% rule is the simplicity. In comparison, a life-cycle consumption model would seem complex to implement to about 60% in the highest income quintile. However, in from an industry perspective. Or is it more practical our research, we were not so much focused on minimal and preferred target replacement rates as on minimal than imagined? and preferred expenditures during retirement, Knoef: Well, Jim would be better placed to and then we compared them to current answer this, but from an industry perspective I PEOPLE FIND IT income. We found a lot of heterogeneity even imagine this could be difficult since you need DIFFICULT TO within income quintiles, with part of this information from different sources such as DEFINE A savings, housing, mortgages, household relating to income. People with a lower income RETIREMENT composition and pension wealth in other prefer a higher replacement rate than people EXPENDITURE funds. From an individual perspective, this with a high income. GOAL may be doable. I was involved in updating a Coppola: So when people reported their MARIKE KNOEF pension tool for Nationale Nederlanden, an preferred level, how do you interpret an insurance company. People can fill in all their financial average over the whole retirement period? At the beginning, resources, choose a retirement age and a retirement you may need a higher replacement rate, maybe 100% even for the wealthy; then a 70% replacement rate later may be expenditure goal. It appears people find it difficult to define a retirement expenditure goal. If these tools were extended fine because your consumption is going to decline. Knoef: It is a good point and we asked respondents about with a life-cycle consumption model, it may help, but it is the situation during retirement. You really can’t say “at still important for people to make their own decision retirement” because it is an average throughout retirement. because life-cycle models may not always accurately reflect This is a weakness of the 80% rule, which only really looks at the decision process and heterogeneous preferences of real households. the moment at retirement, but there is also a whole period after, which is also important. Coppola: Jim, a quick last question before our time is up: Michela: I agree … and the interesting thing is that the What should a good retirement product offer retirees? replacement rate – this rule or threshold – is more or less Moore: The essential thing, which is particularly difficult constant across different countries. However, I think in a low-return world, is to provide some measure of capital health expenditures vary greatly in different countries, protection and a competitive return for a reasonable particularly in the US compared to Europe, and that amount of risk. If you start trying to bundle healthcare might have an effect on the optimal replacement rate. products in there, then there is need for better healthcare Jim, your view? products owing to their complexity. Coppola: Thanks to you both.  Moore: I think there needs to be more viable markets for

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OVERCOMING THE ‘GUINLE CATCH’ After a lifetime of grand living, millionaire playboy Jorge Guinle ruefully reflected that “the secret to living well is to die without a cent in your pocket, but I seem to have miscalculated’’

By Greg Langley

O

nce heir to Brazil’s richest family, Jorge Guinle roomed with Errol Flynn and hung out with Howard Hughes. While in Hollywood, Guinle was romantically linked to Rita Hayworth, Lana Turner, Anita Ekberg and Marilyn Monroe, but in the last 20 years of his life, he lived on a government pension. Guinle was caught out by a retirement catch that confronts everyone: no matter how many resources you have, if you don’t plan, it may not be enough. How much an individual needs for retirement depends on, among other factors, their relationship status, consumption expectations and their wish to leave a legacy – and, of course, the great unknown: how long they will actually live.

All our yesterdays: how can we better plan for the great unknown?

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80% RULE HAS LITTLE RELEVANCE Recently Michael Hurd and Susann Rohwedder, both with the RAND Corporation, concluded that the income replacement rate is of little use in the modern world. While it may have been suitable when retirement income came largely from social security (state pension) and defined benefit (DB) pension schemes, it is ill suited for a time of defined contributions (DC) and where people use other assets, such as savings or housing, to finance retirement. In Measuring Economic Preparation for Retirement (2015), the pair argue that various approaches fail to mimic what people actually do in retirement. For example, most people enter retirement married but within about 10 years one spouse dies. Spending drops and so can income, for example, from social security but not overall wealth. So what may have been adequate before, now becomes “too much” for the survivor who inherits the remaining assets. The 80% rule also fails to take into account that today both spouses often work. This can result in a household having two earners with different retirement ages because of a substantial difference in their ages, or because one person chooses to retire earlier or later than the other. This modern work environment, where people can phase out of work, further complicates matters. In the US, only a third of full-time workers go straight into full-time retirement and this shifting between incomeearning statuses blurs the concept of the 80% rule as quantifying pre- and post-retirement income becomes difficult.

It is better, the two economists argue, to use a consumption-to-death measure to check for economic preparation. This examines the probability that a household has enough resources to finance spending (consumption) from shortly following retirement until death. This approach tracks individuals as, for example, they slowly reduce spending on items such as cars and travel, or downsize their home. LESS IS FINE IN RETIREMENT The good news is that if the 80% rule is dead, then many future retirees, especially those in higher income brackets, may need to replace less of their pre-retirement income than previously thought. Hurd and Rohwedder write that the 80% approach slightly understates the percentage of singles adequately prepared for retirement in the US, but “grossly understates the percentage of married persons adequately prepared.” This is because married people have three times the assets of singles but income is just twice as much. On paper, this means couples do not look better off, but in reality have a greater ability to fund spending from assets. However, Alicia Munnell, Matthew Rutledge and Anthony Webb from the Center for Retirement Research at Boston College (CRR) dispute that the income replacement rate is dead. They are not convinced that current retirement saving rates are adequate and interpret the data on declining consumption in retirement differently. The RAND Health and Retirement Study (HRS) focuses on the preand post-retirement spending of households. The data shows small declines in consumption immediately after retirement and sharp cutbacks in later years. For these researchers, this indicates not that people willingly reduce consumption, but that, apart from those with very high incomes, they do not have the resources to maintain that pace of consumption over their entire retirement. Munnell and colleagues use income replacement in the National Retirement Risk Index, which computes projected retirement income replacement rates and compares them with target replacement rates.

BY HOW MUCH DID (DO) YOU E XPEC T YOUR TOTAL SPENDING TO CHANGE WITH RE TIREMENT ? Year s to r etir ement 0% -5% -10%

y-11

y-9

y-7

y-5

y-3

Year s af ter r etir ement y-1

E xp e c te d c hange in tot al sp ending

y +1

y +3

y +5

y +7

y +9

y +11

E xp e c te d c hange in tot al sp ending r etir ement

The final guesstimate can be as diverse as the number of people posing the question, but financial planners often use income replacement rate as a rule of thumb. This suggests that individuals replace 80% of preretirement income with other sources to maintain the same standard of living they had while working. However, while the 80% rule helps set goals, some experts see it as too simplistic.

-15% -20% -25% -30% -35%

y-11

y-9

y-7

y-5

y-3

y-1

y +1

y +3

y +5

y +7

y +9

y +11

Source: Allianz International Pension c alculation, base d on dat a from HR S - C AMS sur vey, waves 20 03 to 2015

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“Optimistic views of US retirement preparedness depend crucially on assumptions about behavior that may not reflect real-world activity, or on a snapshot of consumption levels that are unsustainable in the long run,” the trio conclude in Are Retirees Falling Short. “Our best assessment is that retirees are falling short and will fall increasingly short over time.” LIFE-CYCLE CONSUMPTION “The approach developed by Hurd and Rohwedder is a closer approximation of the life-cycle consumption model,” explains Michela Coppola, a researcher with the International Pensions unit of Allianz. The model assumes that individuals aim to maximize the utility they derive from consumption over their entire life span. As a consequence, they choose a “smooth” consumption pattern that keeps the value they derive constant. That does not necessarily imply that consumption remains constant over time. “At older ages, the probability to die increases from year to year,” says Coppola, “So if you are not sure you’ll be eating a slice of your next birthday cake, it is better to consume more today and plan to live on less rather than leave a surplus of wealth after death.” Using the income replacement rate as a guide assumes that the optimal pattern is constant consumption throughout retirement. This may hold true in early retirement, but may be an oversimplification in later years.”

Expanding the sample used by Hurd and Rohwedder on consumption with three additional waves of survey data, Coppola compared anticipated and recollected changes in household spending before and after retirement (see graph opposite). Immediately before retirement, respondents expect on average a drop of about 20% of spending, but in the year immediately after retirement they experience an average reduction of about 17%. Seven years into retirement, the reported drop is less than 15%. “This indicates people underestimate fixed costs,” comments Coppola. She suggests erring on the side of caution in calculating resources required. “Considering the stakes involved, it is better to carefully think about future spending before rashly consuming.” The alternative could be to end like Jorge Guinle who, despite all his riches, was forced to scrape by in the end. 

PLANNING IS CRITICAL If the good news of Hurd and Rohwedder is that people may need to accumulate less than previously thought, the bad news is that the amount required critically hinges on the ability of people to foresee how their spending will evolve after retirement.

If you’re not sure you’ll be eating a slice next year, consume more today

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DITCH THE DEMOGRAPHIC GLOOM: EUROPE ISN’T DYING, YET The demographic outlook for the West is better than previously thought

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eports of the death of the West are greatly exaggerated, it seems. In recent times, there has been a growing narrative about the population’s demise owing to falling birthrates, sparking concern among policymakers about long-term population decline. But trends in fertility have been misunderstood: the underlying trend in Europe is upwards and population aging can be managed, argue David Coleman, professor of demography, Oxford University, and Stuart Basten, associate professor, in their paper The Death of the West: An alternative view. “There has been a chorus of repetition about Europe’s and the English-speaking world’s declining birthrate, which has become engraved into people’s minds, but this isn’t paying attention to the actual facts, particularly in western Europe,” say Coleman and Basten. In fact, average total fertility in western Europe has been edging up slightly since the 1980s, with strong growth in northern Europe, reaching 1.81 in the UK in 2014 and 2.0 in France, for example. (Total fertility rate is the number of children that the average woman would have if current birthrates persisted.) Birthrates in eastern and southern Europe, although lower, have also been creeping up slowly. Hence the good news: the West’s share of world population will undoubtedly decline, but sustainable fertility rates should return, given economic recovery and appropriate social reform such as the encouragement of gender equity in the workplace and at home, predict Coleman and Basten. The pair expect birthrates to average out at 2.0. Population aging should remain manageable, as long as total fertility remains above a “safe” limit of at least 1.7 and with appropriate increases in retirement age. WE’RE ALL EQUAL Increasing equality between the sexes and a functioning democracy in the Western world is prompting the recovery in the birthrate, explains Coleman. Women have delayed having children, and hence depressed the birthrate, in order to be able to go to university and secure a career. In many countries, that postponement has come to an end. Changes in attitude towards sexual equality, and the introduction of more family-friendly policies, are enabling Western women to have at least some of the children that they consistently state in surveys that they want to have. This should continue, argue Coleman and Basten. Where progress in these directions is limited, as in parts of southern and eastern Europe, birthrates may remain in the Average total fertility in doldrums for longer. western Europe “If women are behaving more like is showing signs of rising men in the sense that they are

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» THERE HAS BEEN

A CHORUS OF REPETITION ABOUT EUROPE’S DECLINING BIRTHRATE, WHICH HAS BECOME ENGRAVED INTO PEOPLE’S MINDS, BUT THIS ISN’T PAYING ATTENTION TO THE ACTUAL FACTS, PARTICULARLY IN WESTERN EUROPE DAVID COLEMAN

now represented in equal or even greater numbers in universities and in senior positions in the workforce, then men have to behave more like women, by helping out in the home, by taking time off to look after the children,” says Coleman. “We also need gender equity in the welfare system to make it easier for women to take time off and then get back into the workplace and receive some compensation for their lack of earnings.” In countries where the prevalent culture embraces equality, the birthrate is high – for example, in western Europe. In more patriarchal societies, such as parts of southern Europe, where a woman’s place is often considered to be in the home, gender equity suffers and so do reproduction rates. Immigration also plays a role. Immigration flows into western Europe boost birthrates by 0.1 to 0.2, says Coleman: most migrants stem from cultures which have more children.

THE MEASURE OF A MAN So why have we been getting it wrong? It’s partly down to outdated methods of measuring aging, Coleman says. Demographic gloom has been furthered by using the oldage support ratio (the number of people of nominal working age divided by the number of people of pensionable age) as a standard measure. In western Europe, the ratio is currently four. If you project the population forward, this ratio grows worse. Increased Coleman believes we should instead equality between the sexes is be using indicators that adjust for the prompting the increasingly high boundaries of recovery in the birthrate

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healthy working life, also taking into account the upwards adjustment of pension age. “The current indicators have a rigid set of boundaries that don’t make sense in light of increasing life expectancy,” explains Coleman. “We are currently adding an additional three months of life for each calendar year that passes, so these indicators don’t take into account the higher proportion of people living into older age in a healthy condition.” He believes it would be better to calculate the basis of old age starting when expectation of life is down to 15 years. Then a more favorable picture of Western demographics emerges.

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EAST VERSUS WEST While this is good news for Western demographics, it’s not the case in east Asia, for example, which faces different challenges. The two demographers have predicted that birthrates in the East will fall for some time to a lower rate than those in Europe as patriarchal societies and gender inequality hamper ability to react to demographic change. China has particular problems. As well as suffering from population aging, the country risks a dangerously low birthrate, close to the global warning line of 1.3, or the “low fertility trap.” Population growth has been cut through a one-child policy, averting over 400 million births, according to Chinese calculations. But reforms to allow families to have at least two children will have little effect: according to surveys, Chinese city dwellers don’t want a second child due to cramped living conditions and the desire to dedicate material resources to just one child. 

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URSULA STAUDINGER ROBERT N. BUTLER PROFESSOR OF SOCIOMEDICAL SCIENCES AND FOUNDING DIRECTOR OF THE ROBERT N. BUTLER AGING CENTER, COLUMBIA UNIVERSITY A life span psychologist and internationally acknowledged aging researcher

QUESTION You dislike the term “aging society.” Why?

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Answer It is incorrect because it is not society that is aging but the population. What a society does with the demographic changes going on in the population composition is up to society. A society with an aging population can be a useful and innovative society if handled well.

In what way then should the phenomenon we are seeing be described?

It is a society of longer lives. We have developed into a society that facilitates and enables longer, healthier and more active lives for more and more of us. By calling it a society of longer lives, it highlights that there needs to be a transition. Today, once you reach age 60 you have on average another 20 years to live.

How will societies have to restructure and adapt?

Our societies are not yet prepared to make best use of that last phase in life, so it starts with health, it concerns the labor market and it matters to the education system. These are three crucial pillars of societies and so it is a Herculean challenge to transform. We need to realize that today we live 30 years longer than 100 years ago and adjust these pillars accordingly.

Is there a country handling this well?

There is no perfect country, but the Scandinavians have done a great job in balancing work and family. Primarily you see it in the labor force participation rate of the 65+. It is amongst the highest in the world and has been for some time. Participation in lifelong learning is also amongst the highest and so, at least in Sweden, is average life expectancy.

Are we actually a Dorian Gray society, prizing youth and beauty, which blinds us to the abilities of older citizens?

We certainly haven’t paid as much attention to building strong images of mid- and later life as we have to idolizing young adulthood. Since 2000, there has been a gradual change driven by the graying of the baby boomers. Their sheer numbers mean advertising has changed. Daily, one is confronted with more and more mid-life people. Yes, they are beautified, but it is diversifying what we idolize. As a society of longer lives, we need to put a limelight on the strengths and weaknesses of each phase in life.

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THE MISSING RETIREMENT INCOME MIND-SET After years of political reforms and media warnings, people are now well aware that savings will play a critical role in ensuring comfort in old age, but an alarming number have unrealistic expectations as to the income their savings will provide By Richard Wolf

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n a recent survey conducted by Allianz Global Investors in the United States, only 52% of the 401(k) savers among 1,300 people polled had a realistic idea of the income their retirement savings was likely to generate. “It’s certainly an eye-opener,” says Glenn Dial, head of retirement at Allianz Global Investors. “The message concerning taking retirement preparation into your own hands has definitely sunk in, but people are still unaccustomed to thinking in terms of a retirement income stream.” In the survey, interviewees were asked about the most important source for retirement income. Some 38% believed employer-sponsored retirement savings plans (defined contribution (DC) plans, such as 401(k)) would be the most important. Including personal savings and investment accounts, 61% of respondents expected that DC retirement plans would be their most important income stream, showing widespread awareness of the new retirement income reality. Concerns about scheme funding in this environment of low yields and increasing longevity have seen many companies close traditional defined benefit (DB) pension schemes to new hires. Social security is also coming under financial pressure as baby boomers enter retirement. In the future, retirees will rely more on personal accumulated pension pots than on preset pension formulas that pay a regular income stream.

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This change in mind-set has been supported by reforms that encourage employees to save far more, far earlier, and that have made the savings process easier. Employer match to individual employee pensions are now close to universal, and more than 60% of new plan entrants are enrolled via automatic enrollment. At the end of 2015, over $1.1 trillion in assets were held in target-date funds – a favorite of younger employees, according to EBRI & ICI. CONFIDENCE IN RETIREMENT INCOME But do individuals understand efforts to build stronger, more effective DC plans? In the AllianzGI survey, respondents were asked if they were confident they would have enough money throughout retirement. In the responses, a difference emerged between people covered by a DB pension plan compared with those with only a 401(k) plan. Overall, 87% of DB plan members said they were highly

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Think you know how much you’ll need in retirement? Almost one in two will get it wrong

$350,000. At the median, respondents estimated their 401(k) pot to yield a future monthly retirement income of $1,500, preferably from the median expected retirement age of 65. To judge how realistic this is, the benchmark was a “plain vanilla,” gender-specific immediate life annuity from a leading online annuity brokerage firm. As an example, a man aged 65 could receive a 6.5% annuity (best quote). Therefore retirement assets in the range of $300,000 to $350,000 would yield a lifelong retirement monthly income between $1,600 and $1,900. If the retirement saver had aspired to $1,500, then his retirement income expectations were considered realistic.

or fairly confident that they would have enough money for retirement, while only 64% of 401(k) members felt the same. One concern of the survey was whether people understood how DC assets could be turned into a stream of income throughout retirement. In an earlier survey, AllianzGI found that only 50% of Americans aged 45+ had thought about a savings decumulation strategy. Owing to the high level of uncertainty DC savers face regarding oldage income security, the more recent survey included a retirement planning exercise. Interviewees were asked: what were their current 401(k) savings; what proportion of their salary did they contribute; how high was the match of their employer; what was their expected retirement age; what was their aspired level of saving at retirement; and, most notably, the income they wanted to achieve during their retirement period. The median expected final account ranged from $300,000 to

UNREALISTIC EXPECTATIONS Only 52% of respondents had realistic expectations regarding their savings. Some 17% would need to hit the upper end of their savings target to achieve their desired income. Another 31% significantly overestimated the income that could be drawn from their potential DC plan savings. “This is alarming and highlights how complex the task is to convert one’s savings into a lifelong income stream,” says Glenn Dial. “Low-income respondents and families with children especially overestimate their ability to generate expected retirement income from their savings.” The results reveal that many future 401(k) retirees are at risk of falling short of their desired income and potentially unable to sustain their living standard during retirement. This situation raises the question whether people are currently saving too little for retirement, as they seem to be overestimating the income their aspired savings might “buy.” “Most recent retirement innovations have related to the accumulation phase,” says Dial. “People today are saving more for longer, but the complexity of the decisions they have to make has also increased.” He suggests as a next step that firms provide plan members with guidance so they can adopt a retirement income mind-set. “The complexity of the retirement decision remains unaddressed and, if it continues, many people will be in for a shock at the point of retirement.” 

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GULLIVER’S TIME TRAVELS How older societies will not only change our economies but will actually transform the process of aging itself and our perception of it

They may not be young any more, but they know what they want. And it ain’t free

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By Ken Dychtwald

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or a long time, many businesspeople expecting the youth market to expand perceived those over 50 as staid, crusty and tight with what little money they have. But aging populations in the US and elsewhere are pulling the marketplace in new directions. The 111 million Americans over 50, many of them part of the baby boomer generation, have transformed large areas of our lives, ranging from food to fashion and workplace to leisure time. And they won’t just grow old – they will transform aging and the marketplace that serves it. Representing 35% of the total US population, Americans over 50 now have a combined annual personal income of $4.8 trillion and control 76% of the total net worth of US households – nearly $49 trillion of wealth. This group owns 76% of certificates of deposit, 72% of bonds, 74% of stocks, 78% of retirement accounts and 76% of all financial assets, according to a Federal Reserve survey. This is a vast and largely misunderstood market.

The over-80 group is smaller than other 50-plus groups. Only 5% of 80-plus-year-olds are working, compared with 23% in the 65 to 79 age range and 64% of those 55 to 64. They have the highest poverty levels of any age group in the US. Although some remain active in the community, most retreat to a life of daily self-care and contact with a small group of family and friends. Approximately two-thirds of this population segment is female. Historically we have lived according to the linear life plan: first you learn; then you work intensely for three or four decades; and then, if you’re fortunate enough to live a bit at the end, you have a few years to rest and relax before you die. But higher life expectancy is not about tacking something on at the end. Too often, our 20th-century version of maturity left out the crucial element of purpose. Older people increasingly want to remain engaged in something meaningful, and maturing men and women pursue goals of personal well-being and self-fulfillment.

WHY IS A BEEHIVE A BEEHIVE? MEET THE 50-PLUS CONSUMER Large-scale aging, as we experience it for the first time Marketers often lump everyone over 50 into one large, vaguely defined group. That’s a mistake. I segment them in human history, raises many questions. How did we into three age groups, understanding that decide on the number of seconds needed for pedestrians to cross the street? How is the there may be differences between members of font size for newspaper typeface determined? any one segment. We have woven a physical world that is as People in middle adulthood (50–64), with suited to our needs and activities as a beehive their children usually grown and their mortgage mostly paid, have the highest is for bees. But it revolves around an ideal of youth. The physical changes of aging cause disposable income of any demographic group. thousands of mismatches with the world They are better educated and more affluent around us. than their parents were at the same age. Their Aging slowly sets in during our mid-40s. major issues are health, self-fulfillment, social K E N DYC H T WA L D Our eyes let in less light; color perception activities, comfort and how to spend their President and CEO of changes. What may appear striking to a increasing free time. They are an excellent Age Wave market for financial services, luxury travel young designer might miss the mark with the tours, personal care products, adult education, second older people. Another challenge comes from stiffness and loss of finger dexterity. More than half of those over 65 homes, and recreational products and services. have arthritic fingers. That means medicine bottles, food In late adulthood (65–79), most people live active and packaging, cutlery, computer keyboards, appliance independent lifestyles. They are not yet “old” and they share controls and purse clasps need to be redesigned for older many of the activities of those aged 50 to 64. But they are hands. Similarly, clothing manufacturers will use more concerned about health and have a growing fear of serious Velcro tabs and larger buttons, eliminating the small illness. Their use of medical and long-term healthcare fasteners that are difficult for older hands to manipulate. services rises dramatically, as does their reliance on family Many of us envision the future as a world created by and friends for assistance with daily living. They are a and for the young. Yet like Gulliver, we risk becoming strong market for finance and estate services, health and physiological outcasts in our homes and communities as fitness products, education, travel, personal care products, well as in our own bodies unless we adapt our societies to and second homes. No longer working, many in this group large-scale aging. The good news is that, as demographic are sensitive about being excluded from society. They often change bends the marketplace in its direction, it is likely have active social networks and remain involved in the community. The number of female-headed households to create an economic bonanza from products designed for a new generation of older citizens.  begins to climb.

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OVERPROTECTING THE PUBLIC Regulatory authorities are there to protect consumers. But is the strong swing back to their overseeing pension solutions in the public interest?

The tendency to protect against vague threats can lead to overregulation

By Daniel Sandmann, Allianz SE Group Compliance – Head of Customer Protection, and Greg Langley

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t has been often noted by industry commentators that retirement savers have in recent decades been left out in the rain. For more than a decade, governments have pruned public benefits and placed emphasis on occupational pensions to sustain individuals throughout retirement. For their part, employers, faced with underfunded defined benefit (DB) schemes and the unexpected longevity of former employees, have been shifting to defined contribution (DC) schemes to limit their liabilities, which is

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changing the risk distribution between the pensions provider and the customer. While DB schemes guarantee retirees a defined payment per month in retirement, under DC schemes little is guaranteed – except that individuals are left alone to weather all investment, inflation and longevity risks. On the life insurance side, years of persistent near zero interest rates mean solid returns can no longer be guaranteed. In place of traditional savings products, hybrids now combine capital opportunities and safety

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mechanisms, but with low or no return guarantees. Such products can provide a significant return to the customer, but represent a new breed of vehicles with a different set of risks than in the past.

the prudential risks coming with these product solutions. Now, the public side are effectively saying, “This time we’ll do it ourselves.” Regulatory authorities should protect consumers, and it is undeniable, given the complexity of the financial decisions and products the public faces, that they do need A CHANGE IN PRACTICE? These developments have resulted in a dramatically protection. But is such a strong swing back to the state different retirement savings environment. Far more is overseeing solutions in the public interest? demanded of savers today even though financial literacy In the case of PEPPs, given that it would require studies show most people do not have the far-reaching legal harmonization, regulators skills to make sophisticated long-term need to lead the way. However, while any investment decisions. The industry and initiative to encourage people to save for H EALTH INSURANCE NO customers need to access – with a time horizon retirement is to be applauded, it is presumptuous LONGER COVERS of 50–60 years – the expected exposure to to assume one particular “best” approach can SURGERY, SO financial market risks such as return volatility, meet the needs of all citizens. YOU’LL HAVE the effects of inflation and the dangers of This is particularly pertinent for such a TO DO IT outliving one’s assets. Any misstep could strange beast as the European Union YOURSELF AFTER composed, as it still is, of 28 different states mean the saver will not only face falling living READING THIS each with a market of different and often standards in retirement, but straight-out BROCHURE competing participants and interests. poverty. Zvi Bodie, a professor from Boston ZVI BODIE Many of these pension markets are already University, says this is a fallacy of the current overburdened by regulation. This can result in system and summarized it best when he said it subsidies provided to encourage savers absorbed by providers themselves, as providers seek to is like telling people, “Health insurance no longer covers surgery, so you’ll have to do it yourself after reading this defray the complex costs of regulatory compliance. brochure.” With PEPPs, the risk is that the EU will not so much create consumer confidence in Pan-European Pension This situation is driving a decided swing back towards the state again offering shelter to retirement savers. The Products by putting in place legislation to protect savers as most recent example is NEST in the UK, the DC pension be imposing yet another layer of regulatory requirements. scheme set up to automatically enroll workers as part of If this is the result, individual markets will experience pain workplace pension reforms. In Germany, there is discussion as they try to lay these regulations over existing national of a “Nahles-Rente,” proposed reforms named after Andrea regulatory environments. Nahles, the Federal Minister of Labor and Social Affairs, which is something of a cut-and-paste of NEST. SMOTHERED WITH PROTECTION Ultimately, this will not be in the interest of pension savers. Yet the most ambitious project is the effort of the European Insurance and Occupational Pensions Authority Today, there are already a confusing array of retirement saving options available, so if PEPPs result in increased (EIOPA) to create standardized, private Pan-European Pension Products (PEPPs). Such a cross-border approach complexity savers are likely to avoid or underinvest in such makes sense if it increases the mobility of workers products. A better approach to encourage retirement throughout Europe and helps providers achieve scale and savings at the European level would be through income tax improve competitiveness to create better returns and lower deferrals and a wide choice of underlying investment costs for pension savers. PEPPs, however, as a product group products with transparent expenses. are shaped by regulation. The role of the industry is Where savers need assistance is in the form of yet to be defined. How exactly will insurers and asset protection and advice to understand their options through more guidance and advice. Only if industry gets it right and managers be involved? Will syndication be relevant? These are critical questions whose answers will be offers transparent and fair products, will the incentives for highly contentious within one or more of the distinct state-operated solutions cease. After years of pushing national retirement provision policies of the European savers outside to look after themselves, regulators now risk Union. Yet the most striking aspect of the PEPPs approach is overcompensating by smothering them with protection and preventing them from saving enough to support that it marks a decided change in practice. In the past, the industry would create products and regulators focused on themselves in retirement. 

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WHAT PRICE GOOD HEALTH? Will an aging population strain our healthcare systems and wallets?

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ood health is priceless; bad health tends to be expensive. In these days of an aging population, people are living longer but not necessarily more healthily. The over-60s already account for a quarter (23%) of the global burden of death and illness, according to John Beard, director, department of aging and life course, World Health Organization (WHO). The concern is that an aging population will equate to higher healthcare costs, weighing down individuals, families, healthcare systems and economies. As a consequence of global aging, the incidence of non-communicable diseases, such as heart disease, stroke and diabetes, is set to rise. So is cancer: the annual number of new cases is projected to balloon to 17 million by 2020, and to 27 million by 2030, according to Beard. Then there’s dementia. Its prevalence rises sharply with age: around a quarter of people aged 85+ suffer. Michael Hurd, director at the RAND Center for the Study of Aging, found that dementia has a total annual societal cost of $41,000 to $56,000 per case in the US, amounting to $159 billion to $215 billion nationwide in 2010. By 2040, estimates suggest that these costs will more than double. BITTER PILL TO SWALLOW Before we panic, costs might not be as extreme as expected. Population aging is only a relatively minor driver, says Beard. Aging contributed only 2% of global healthcare cost inflation in a study for the US from 1940 to 1990 (a period of faster

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aging than is currently being experienced), with bigger drivers including new technologies and inefficiencies in the system. In addition, research from Tom E. Getzen, professor of risk, insurance and health management at the Fox School of Business at Temple University, suggests that healthcare spending as a percentage of GDP is determined by what the country can afford. Once the country determines that amount, it is split up among age groups. For many elderly, however, the price of medicine remains too high. Even in developed countries, older people often have to choose between buying medicine and food. Prescriptions in the US regularly go unfilled because of cost, says Tim Dall, managing director for healthcare and pharma, IHS Life Sciences. Lowering the price of medication seems the obvious answer but could cause pharmaceutical firms to lose the impetus to innovate. While some medications are expensive when first introduced, prices fall substantially as they go from brand to generic, explains Dall. “In early years, society may pay a high price, but in the long term, we are better off,” he says. “If the price falls over time, it’s a win for everybody. The pharmaceutical company gets a reward for innovation, and society benefits as people eventually have access to lower-cost medication.” GERIATRIC CARE ON THE CURRICULUM It’s not just the price of pills, it’s also whether medication is age-appropriate. Older bodies have different conditions and metabolisms to younger people. But widespread uncertainty remains about responsiveness to and tolerance for drug treatments in a population of over-65s – let alone one of over-80s. Clinical trials for new drugs rarely address populations of over-75s as a sizable cohort. Medical interventions are generally tested on healthy, younger people, but the fact is that most over-65s suffer from more than one condition at a time. There is also the danger of interaction between different medicines: older people tend to take more medication. Robotic caregivers: a solution to the pressures of an aging globe

FOCUS Will we miss the human touch?

Our systems aren’t geared up to the healthcare needs of an aging population, argues Beard, which basically requires the delivery of integrated care services. “We don’t have enough geriatric specialists or the breadth of skills among frontline clinicians and caregivers,” he explains. Beard believes geriatric care should be on the curriculum of all health professionals, so they can acquire basic skills and knowledge to deal with the elderly, which will form the biggest proportion of future clients. Part of the problem is that taking care of older patients, and unraveling the complex problems associated with multiple chronic illnesses, isn’t so profitable. “With better reimbursement models, we might be training more geriatricians and fewer cosmetic surgeons,” says Jonathan S. Skinner, professor, department of economics, The Dartmouth Institute. Ultimately, Skinner says, we don’t train enough geriatricians to deal with the growing numbers of elderly. In the future, already long waiting times for appointments may be exacerbated, and access to care for some of the nation’s most vulnerable patients may be reduced, as well as their quality of life. WHO CARES? To add to these problems, there is an inadequate number of carers. As people age, many are unable to live alone unaided, for reasons ranging from simple frailty to conditions such as dementia. In the past, family members, particularly women, provided support, but with families spreading out geographically, there are fewer children and grandchildren available to help out. With today’s women busy juggling their own lives that may involve careers, families or higher education aims, many elderly are left to rely on paid help. Unfortunately, countries have limited access, particularly for poorer people, for the long-term services needed, ranging from chronic care management to long-term care, explains Beard. “There needs to be a continued role for families, but governments need to better support caregivers in this role and can directly provide care for people with significant needs such as advanced dementia.” Technology can assist by relieving caregivers of routine, mundane tasks. In Japan, “robot nurses” already clean patients or assist them from wheelchairs and onto beds, for example. More broadly, telemedicine will enable medical professionals to offer advice at a distance, while patients’ vital signs can be monitored remotely. But sophisticated technology lacks the human touch. Sometimes for the elderly, particularly for those without friends or family living nearby, paid care workers provide valuable contact to society; their

visits are often the highlight of the older’s person’s day. Companies need to look at the needs and aspirations of older people and try and develop products to fill caregiving gaps. THEN THERE IS DEATH Death comes at a high price. In fact, the most costly period of an adult’s life in terms of healthcare costs is the last 18 months. Dying in intensive care is particularly expensive. Interestingly, expenditure for those last 18 months tends to fall after the age of 70–75, particularly when there are other options, such as long-term care. This might reflect agist attitudes or the fact that some medical procedures become less effective or more risky with age, says Tim Dall. Or it may reflect the fact that people shun medical intervention in their final months, says Beard, preferring to die with dignity, rather than being plugged into a machine in hospital. OLD AGE ISN’T A DISEASE Depressingly, health systems are poorly aligned to the needs of older populations. Most are designed to cure acute diseases, while older people experience chronic diseases and normally more than one of them, says Beard. “The way forward,” he argues, “would be to provide integrated services that have an overall assessment of the elderly’s needs, identify priorities and then have interventions that address those priorities rather than respond to each individual condition.” We need to extend affordable healthcare to all older adults; we should emphasize low-cost disease prevention, such as encouraging the elderly to reduce salt intake or keep up to date with vaccines, and focus on early detection rather than on treatment. As Beard points out, elderly individuals aren’t suffering from an unknown, terminal disease called old age. They are patients for whom proper treatment may well increase the length and quality of life – consumers with specific desires and often the assets to match. They are citizens with rights. 

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CUSTOMERS NEED FREEDOM AND OPPORTUNITIES FOR OLD-AGE PROVISION Life insurers and asset managers are jointly launching innovative concepts that address the woes of customers in the low-interest rate environment By Volker Priebe and Kai Wallbaum

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ears of persistently low interest rates policyholder assets can, in addition, save costs. VO L K E R P R I E B E Head of product with virtually no prospect of returns It is clear, however, that the considerable need development at have hit security-oriented savers hard. for old-age provision today cannot be covered by Allianz Leben As a result, many are questioning if they can fixed-income investments alone in the current K A I WA L L B AU M continue to rely on life and pension insurance to low-interest rate environment. As a result, those Head of Global Life/ finance their capital requirements in old age. saving for retirement must now strike a balance Asset Business, The situation is compounded by market Allianz Global Investors between security and opportunity, and the observers who have taken a pessimistic view on industry is responding with new solutions. the effectiveness of insurance in this world of negative interest rates. We are more optimistic. The need for TRADITIONAL BOOK AND UPSIDE POTENTIAL insurance companies and pension plans to support One new type of product class uses modified guarantees to people’s retirement ambitions has never been greater, and enable people to invest in the traditional insurance book, innovative concepts that support savers have been on the while providing upside potential. How this functions can market for some time. be seen in the example of the concept called “Perspektive” Although the great wave of baby boom retirement from Allianz Leben in Germany. The product guarantees capital on the pension start date of at least 100% of the is well underway in the United States and Australia, it is only about to begin in Austria, Germany and the UK. The premiums paid in. In 2016, the credited rate of the policies first boomers will officially enter retirement in 2021, with came to 4%. This is 0.3 percentage points more than for public pension systems coming under mounting pressure. traditional policies. While such products are convenient for As states grapple with the mounting costs of public people who want to have investment decisions automated, pensions, with people living longer than previous those seeking to be more active can look at index- or unitgenerations and spending proportionally more time in linked concepts. The latter invest a portion of the old-age retirement, benefits are likely to continue to fall and savings in investment funds that customers can select individuals are going to need to create other sources of individually. retirement income. The extent to which premiums are invested in funds is The traditional book of financially strong life insurers, determined by, among other things, the level of security typically used for financing long-lasting liabilities, guaranteed by the policy: customers can opt to adjust the can remain a key element of collective accumulation of level of minimum capital that is guaranteed on the pension start date. As well as the level of 100% of the premiums paid, old-age provision. With the expertise of major institutional investors behind them, life insurers spread investments the old-age provision concept “InvestFlex” allows over asset classes, using tangible assets like customers to select guarantee levels of 80% or 60% of the premiums paid. This can increase the upside potential real estate or equity as key investment components. Longterm investments, such as renewable energy or infrabecause a larger portion of the premiums is initially plowed structure projects, also promise stable, attractive returns into the fund investment. Depending on the policy terms, that match the liabilities of insurers to customers’ needs this allows initial fund ratios of 70% while maintaining for secure long-term returns. The central management of valuable pension start date guarantees.

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More choice: life insurers and asset managers jointly offer new pension solutions to their clients

Investments in opportunity-oriented asset classes such as equities give customers the chance of higher returns compared with conventional policies. This is because with unit-linked insurance the amount of the total capital available on the pension start date depends on the performance of the underlying fund unit that the policy invests in. This means, however, that investments can also be affected by capital market fluctuations. People who choose unit-linked concepts need to be prepared and able to accept the risk of such fluctuations. Multi-asset concepts can, however, provide a check on potential losses. This is achieved by either offering lifecycle investment profiles that adjust the fund risk during the term to reflect the policyholder’s risk-bearing ability, or by ensuring that, in a given calendar year, a specified maximum loss threshold will most likely not be exceeded. CUSHIONING FLUCTUATION BLOWS The intelligent management of the investment split between traditional book and fund investment also helps cushion the blows of fluctuations in value, since the traditional book offers more returns and more stability

than other “risk-free assets” commonly used in unit-linked concepts with guarantees (such as CPPI concepts). At the end of the policy term, fluctuations can also be mitigated by optional end-phase management. In order to secure returns, customers can also opt for guarantee increases during the term when they take the policy out. This means that if the policy shows favorable development, the benefit guaranteed on the pension start date can increase beyond the level originally selected. Decumulation strategies are also likely to play more of a role in future insurance retirement products. These solutions combine variable or fixed payouts with capital market participation and insurance cover during retirement. With people spending 20 years or more of their lives in retirement, models combining pension payments with high-return investments on the remaining capital could be increasingly attractive. Finally, the changing regulatory environment in Europe will also give rise to new product generations. Investors will continue to look for strong investments based on flexible, transparent concepts that address their individual requirements and offer good value for money. 

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We should stop thinking of healthcare as an expense and recognize it as an investment

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HOLDING BACK THE YEARS Want to see what an aging society will mean for us all? The Future Elderly Model, a microsimulation model tracking the elderly, takes a peek into our future

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t’s the stuff of fairytales: finding a magic formula to slow down the relentless, creeping march of old age and prolong our meeting with death. But adding five or 10 years to life expectancy has become more than mere fantasy – improved health, nutrition and hygiene have turned it into a realistic achievement. Of course, you only live out the fairytale if you are fit and healthy, not suffering from bodily decay and mental decline, drowning in misery and medical bills. And while few can resist the idea of extra time, surely this saddles society, resources and environment with an additional burden. More than 100 years after Germany’s “Iron Chancellor” Otto von Bismarck conceived one of the first pension schemes, more people are qualifying for old-age entitlement programs and remaining in these programs for longer than ever before. Tens of millions of baby boomers retire and life expectancy continues to rise. Trustees of Medicare, the US health insurance program for those over 65, calculate that Medicare spending will rise from 3.5% of gross domestic product in 2013 to 5.2% in 2035. So are extra years bound to spell fiscal pain? To try and work out exactly what extended aging means for US society, Dana Goldman – professor of public policy and pharmaceutical economics and director of the Schaeffer Center for Health Policy and Economics at the University of Southern California – developed a simulation model designed to predict the future costs and health status of the elderly in the US. The Future Elderly Model (FEM) takes a representative cohort of Americans, tracks them over time and simulates how they would fare if they changed their behavior, such as smoking less, or adding variables including changes in disability, improved prevention of diseases, changes in income and employment status. According to the FEM, people aged 51–52 in 2030 are 27% more likely to suffer from diabetes than that age group in 2004. As a resource, Goldman and colleagues turned to a longitudinal survey called Growing Older in America: The Health and Retirement Study, which has been interviewing Americans over 50 every two years

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since its launch in 1992. Goldman is now extending his work to both Europe and Asia. SLOW IT DOWN The key, the FEM found, to successful aging is “delayed aging,” namely allowing individuals to biologically age more slowly and enjoy the mind and body of someone chronologically younger. The Alliance for Aging Research, a group promoting healthy aging among the elderly, is among those advocating research into the science of delayed aging to increase people’s “health span,” as well as their life span. By manipulating genes, cutting back on caloric intake and modulating those hormones that affect growth and maturity, scientists have extended the healthy life span of invertebrates and mammals. Research suggests that similar approaches can be used for humans, delaying the onset of age-related diseases and disabilities. “If aging is delayed overall, the incidence of all disease falls, whereas if just one disease is eradicated, another tends to simply take its place,” says Dana Goldman. Delaying aging would bring dramatic benefits, the FEM indicates, namely an average increase in life expectancy of 2.2 years, equaling $7.1 trillion in economic gain over 50 years in terms of health-related expenditures saved. Cutting obesity alone by 50% would save $1.2 trillion. Making elderly Americans adopt a healthier diet and lifestyle to put them on a par with the health status enjoyed by their western European counterparts would save as much as $1.1 trillion in discounted health over 45 years, adds Goldman. DON’T BREAK THE BANK But what about the fiscal burden of those extra years? According to Goldman, we shouldn’t fear population aging as something that “could break the bank.” He suggests adjusting

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I F AGING IS DELAYED OVERALL, THE INCIDENCE OF ALL DISEASE FALLS. WHEREAS IF JUST ONE DISEASE IS ERADICATED, ANOTHER TENDS TO TAKE ITS PLACE DANA GOLDMAN

the eligibility age for old-age entitlement programs to offset the costs of increasing longevity. “If you allowed the eligibility age to change gradually, then you could do it in a way that would be fiscally prudent.” The major drawback here is that poorer and less educated people tend to have shorter lives so these would need a “reasonable safety net” to fall back on, he points out. Another idea would be to introduce a jobspecific retirement age. “Someone who studies for longer starts their career later and has a higher retirement age than someone who starts their career earlier. A manual laborer places a lot more muscular stress on their body than someone who sits at a desk all day long, so something like this could be taken into consideration,” he continues. However, if we fail to adapt policy measures to the new reality of increased longevity – and plow funds into research on how to delay aging to forestall disease – we risk placing huge pressure on the social fabric. Young people would be forced into caregiver positions to look after the old and sick, resulting in a “huge generational conflict,” Goldman predicts. The clock is ticking. In his view, we have only about a decade to act.

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THE NEW OLD Obviously, the easiest way to avoid health costs altogether is to stop getting ill in the first place. Preventative measures, such as encouraging people to exercise more, eat better and adopt a healthier lifestyle, could reduce costly and extensive hospital stays and the incidents related to expense-ridden disease. Again, it comes back to living not just longer, but well. A healthy old age means more quality time spent with loved ones, being productive for longer in the workplace and being able to transfer knowledge and expertise to younger colleagues. Elsewhere in society, active grandparents can look after the grandchildren, allowing more parents to go out to work. The definition of “old” has already changed. The entertainment industry was once solely the domain of the young and hip. Look at the likes of Mick Jagger, who is 73 and a great-grandfather but is still rocking the crowds. And urban areas are becoming more attractive as people seek out accommodation close to healthcare services, shops and facilities, in preparation for their later years. The key is to make those extra years count by living well, not just longer. 

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THE BEST OF BOTH WORLDS Combining annuities and capital market investments brings liability matching within reach of savers

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obert Merton’s study The Crisis in Retirement Planning (see pp. 38–40) didn’t go unnoticed in the financial industry. Merton’s argument, in conjunction with the current depressed yield environment, led Dan Krueger and Kai Wallbaum to cooperate across the Atlantic. With Krueger working for the US insurance branch of Allianz Group and his German colleague Wallbaum working for the asset management branch of Allianz Group – also the publisher of this magazine – both hope to launch a “holistic” retirement income solution in 2017. By combining an investment approach with a deferred annuity, “we have a solution thinking in cash flows,” Wallbaum says. Based on the retiree’s income needs, subdivided into must-haves and nice-to-haves, client and adviser devise an investment strategy that delivers initial retirement income based on capital market returns from the investment vehicles of Allianz Global Investors, PIMCO and selected third parties. If markets perform worse than expected, the annuity could kick in earlier; if markets do better, it kicks in later.

Liability-driven investment should be available to clients with the flexibility to change as necessary

The idea is as much a response to Merton’s study as to current low yields. While cash deposits may have been safe and sufficient in times when returns were 4% or higher, next to no returns on safe assets have workers struggling to grow their retirement nest egg. Combining longevity protection with a client-individual managed account allows retirees to participate in capital markets while covering the risks relevant during decumulation: market, inflation, liquidity and longevity risk. “Neither annuity nor investment product could address these risks by itself. Together, they do,” says Wallbaum. Following Merton’s argument, the approach ignores volatility and short-term market valuations. The idea is to design the product to be cheaper than a traditional variable annuity because the holistic approach should reduce the guarantee costs of the concept. “Both aspects could of course be offered separately, but the dynamic allocation between both components makes it possible to offer stable income levels at lower costs than current solutions in the market. The combination makes liability-driven investment available to retail clients with the flexibility to change as their needs evolve,” says Wallbaum. Yet much of the success of such an approach depends on good advice, including also a regular review of assets and liabilities based on allocation and performance. With investment horizons spanning several decades, digital support tools should enable an efficient setup for customer and advisor. 

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m e te

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STOP WORRYING ABOUT ASSET VALUE Volatility and valuations are the wrong measures for retirement saving, says Robert Merton. Income stream is what the industry and regulators should look to as a benchmark

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lthough aged 72, Nobel laureate Robert Merton is far from retiring. The professor of finance (MIT Sloan School) provides a personal example when he argues that people should retire when ready, not at a pre-set age. “Some people can’t wait to reach retirement, but I’m not one of them,” says Merton in a recent interview with PROJECT M, RO B E R T C . MERTON brushing aside the notion he should slow Robert Merton’s down. “When one reaches retirement age, achievements include one needs greater opportunities to make the first continuoustime option pricing intelligent choices.” model, the BlackMeanwhile, in the years leading up to Scholes formula, which secured him a retirement, people need savings solutions Nobel Prize in 1997. that are smarter than what is currently on He is a distinguished offer. Retirement plans suffer from a professor at the MIT Sloan School, preference for assets over income, Merton university professor criticizes. emeritus at Harvard University and “Investment value and asset volatility are Resident Scientist at simply the wrong measures if your goal is to Dimensional Holdings obtain a particular future income,” he writes in a contribution to the Harvard Business Review (HBR). Yet these are the benchmarks cemented into the regulation of DC plans. In the US, disclosures highlight net asset value and its changes while “regulators in the European Union have even considered requiring minimum rates of return. But if the goal is income for life after age 65, the relevant risk is retirement income uncertainty, not portfolio value,” Merton writes in HBR. In fact, such requirements would prohibit investments into vehicles that provide a reliable income stream. “Under regulations that set a minimum floor, retirement plan managers would not be allowed to invest savers’ funds in deferred annuities or long-maturity US Treasury

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bonds – the very assets that are the safest from a retirement income perspective.” In short: for retirees, risk should be defined from an income perspective and the risk-free assets should be deferred inf lation-indexed annuities. MAKE IT PLAIN Managers do not necessarily need to buy annuities. “They should match the risk-free part of the portfolio in such a way that, on retirement, the employee would be able to purchase an annuity.” This kind of liabilitydriven investment already exists for institutional investors; it simply needs to be applied on the individual level. Despite – or because of – his deep understanding of finance’s mechanics, Merton is no stranger to plain talk. When they’re planning to save for retirement, individuals are too often asked complex questions such as, “How much debt versus equity do you want?” This resembles salespeople asking car buyers what engine compression ratio they would prefer when what matters to them are mileage, acceleration and reliability. Merton bought his first stock aged 10 in General Motors, allowing him to combine finance with his other passion: cars. Throughout college and graduate school, young Bob Merton, as his late mentor Paul Samuelson called him, would rush to the brokerage houses by 6:30 a.m. and trade

Should workers be expected to understand complex retirement plans and make important choices?

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stock, convertible bonds, warrants and over-the-counter options before classes. What followed is an impressive career in finance. JOGGING OR WALKING? What irks Merton most is that, following the shift from defined benefit (DB) to defined contribution (DC) pension schemes, workers with little financial expertise are expected to understand complex retirement investments. “With DC plans, the responsibility falls on the member. They are asked to make decisions for which they are largely unprepared,” Merton explains. In his opinion, the idea that people are able to manage their retirement funds isn’t realistic. “If I’m having a knee operation, should the doctors ask me whether I want titanium pins or stainless steel ones inserted in my leg? It doesn’t make sense.” Instead, savers should be presented only with decisions that are meaningful to them (see page 35). Namely, the financial equivalent of asking whether a patient wants a standard knee operation or a more complicated, expensive one that would allow him to go jogging in the future. Secondly, retirement providers should help set sensible goals, so that a saver is left with no more than three concerns: his retirement income goals, how much he is able to contribute from his salary and how many more years he plans to work. And the only feedback he needs from his plan provider is how likely he is to achieve these goals. The next step is to strengthen trust in the financial industry. “Before surgery, the surgeon could show me a history of the surgeries he performed, a list of all the tools he is going to use and the surgical procedures he is going to take,” says Merton, adding, “But that wouldn’t mean anything to me. If savers accept that retirement plans are inherently opaque to them then the only option is trust.” 

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I F SAVERS ACCEPT THAT RETIREMENT PLANS ARE INHERENTLY OPAQUE THEN THE ONLY OPTION IS TRUST ROBERT C. MERTON

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Fear of complexity may be discouraging people from seeking vital retirement advice

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Loc al k now le dge

A steady improvement in the sustainability of pensions systems worldwide in the last decade

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PILLARS OF REFORM So, how’s your retirement looking? If you’re worried that the state pension system may not still exist by the time you give up the 9-to-5 slog, then there is good news

reland’s Minister for Social Protection Leo Varadkar sparked controversy back in July when he said that the country’s current pension system was “unsustainable.” He was merely the latest in a long line of politicians who have made similar comments about their own nation’s state pension schemes. In the case of Ireland, Varadkar had grounds, as the demographic outlook recently altered for the worse. The country still has the highest total fertility rate of any European country (2.1), but this has dropped from 4.0 in the 1960s. As Ireland’s long-term demographic dividend winds down, the country’s economic crash means its long tradition of migration outwards has revived, with the young and skilled seeking opportunities elsewhere. Throw in the fact that those who stay in the Emerald Isle are amongst the longest-lived in Europe, then it is understandable that Varadkar called the situation

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The flip side: systems have become more affordable, but this may threaten retirement income for future retirees

unsustainable. This is reflected in the Allianz 2016 Pension Sustainability Index (PSI), which analyzes the financial sustainability of pension systems in the long term. Ireland, along with Croatia, Italy, Russia and Switzerland, all experienced a significant decline of five places in their ranking since 2014. Mylène Sabatini, an economist with the International Pensions unit at Allianz, says that the decline of Russia was largely due to the ongoing economic crisis. In the case of the other countries, the drop was largely due to a deterioration in the demographic outlook following the 2015 revision of the UN Population Prospects. It is expected that these countries will now age faster than previously assumed. “Despite this, the pension system of Switzerland remains highly sustainable and compares favorably to peers,” says Sabatini. “Italy, Croatia and Ireland have implemented important reforms but maintaining the effort remains key, as old-age provisioning schemes remain under significant pressure while the fiscal room to maneuver remains limited.” Sabatini adds that the challenge for these countries is not simply to reform the pension system to make it more sustainable, but to reform it in such a way that it won’t add to old-age poverty. Recent reforms have increased the risk that retirees will fall into old-age poverty, making it more likely that governments will need to undertake greater

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social spending in the coming years. The good news is that overall there has been a steady improvement in the sustainability of pensions systems worldwide in the last decade, according to the Allianz PSI studies. “In the latest update, Chile, France, Japan, Malaysia and Mexico have moved more than five places up the ranking; Denmark has moved up four places as a result of reforms that include an increase in the age of retirement.” CHANGES BEAR FRUIT The improvement in the sustainability of pension systems has been driven by the recent effects of a wave of parametric changes made by governments up to a decade ago.

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PSI R ANK ING – CHANGE BE T WEEN 2014 AND 2016

50

It al y

45 40

Cr oatia Ir eland

Rank ing 2016

35 30

Franc e

Rus sia

25 20

Malaysia

Sw it zer land

15 10

Chile

5 0

Japan

0

5

10

15

Mexic o

20

25

30

35

40

45

50

Rank ing 2014 Decline in ranking compared with 2014 Increase in ranking compared with 2014 Minor changes compared with 2014

Source: Allianz A s set Management, International Pensions

Concerned that aging populations would significantly increase public pension spending, governments raised retirement ages and reduced benefits in line with expected increases in life expectancies. They also fostered environments that have increased the effective retirement age (the age when people actually retire as opposed to the official retirement age). The 2016 Allianz PSI update shows that – as in 2014 – Australia, Denmark, Sweden, the Netherlands, Norway and New Zealand top the ranking and have pension systems that seem sustainable in the long run. These six countries exhibit well-designed systems combining lean first-pillar pensions with high legal and effective retirement age, which put them on a financially sustainable path over the long run. China and Thailand are under the greatest pressure to reform, as both countries lack a comprehensive pension system, and only a small share of the population is enrolled in a pension plan. This means retirees have a high risk of falling into poverty. The population of both countries will age rapidly in the coming decades, which is expected to weigh on public finances, especially as the retirement age (both legal and effective) is low. In all, 54 countries were analyzed as part of the Allianz PSI. Countries included for the first time are Argentina, Colombia, Peru and the Philippines. Argentina, Peru and the Philippines are under little pressure to reform because their population is young and expected to remain so in the coming decades. What is common between all four is a large informal employment sector, which means coverage of the various pension systems is limited and old-age poverty risk is elevated.

In between the top countries and those under most urgent need to reform is a broad group with differing systems and pre-conditions. These include “young” countries with fragmented pension systems challenged by a rapidly aging population, and “old” countries with developed pension systems, which have initiated reforms in an attempt to safeguard the financial sustainability of their old-age provisioning systems. SUSTAINABILITY V ADEQUACY While the Allianz PSI assesses the financial sustainability of pension systems, it does not examine the flip side – the adequacy of state pensions. While many of the reforms implemented over the past decade have improved the sustainability of the pension systems, they have done so by reducing the level and the security of the public pension benefits. “Reforming pension systems is a delicate balancing act between safeguarding the financial wellness of one generation – who has worked and contributed to the existing system – without endangering the one of future generations,” explains Sabatini. This means systems have become more affordable and financially sustainable in the long run, but this may come at the cost of the adequacy of retirement income for future retirees. To compensate, incentives have been introduced to foster funded occupational and private pension plans which will result in a different income mix for future pensioners: the previously dominant first pillar (state pensions) will give way to funded elements; defined benefit (DB) will move toward defined contribution (DC) schemes; and family support structures toward more formalized, institutionalized ones (as in Asia). In addition to the PSI, Allianz has created an index to measure and track the evolution of retirement income adequacy: the Retirement Income Adequacy (RIA) Index, which analyzes different sources of retirement income. This shows that the pension schemes of the Netherlands, Denmark, Norway, Switzerland, the US and Sweden score high both in terms of sustainability and retirement income adequacy, closely followed by New Zealand. Sabatini says that the first (public) pillar of the pension systems of the Netherlands, Norway and New Zealand is both sustainable and able to generate adequate retirement income. She notes in countries such as Australia, the first pillar is highly sustainable but scores poorly in terms of retirement income adequacy. Chile and Mexico also score well in terms of sustainability but poorly in terms of income adequacy. Indonesia, India, Malaysia, Hong Kong, China and Thailand also rank at the bottom of the RIA index. 

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SUSPICIOUS MINDS HOLDING BACK EUROPE Suspicion is the guiding principle on European markets in the post-financial crash era, and it’s hampering recovery

By Olivier Rousseau

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he global financial crisis, which has left economies scarred and maimed, delivered the final blow to “respectful deference.” This was the notion, adopted by far too many regulators during the bull days of the mid-2000s, that despite excess market froth, there was no cause for alarm: the private sector knew what it was doing and it was mostly doing the right thing. Within Europe, the most extreme version of this was displayed in Ireland. There, the excessively cozy relationship between regulators and bank executives bordered on servility. It was assumed that the enormous pay checks of the bankers reflected vastly superior competencies. As a result, instead of being duly intrusive and challenging, the financial supervisor and central bank were, in practical terms, hijacked by the private sector. Lehman Brothers was a classic example where the markets and authorities were misled to the true state of a bank’s finances. However, a contributing problem to the crisis was that the prudential frameworks were not constructed to carry the loads placed on them. Rules were either too lax, too weak or non-existent. An example is that within the European Union definitions of equity capital differed substantially. This meant that in some countries bank solvency ratios were not comparable to those where regulators applied a stronger definition of equity capital. How can we return dynamism to the Another example is that internal risk models European markets? allowed banks to conclude that their By restoring trust and acknowledging activities were not placing their own capital that equities have at great risk. That was partly delusional, a long investment duration as was the safety of special-purpose

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Onsedissum senempore qu autem nissimus idunto optam veria dicte nihicie ndellenieturNempos modiaepero cuptus est, quas et aut et

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vehicles (SPV) created to sit outside balance sheets. As the crisis took hold, the fiction was exposed and the banks repatriated SPVs onto the balance sheets at the worst possible time.

institutional investors has become far shorter. This is influenced by the increasing number of short-term players, such as hedge funds, and high-frequency trading (HFT). Over the last decade, HFT has fundamentally altered markets. While some traders have replaced SUPER-TIGHT LEGAL ORDER O L I V I E R RO U S S E AU The new financial era is dramatically different banks in providing short-term liquidity to the Appointed executive director of the Fonds de from pre-Lehman days. Excessive suspicion market (“scalping”), a large number have Réserve pour les has replaced excessive trust in the minds business models that can be construed as Retraites (FRR) in 2011. Formerly worked for of regulators, politicians and the public. electronically front-running end investors and the French Treasury in traditional intermediaries. The prudential frameworks for banks Paris. He also worked 11 All these short-term strategies, encouraged and insurance companies have been severely years at BNP Paribas and served on the tightened and a wave of rules introduced that by free money, create substantial volatility as resident board of is often described as a “regulatory tsunami.” positions are liquidated in the case of large directors of the European Bank for price corrections. But it is not only financial Basel III has more than doubled common Reconstruction and shenanigans creating volatility. Genuine equity to 4.5% (up from 2%) on risk-weighted Development in London, and as regional assets of banks wishing to keep their license to hedging policies contribute when executed via economic and financial operate. A new buffer of 2.5% has been added option strategies. This is because when the counselor at the French embassy in Stockholm while own account trading is treated price of a security or a basket falls, the delta unfavorably when not banned outright. A equivalent of the put increases as the countercyclical buffer of up to 2.5% in tier one capital can be counterparty must sell more of the underlying securities – added, if supervisors deem it necessary. And the largest exaggerating the price fall. banks enjoy an additional 3.5% systemic buffer. Whereas risk-based solvency requirements for insurance companies RESTORING MARKET DYNAMISM are becoming the norm almost everywhere in the world, in How can we return dynamism to European markets? Part Europe, Solvency II demands a 99.5% confidence level on of the answer is under way: a relaxation of Solvency II. The one year. In the US, a 10-year holding period is assumed real solution, however, would be to restore long-term with a 95% confidence interval. Solvency II has restricted horizons so insurance companies no longer measure the amount of stocks European insurance companies and solvency on a one-year basis, and also to acknowledge that defined benefit (DB) pension funds can hold. This locks equities have a long investment duration. The current them into sovereign bonds despite abysmal yields. In effect, standard is one reason why Europe’s economy is so much Solvency II has become a tool of financial repression more fragile than that of the US. subsidizing governments’ debt and providing cheap credit DB pension schemes should also be able to switch from to the private sector. super-low-yielding bonds into more equities and stable cash-flow-producing unlisted assets. This could offer a The combined effects of supranational and national regulatory measures are visible in the plight of DB funds in reasonable prospect that pension promises could be upheld the UK and the Netherlands. Because asset owners with over the long term. To deal with short-terms players, some fragile funding ratios are prevented from taking more risk people advocate a return to fixing prices on stock markets into their portfolios, they cannot sell poor-yielding bonds once a day. This is an extreme solution, but has merits, as a and rebalance with higher-yielding equities. These poor large portion of HFT is not linked to real economic activity. return prospects have the unintended consequence of Instead, it is people stealing directly from the plates of digging pension schemes deeper into their unfunded hole. genuine economic actors. Finally, the individual investor should not be forgotten. In countries like France, regulated rates and tax regimes NEGATIVE IMPACT OF SHORT-TERMISM outrageously favor low risk and liquid investments to the Tightening regulations cannot alone be blamed for this situation. A significant problem is that the horizon of detriment of long-term capital financing the economy. 

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WHY WE RETIRE WHEN WE RETIRE Extending retirement entry age is a commonly prescribed suggestion to make pension schemes more sustainable. Yet what drives workers’ decisions to retire when they do?

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hat workers do in their final years before retirement is crucial to their private retirement finances and also to the state coffers. To help reduce the financial pressure on state pensions, policymakers often seek to extend working lives by raising the retirement entry age. The message seems to have reached the audience. When asked whether they will retire at the age of 65, or before or after, 37% of Americans give the answer “over 65,”

according to the Gallup Economy and Personal Finance survey of 2015. Yet life rarely follows a schedule. In the Health and Retirement Study’s initial cohort (born 1931–1941), 41% of those who had been working at the age of 58 retired earlier than they had planned. The question is why. According to the 2014 Employee Benefit Research Institute Survey, about half of retirees reported having to leave the workforce earlier than planned primarily

Life: is there any pattern or shape to it? Plan as we like, so much happens that is unforeseen

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owing to health issues (61%). Caring for a spouse or other family member with health issues (18%) also ranked high, as did work-related troubles such as downsizing or changes in the skills needed to carry out their jobs (25%). Geoffrey Sanzenbacher agrees. Health is the most important factor in earlier-than-planned retirement, followed by involuntary job loss and changes in the family such as a spouse’s retirement, Sanzenbacher, Alicia Munnell and Matthew S. Rutledge (all Boston College) write in their paper, What Causes Workers to Retire Before They Plan? “Researchers often control for whether or not a worker is in a blue-collar job, assuming that less physical, whitecollar occupations allow for longer careers,” Sanzenbacher told PROJECT M. “But this ignores the fact that even whitecollar workers may find themselves relying on skills that have declined.” As an example, he points to pilots losing their eyesight or dentists losing fine motor skills.

Together with Anek Belbase, Sanzenbacher constructed a “susceptibility index” that ref lects how prone an occupation is to declines in ability, regardless of whether the occupation relies on physical abilities (blue-collar) or cognitive challenges (white-collar). Once the index is factored into early retirement and disability entry regressions, the commonly used variable of blue- or whitecollar is not statistically significant. “This indicates that it is not so much whether a job is blue- or white-collar, but whether or not the job uses abilities that decline over a worker’s life. It just so happens that blue-collar jobs, which are typically more physically demanding, are more likely to fall into this category,” Sanzenbacher explains. He cautions that the type of occupation is not the only thing that determines a worker’s ability to work longer. “Some workers, through luck and lifestyle, will not experience a significant decline in ability relative to their

Over 60% of US workers reported having to go into retirement earlier than planned, according to a survey by EBRI in 2014

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job requirements.” Active people in their 60s have as much stamina as inactive people in their 30s. Firefighters, for instance, are unlikely to experience declines with age that might be common for less active individuals. A sedentary job, however, can contribute to many long-term illnesses, such as diabetes and heart disease. DO WHAT YOU WANT AND WORK LONGER For workers fortunate enough to decide when to retire, what role do job characteristics, job satisfaction and personality traits play on their decision to stay in the workforce? Compensation and financial incentives will certainly come to mind. However, there are other work-related factors that can affect individual retirement decisions. Specifically, job characteristics such as autonomy, skill variety, task significance and difficulty, stress and physical demands, peer pressure, and relations with co-workers all play a

crucial role in determining the psychological commitment to work at older ages. Personality traits also play an important role. In the study Labor Force Transitions at Older Ages: The Roles of Work Environment and Personality, Marco Angrisani, an economist at the University of Southern California, and his co-authors report, “We found that being open to experiences plays a significant role in older people deciding to stay in the workplace.” Somewhat surprisingly, the study found that conscientiousness has a low impact on labor force transitions. Another common measure to salvage state pension schemes from issues of unsustainability, besides increasing the retirement age, is lowering benefits. However, a recent study (Evaluating the Impact of Social Security Benefits on Health Outcomes Among the Elderly) establishes that higher benefits improve mental health and cognitive abilities. “Our findings suggest that changes to social security benefits have important implications on the health and well-being of the elderly,” Padmaja Ayyagari (University of Iowa) told PROJECT M. Depression, for example, is strongly associated with low income and is often more severe among persons with disabilities. A higher income could improve health through less financial strain, better access to healthcare and morebeneficial living arrangements. So what are policymakers in the US and elsewhere to do? Increase social security benefits to reduce healthcare spending, or reduce social security benefits at the expense of exploding healthcare costs? “In our study, we found that a $1,000 increase in annual social security income both increases the total cognitive score by approximately 4% and improves day-to-day activities and the ability to care for oneself by 16%,” Ayyagari said. 

W H O I S M O S T L I K E LY T O R E T I R E E A R L I E R ? (In order of most to least susceptible) 1. Assemblers 2. Police and detectives 3. Truck drivers 4. Licensed practical nurses 5. Textile operators 6. Designers 7. Childcare workers 8. Residential cleaners 9. Cooks 10. Super visors & proprietors Blue - c ollar

W hite - c ollar

Source: Susceptibility Index, Geoffrey T. Sanzenbacher et al., “Does Age-Related Decline in Abilit y Correspond with Retirement Age?”, September 2015

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Global oppor tunities

INCREASINGLY THIRSTY Disparity between water supply and demand is a growing international concern. Investing in infrastructure can ease the problem By Andreas Fruschki

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ater, or lack of it, has been making headlines around the world during the past year. Monsoon rains may have brought temporary relief to India, but since 2014, thousands have died from the extreme drought that has gripped the country. In California, the state’s hottest and driest drought ever recorded has cost the agriculture sector billions of dollars, ravaged water supplies and fanned the flames of deadly wildfires. In October 2015, São Paulo’s Cantareira reservoirs, which supply water to over 9 million people, were operating at a mere 12% capacity after two years of drought. The world’s water supply is suffering. According to the World Economic Forum’s Global Risks 2015 Report, water crises are the planet’s number one societal risk. A blend of population growth, urbanization, rising consumption levels and climate change are increasing the disparity between supply and demand at an alarming rate. According to the 2030 Water Resources Group, there is a 40% gap between existing water supply and expected demand in 2030. This goes beyond providing enough drinking water. Domestic needs make up just 8% of global water use, with industry, including energy production, comprising 22%. By far the largest water consumer is the agricultural sector, which accounts for around 70% of worldwide use. This is a problem. The UN says that by 2050, agriculture will need to produce 60% more food globally and double its current output in developing countries to satisfy a growing population and increased standard of living. WANTED: TIME AND MONEY There are three main solutions to the issue of water scarcity: countries around the world must expand their access to water

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supplies; they must increase the efficiency of this access; and they must improve the quality of the water they provide. This opens up a number of investment opportunities. Unlike other natural resources such as oil, gold or coal, it isn’t possible to invest in water directly. Instead, investments can be made in companies that provide infrastructural solutions like pumps and pipes, or firms that produce water treatment systems or efficient irrigation technology. One area that has seen a recent uptick in investment is desalination plants. With 97% of the world’s water in our oceans, turning salt water into fresh water is a popular – albeit energy-intensive and costly – choice in hot, dry countries with large

F O O T P R I N T S O F WAT E R “A visual exploration of evaporated water,” by Zachary Burns. The images show what remains of 2 x 3 cm water droplets on glass, after evaporation. Under the microscope, traces of impurities can be seen, revealing the origin of the water

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coastlines. A 2015 Frost & Sullivan study expects desalination plant capacity to double by 2020. By 2025, the percentage of the population consuming desalinated water could jump from 1% today to 14%. The replacement of aging infrastructure is also set to be an area of increased investment over the coming years. A prime example is the United States, where a large proportion of water pipelines are now 100 years old, meaning they are nearing or have already passed the end of t hei r usef u l l ives. According to the American Society of Civil Engineers, there is now an average of 650 water-main breaks in America every day. Spending on water infrastructure has been in decline for almost a decade in the US, but with postfinancial crisis budgets now healthier and investment no longer postponable, local authorities are beginning to act. Upgrading won’t come cheap, though: the American Water Works Association says the countr y’s buried drinking water infrastructure needs more than $1 trillion worth of spending over the next 25 years.

ANDREAS F RU S C H K I Portfolio Manager Allianz Global Water Fund and Research Sector Head Global Resources

instead of 3.3 liters of water per liter of beer; Nestlé says it is aiming to make a 40% reduction in water consumption at its European sites by 2020. THE NEW OIL? For several years, there has been some discussion as to whether water is “the new oil.” The analogy isn’t accurate; oil can be replaced by something else, but we are yet to find a substitute for water, which makes it the most important resource on Earth. Growing demand for water is a serious issue, but the Earth possesses adequate resources, and solutions do exist: we know how to divert water from abundant locations to regions where it is scarce; how to transport and store water securely; and we know how to turn salt water into fresh water. But there are still too many countries where the infrastructure simply isn’t up to scratch. This can only be solved with time and money. 

MEASURING WATER FOOTPRINTS Even for companies not directly involved in the industr y, water is becoming an increasingly important factor for investment. Water footprint assessment tools mean businesses can now gain a more accurate picture of where and when water is used in their, and their suppliers’, operations, allowing them to address any process weaknesses. By disclosing the information alongside energy and carbon footprints, this information also gives investors greater insight into a company’s business model when analyzing its ESG criteria. Some firms are using the data to set themselves “water targets.” Beverage giant SABMiller, for example, is aiming to use three

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Rio 2016: the average cost per athlete was 10 times the average Brazilian’s salary

MEGA-FAILURES Now that the medals have all been won and the cheering crowds are gone, it’s time to count the cost of the sporting extravaganza known as the Olympics. Surprisingly, given the near bankruptcy of the host and other problems that plagued its preparations, the 2016 Rio de Janeiro Olympics were not as financially disastrous as they could have been

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T

he gold medal holder in Olympic cost overrun in dollar terms remains Sochi (2014). The final price tag for Vladimir Putin’s folly was a staggering $16.3 billion higher than the planned $5.6 billion. Silver­ is retained by Barcelona (1992) with a cost overrun of $7 billion while London (2012) claims bronze with a $6.5 billion overspend. Rio, with an overrun of $1.5 billion, ranks as a mid-level Olympic blowout. However, cautions Bent Flyvberg, “This came at a time when Brazil could least afford it, given that it’s facing its worst economic and political crisis since the 1930s.” Flyvberg, chair of Major Project Management at Oxford’s Saïd Business School, defines mega-projects as those costing more than $1 billion and affecting more than a million people. With sports-related costs ranging up to $21.9 billion (Sochi), the Olympic Games fall into that category. But all mega-projects have the potential to be mega-disasters. The Berlin Brandenburg Airport is one major embarrassment. Costs have quadrupled to €8 billion ($9 billion), and, originally scheduled for 2012, the futuristic airport remains unopened. Berlin’s farce is only an extreme version of the problems that plague many projects. “Most mega-projects fail,” says Flyvberg. “Most” is nine out of 10. Nine out of 10 have cost overruns or benefit shortfalls, or are not completed on time. To obscure the issue, some projects fail financially but are still considered a success. Certainly passengers zipping beneath the seabed of the English Channel appreciate the speed of the transit. Few would recall that the project was initially insolvent, with a return on investment of -14.5%. In fact, mega-project failures are so common that Flyvberg has over 200 from 20 countries and five continents in his database. And yet we continue to start new projects. As populations grow and cities develop, mega-projects can provide solutions to pressing transit, water security and natural resource management problems, as well as providing the information infrastructure required for today’s world. Unfortunately, mega-projects as they currently work are a poor delivery model. THE BIRTH OF A MEGA-PROJECT The question arising from Flyvberg’s research is, why do we continue to be so bad at building the things we so desperately need? Infrastructure planning, he explains, is based on the business case, which sums up benefits against costs. When benefits outweigh costs, building begins, but planners are notoriously inaccurate in estimating costs. Business cases are riddled with errors, with costs creeping up as scope increases. In rail projects, for example, costs are on average 44.7% over forecast, whereas ridership only meets 51% of forecasts.

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Planning errors would be forgivable if the industry showed improvement. However, as his database indicates, over the last 70 years there has been none. Without improvement, Flyvberg dismisses incompetence as an explanation. He points out more cynical reasons why projects cost more and benefits are less than expected. Mega-projects often require a hybrid of public-sector support and private-sector input, with neither having the capacity to complete the project without the other. It can be one of the rare times when co-operation between trade unions, private companies, consultants, citizens and politicians is in everyone’s self-interest. These stakeholders all want the mega-project to begin, and they interact in a way that forces it off the drawing board and into the public sphere. Unfortunately, those who benefit most are often the ones identifying costs, developing timelines and forecasting benefits. With so much support for megaprojects, the business case is often predetermined, with little critique from insiders. Outsiders are excluded entirely. In reality, benefits and costs are more complex. Large projects often have long planning horizons or nonstandard design, or are the first of their kind. Benefits are sometimes financial but often represent improvements in quality of life. This makes forecasting prone to abuse, with costs and benefits adjusted as needed. Those involved are not naïve, but Willie Brown, a former mayor of San Francisco, was more brazen than most when he dismissed questions on the Transbay Terminal cost overrun. Speaking at the time that the first budget shortfall became apparent, he said, “News that the Transbay Terminal is something like $300 million over budget [now $700 million] should not come as a shock to anyone. We always knew the initial estimate was way under the real cost.”

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He then confirmed the real issue: “The idea is to get going. Start digging a hole and make it so big there’s no alternative to coming up with the money to fill it in.” OLYMPICS – A MODEL FOR DISASTER Improving mega-project planning and delivery is possible. Flyvberg advocates a move away from current forecasting methods. Rather than allowing planners to be influenced by excitement and optimism, he recommends reference class forecasting. This ignores specific details of any one project and instead looks at the timelines, costs and benefits of similar project types, which allows for a less biased and more realistic representation. He also highlights the role of the private sector, which typically delivers mega-projects. Procurement methods such as cost plus (where governments pay the costs of a project and a percentage as profit) disincentivize cost reduction and allows companies to shift the risk onto the government. An open and transparent bidding process with financial responsibility shared between the public and private sector is essential to managing costs. If these are some of the elements that make successful mega-projects, it is easy to see why the Olympics are unsuccessful. They represent once-in-a-lifetime events for most locations. Those involved have no experience in planning mega-projects, the local industry has never built anything to a similar scale, the bidding process is often rushed, non-transparent and corrupt, and cost responsibility is entirely borne by the host city. “If you wanted to make it as difficult as possible to deliver a megaproject on budget, you would follow the template of the Games,” says Flyvberg. Aware of a growing reluctance by potential hosts to bid for the Games, the International Olympic Committee developed a knowledge management program in the early 1990s. This shares knowledge between past and future host cities. Since the program’s beginning, the median cost overrun has fallen from 231% to 51%. However, the average cost of the Olympics has increased, with London being the most expensive Summer Games and Sochi the most expensive Winter Games ever. Cost overruns aside, the Olympic Games are also a significant burden on hosts, particularly in developing countries. To put that into perspective, the average Games cost $500,000 per athlete. Rio was lower, at a cost of $400,000 per athlete, but it was still more than 10 times the average annual salary in Brazil. If the country had invested that Most megaprojects fail. So money in its citizens, it might not be why do we keep experiencing its current political and starting new economic turmoil.  ones?

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A WATERY END An ice-free North Pole could soon become reality. The consequences reach far beyond the Arctic P E T E R WA D H A M S

By James Tulloch

I

f Peter Wadhams is correct, flags at the North Pole will soon have to be attached to buoys. For more than 40 years, the Cambridge physicist has been hitching rides on icebreakers and nuclear submarines, pitching camp on ice floes, observing the ebb and flow of Arctic sea ice. He is convinced that by 2020, if not before, in summertime that ice will melt away. To put this in perspective, in the 1980s, Arctic sea ice usually covered about 3.01 million square miles (8 million square kilometers) at its lowest ebb in September – an area the size of Brazil. These days, September ice extent is about half that (the record low in 2012 was 1.3 million square miles (3.4 million square kilometers). In other words, the Arctic has already lost ice the size of the Indian subcontinent. “It is a different world,” says Wadhams. “When I first went, nearly all the ice was multiyear ice – heavy, thick, rugged stuff. It was very tough to travel on and very impressive. Now it is just first-year ice. There is nothing to it. It is very flat and thin, only a meter thick instead of three meters. In the past, we could camp on the ice and supply it by air. Now, if you set up a runway, the ice breaks up.” A once-formidable landscape is wasting away and there is nothing we can do about it. Hence the mournful title of Wadhams’s book: A Farewell to Ice. “We are past the point of no return,” he says. “The Arctic is warming about three times faster than elsewhere. Every feedback is tending to accelerate warming and ice retreat. There is no countervailing force that is going to save the ice or bring it back.”

leads the Polar Ocean Physics group at Cambridge University studying the effects of global warming on sea ice, icebergs and the polar oceans. This involves work in the Arctic and Antarctic from nuclear submarines, autonomous underwater vehicles (AUVs), icebreakers, aircraft and drifting ice camps. He has led over 50 polar field expeditions

MELTING POINTS The main culprit is warming air temperatures, aided and abetted by warmer water from the Atlantic Ocean infiltrating the Arctic, and new wind patterns that blow first-year ice out of the Arctic before it can thicken and become multiyear ice. Feedbacks reinforce the cycle of decline. For instance, when sea ice retreats, it leaves open water, which allows the winds to generate waves. Waves penetrate and break up the ice, a process Wadhams is studying with the US Navy. The downward trend continues in 2016. As of 18 July, after the warmest Arctic winter on record and record-low sea ice extents in every month except March, the National Snow and Ice Data Center shows this year’s sea ice extent is neck and neck with the record low levels in 2012.

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The ice is melting as CO2 emissions smash the system and climate patterns change

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Should ice extent dip below 1 million square kilometers (386,000 square miles), the Arctic would be considered free of sea ice. “September ice is going to vanish first, but July, August and October will not be far behind,” says Wadhams. “It will be like the Antarctic, where you have an ice-free summer about four months long.” CONSEQUENCES FOR CLIMATE, SEA LEVELS Although that may be great news for cargo ships shuttling between Asia and the West, for people affected by climate change it is very bad news indeed. Wadhams identifies three consequences. First and foremost is the darkening of the Arctic, which accelerates global warming. White ice reflects the Sun’s heat like a giant parasol – the albedo effect. When the parasol contracts it leaves dark open water, which absorbs heat. Warmer water inhibits ice formation and heats the air over Arctic coastlines, encouraging snowmelt and darkening the land. Earth’s reduced albedo is a major contributor to global warming, say researchers at the Scripps Institution of Oceanography. They calculate that since 1979 the darkening Arctic has had the same effect as one-quarter of global CO2 emissions. Based on preliminary findings from his ongoing research, Wadhams is even more pessimistic. “That paper is outdated because it didn’t take account of snowline retreat in summer,” he says. “If you add the two effects together, then it is equivalent to about half of the effect of CO2 emissions.” Second is the threat of a gigantic release of methane, a greenhouse gas more than 25 times as potent as CO 2 , over a 100-year period. As the Arctic Ocean warms, it thaws seabed permafrost, which releases trapped methane. Recent expeditions have discovered methane plumes in the East Siberian and Kara Seas, says Wadhams, who calculates that Arctic methane emissions could add 0.6 degrees Celsius to global temperatures. Third is accelerated global sea level rises – almost certainly more than a meter this century – due to warmer Arctic air melting ice on land, particularly the Greenland ice sheet.

ARC TIC SE A ICE E X TENT (Area of ocean with at least 15% sea ice) 2016 2015

2014 2013

2012 1981–2010 Average

± 2 St andar d D ev iation s

E x tent (million s of k m 2)

16 14 12 10 8 6 4 2

Apr

May

Source: National Snow and Ice Dat a Center

Jun

Jul

Aug

ARCTIC DEATH SPIRAL A Farewell to Ice by Professor Peter Wadhams was published by Penguin Books in September 2016 More on: www.projectm-online.com

ARCTIC DEATH SPIRAL OR ALARMISM? Professor Wadhams’s predictions are controversial, some say alarmist. He attracts criticism for the severity of his warnings and the frequency with which he sounds the alarm. This is largely because he is far more pessimistic than the consensus view represented by the Intergovernmental Panel on Climate Change (IPCC): Arctic sea ice will persist until mid-century at least. SO IS HE GUILTY OF CRYING WOLF? “I haven’t cried wolf yet,” he chuckles. “My cry has been that the trend leads us towards zero ice in 2016 or soon after. If we don’t go to zero in 2016 or a year or two later then my predictions will be unfulfilled.” That said, he argues that the IPCC’s stance is preposterous. “You can’t go to the Arctic and see the trends over 30 years and not arrive at zero ice very soon. So how come they are predicting 2050 to 2080? Because their models aren’t any good. My opponents are not so much climate change deniers but climate modelers who don’t go to the Arctic.” Wadhams has been going to the Arctic ever since he landed a research assistant’s job aboard the first ship to circumnavigate the Americas in 1969. Over that time he has seen Arctic peoples forced to move villages away from fast-eroding coastlines. If his predictions about “the Arctic death spiral” are correct, the impacts will uproot many more people worldwide. This summer, he scheduled a research trip to Greenland but had to postpone until next year. The reason: not enough ice. 

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The out sider’s v iew

ESTHER BÉJARANO RAPS AGAINST HATE An Auschwit z sur vivor, Esther has had a successf ul late career as a hip-hop ar t ist

By Dirk Wagner

W

NAME

Esther Béjarano

AG E 91

P RO F E S S I O N

Singer and hip-hop artist

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e’ll live forever ... in spite of our enemies,” sings 91-year-old Esther Béjarano to an audience in Hamburg, Germany. Béjarano performs the song, written in 1943 by a poet in the Jewish Ghetto of Vilnius, Lithuania, with Colognebased hip-hop band Microphone Mafia. “We represent three generations and three religions,” she explains. Béjarano believes people from different religions and different cultures can work together in peace. Amongst the band members is a Muslim whose parents migrated from Turkey, a Christian whose parents came from Italy, and she is the Jew from Germany. At the age of 18, Béjarano was taken to Auschwitz and there had her first public performance. Recruited for the Auschwitz Women’s Orchestra, she sang in the morning at the camp’s gate while the prisoners traipsed to the fields and in the evening when they returned, shattered by the hard physical work. She vividly recalls the group singing for new arrivals at the camp gates. “They had no idea what was coming,” she reflects. “They probably thought: well, if they’re playing music, it can’t be that bad.”

As the war neared its end, Béjarano escaped and later emigrated to Israel, where she studied singing. She returned to Hamburg in 1960 but felt like an outsider. If she saw anyone who was her age or older, she wondered what crimes he had committed: “Maybe he was the one who killed my sister or my parents.” For 30 years, she remained silent – until the National Democratic Party of Germany set up an information stand in front of her boutique. “That made me angry,” she recalls. “But what made me angrier was when the police arrived. They defended the neo-Nazis against the people protesting against them. That’s when I thought: I have to do something. I have to let everyone know I’m an Auschwitz survivor.” In 2009, Béjarano, a co-founder of the International Auschwitz Committee and honorary chair of the Union of Persecutees of the Nazi Regime, recorded the album Per La Vita with the band the Microphone Mafia. La Vita Continua, their second album, was released in 2013. The singer looks at her nascent hip-hop career with a sense of pride: “I’m glad I can still do something like this.” 

AWARDS FOR PRO J ECT M PR IN T AN D O N L IN E First published in 2008, PROJECT M has to date won 76 corporate publishing awards. The latest awards from 2013 to 2016: AMERICAN INSPIRE AWARDS: Silver (Online) · ASTRID AWARDS: Gold (Magazine); Silver (App); Honors (Photography: Repor tage) · BEST OF CONTENT MARKETING (formerly BCP): Gold (Financial Ser vices B2B); Gold (Website); Silver (Best Crossmedia Solution) · COMMUNICATOR AWARDS: Silver (Award of Distinction, Website); Silver (2D animation); Silver (mobile)  ·  CHICAGO ATHENAEUM MUSEUM

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Photo Credits Cover/U2: Peter Riedel; p. 3, 4, 12, 21 Illustrations: Berto Martínez; p. 6–10 Illustrations: Bernd Schifferdecker; p. 15 Adam Voorhes/ Gallerystock; p. 17 Jose Luis Pelaez/Gallerystock; p. 18–20 Carl Warner; p. 22–23 Dan Saeliger/Trunkarchive; p. 24 Will Vaultz; p. 25 Bloomberg/ Gettyimages; p. 26 Howard McAlpine/Gallerystock (1), Shutterstock (1); p. 28–29 Bartholomew Cooke/Trunkarchive; p. 31 Ilan Rubin/Trunkarchive; p. 32–33 Martin Parr/Focus; p. 35 Stocksy; p. 38 Elmer van der Marel/Visum; p. 40 Shutterstock; p. 41–42 Nick Dolding/Gettyimages; p. 44–45 Kinsey Barnard; p. 47–49 Illustrations: Quickhoney; p. 50–51 Zachary Burns/ Anzenberger Agency; p. 52–53 Carl de Souza/Gettyimages; p. 54 Martin Sachse/Ullstein-Bild p. 55–56 Charlie Surbey/Gallerystock; p. 58 Ullstein-Bild, Adam Berry/Gettyimages

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Notice: The opinions expressed in the articles in this magazine do not necessarily reflect the views of the publisher or the PROJECT M editorial team. Impor tant Information · I nvesting involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. · T his document does not constitute investment advice or a recommendation to buy, sell or hold any securit y and shall not be deemed an offer to sell or a solicitation of an offer to buy any securit y.

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