Many people are currently not saving enough by themselves to achieve a comfortable retirement income and are relying on employer- or Government- funded pension savings. This potential shortfall has been highlighted in a recent paper published by the World Economic Forum – titled “We’ll Live to 100 – How Can We Afford It?”
The paper identified that in three decades time, many countries could face a potentially catastrophic shortfall in retirement income –resulting in a lot of coverage in the mainstream international press with some scary-sounding headlines such as “World’s Major Economies to Come up $400 Trillion Short on Retirement Savings” (Bloomberg.com, 26 May 2017), or “As WEF Says, Pension Ages Simply Must Rise As We All Live Longer” (Forbes.com, 28 May 2017), or “Pensions are sitting on a global time bomb, warns WEF” (Telegraph.co.uk, 26 May 2017).
Many of these articles have focussed on the Governments’ increasing inability to fund their social security liabilities, that increasing longevity means there will be fewer workers supporting a growing number of retirees, and that retirement savings need to be higher or for longer unless retirement lifestyle expectations are lowered.
Some of the recommendations outlined in the WEF report – often only brushed upon in the press coverage – aren’t reliant on Government policy changes, mandatory employer pensions, or swingeing reforms to the social security provision, but can be influenced by the finance industry:
Make saving easy
With the increasing pace of technological development, savings products are becoming easier to understand and to invest into, and international payments are becoming more accessible, reliable and cheaper. An affordable level of regular savings should be the mainstay of everyone’s financial plan, so product providers and advisors should ensure that they continue to offer simple solutions for these clients.
Support financial literacy
Financial literacy seems to be increasing gradually – a recent survey has shown that millennials, for example, recognise the value of financial advice more than previous generations – but many investors with long-term savings goals are still influenced by short-term market volatility and stop their regular savings, or rebalance their investment at the worst possible times. The need for professional financial advice is as critical as ever, and as individuals find themselves having to invest into stockmarkets in order to achieve returns that their banks can no longer provide, investment advisors and discretionary fund manager services will become increasingly important.
Provide clear communication about pension benefits
For investors saving for a long-term goal such as retirement, it is important to focus on two key questions: is the investment delivering the expected rate of return? and is the projected maturity value still in line with the goal? It is too easy to focus on figures such as current value or surrender value that are usually quoted on statements, when in reality these have little bearing on progress towards the savings target. Product providers and financial advisors are in a prime position to change behaviour here and to improve financial literacy, helping investors to better understand the long-term nature of their goal and the importance of maintaining their regular savings.
To some degree, the recent mainstream press coverage will help with general awareness, and provides a good opportunity to target potential new customers (in an ideal world, this would be everyone who is earning) but in order to make a step-change in the retirement savings rate, it will be essential to increase the uptake of people seeking financial advice – to help them understand the value that this can bring them, and that it is not the sole preserve of ultra-high-net-worth individuals.
There is already a wide range of different investment vehicles available across the globe which are suitable for long-term regular savings goals, and as technology improves and regulations change this range will continue to increase making products more accessible and affordable. So-called ‘robo-advice’ solutions are being pushed as being able to provide a cheap and easy introduction to investing and in some situations these may be suitable however, they are unable to truly understand a client’s needs, or to provide reassurance and guidance when markets are volatile to prevent short-term reactive behaviour from undermining long-term investment goals.
Whatever the future brings, there will always be a need for qualified professional advisors and it seems that the markets are starting to wake up to the fact that the international financial advisor community is perfectly positioned to educate, support and encourage individuals to save regularly for their retirement and ultimately help bring about a change in the global financial future.
