Real Impact Of Global Financial Crisis On Baby Boomers


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This detailed study explores the impact of the global financial crisis across multiple countries, with a particular focus on Baby Boomers, those who are at or close to retirement. The article provides detailed sizing of this segment across key countries, explores asset allocation, and looks at the actual declines in portfolios vs. the market and public perception driven by the media. The conclusion: the people who had the most money suffered the steepest portfolio declines--however most of these declines have been recouped. The lasting impact of the credit crunch will be a slower burn--increased taxes, elimination of company benefits will result in a large portion of the population having considerably less savings.

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Real Impact Of Global Financial Crisis On Baby Boomers

  1. 1. The Real Impact of the Global Financial Crisis on Baby Boomers Baby boomers are retiring a whole lot less wealthy
  2. 2. T he term “wealth destruction” has become the catchphrase for the global financial crisis, with more than seven million references on Google. However, the Oxford English Dictionary’s definition of destruction—the action or process of causing so much damage to some- thing that it no longer exists or cannot be repaired—suggests a more accurate term is required. While it is difficult to quantify, the data indicate that the majority of losses are sitting on paper and reside with large pools of institutional money and extremely wealthy individuals rather than across the general population. To what extent has there been material individual “wealth destruction” as a direct result of the financial crisis? Among which individuals and in what ways? What will have a larger longer-term impact — steep declines in real estate and equity values, or the knock-on effects of unemployment, low GDP growth, and the elim- ination of company benefits? To answer these and other questions, we conducted • Australia’s compulsory pension savings regula- analysis across a sample of countries that have tion (superannuation) provides a valuable bench- some similarities and also very distinct differences mark for countries with low savings rates and in wealth distribution, savings rates, pension aging populations. regimes, borrowing patterns and use of real estate: • China, as an emerging market with no private • The Anglo-Saxon countries of the United States pension system and the world’s largest propor- and the United Kingdom are at the epicenter of tion of citizens over age 60, faces its own set of the crisis with equity and real estate bubbles, complex challenges. failed banks, and mature private pension indus- The global financial crisis is primarily an tries managing large pools of assets. Anglo-Saxon phenomenon that will have a last- • Italy and Germany, representing the continen- ing impact in the United States and the United tal European model, have higher savings rates, Kingdom. lower incidences of borrowing and lower use of The starting point for our analysis is a propri- equities. Retirees remain highly dependent on etary methodology for segmenting and sizing the state for funding, as private pension systems populations by their age, liquid wealth and alloca- are still evolving. tion of assets across cash, securities and pensions. THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney 1
  3. 3. This methodology, supplemented with Lorenz protection policies curve analysis of the evenness of distribution of • Employees (current and former) of banks and wealth across each country’s population, enables multinationals who have lost millions of dollars us to identify where pools of assets are concen- in anticipated wealth as stock options expired trated, movement of households among wealth • Thousands on the cusp of retirement who are bands, funds flows and relative gains and losses in sitting on pension portfolio losses upward of 20 portfolios at a macro level. In this phase, we com- percent in the United States and the United pleted the segmentation for the United States, the Kingdom United Kingdom and Australia. We have focused on the “baby boomers”—those aged 45 to 64 — who tend to control the The Anglo-Saxon countries of largest asset pools in many coun- tries. Tens of millions of baby the United States and the United boomers (and their money) will be retiring over the next 20 Kingdom are at the epicentre of years. That this most important the crisis with equity and real demographic trend has collided with the worst economic down- estate bubbles, failed banks, and turn since the Great Depression has led to much speculation on mature private pension industries the future of mandatory retire- ment ages, the popularity of managing large pools of assets. equities as an asset class and potential alternatives, financial advice, and the provision of public and private pensions. • Those whose own businesses have folded or The epicenter of the global financial crisis whose homes have been repossessed in the wake has produced distinct “micro-segments” within of the financial crisis each country that are challenging to identify via These micro-segments have experienced wealth macro demographic analysis but whose plights destruction in the true sense. While many people are well known and documented. The following have suffered loss of income through unemploy- are included in these micro-segments: ment, short-time working or lower demand for • The 6,000 investors who put a total of $320 their labor, there is little evidence of wide- million into structured products backed by spread destruction of wealth — so that it no longer Lehman bonds exists or cannot be repaired — among the general • Victims of the Bernard Madoff and Allen population. Stanford schemes Each of these micro-segments poses specific • Individuals with deposits with now-defunct challenges both for regulators and the financial Icelandic banks beyond the coverage of investor services sector. However, on a macro level, it is 2 THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney
  4. 4. Figure 1 Lorenz curve model of global wealth distribution, 20081 Lower Mass Emerging Hyper High Ultra-high mass Affluent market affluent affluent net worth net worth market 100% AUSTRALIA Total wealth: $1.4 trillion Total households: 8.2 million Gini coefficient*: 35 80% GERMANY Total wealth: $5.6 trillion % of liquid wealth Total households: 39.8 million 60% on Gini coefficient*: 36 uti rib ist ld UNITED STATES ua Eq Total wealth: $23.2 trillion Total households: 116 million 40% Gini coefficient*: 40 UNITED KINGDOM Total wealth: $3.6 trillion 20% Total households: 25.3 million Gini coefficient*: 36 0% 0% 20% 40% 60% 80% 100% % of households 1 As of December 31, 2008; all amounts are US$ *A Gini coefficient is defined as the area between the Lorenz curve and the line of equal distribution divided by the area under the line of equal distribution. In this chart, the Gini coefficient related to the Lorenz curves depicted, Australia has the lowest number, followed by Germany, the United States and the United Kingdom. (For clarity, they are referenced as income Ginis and not related to the chart) Source: A.T. Kearney analysis likely that the knock-on effects of the global finan- shocks, while wealth creation from income is a cial crisis — unemployment, closure of defined longer and slower process due to many exogenous benefit pension funds, higher taxes and caps on factors, as discussed below. salaries and bonuses—will have a far more mate- Our Lorenz curve analysis enables us to see rial and lasting impact on a larger percentage of relative degrees of wealth or capital concentration the population than the crash itself. among the countries studied (see figure 1). Why is this important? Understanding how much capital Stark Differences in Wealth Distribution is in the hands of a few people, together with There are two sources of wealth: capital, or pre- other factors such as the proportion of savings existing assets, and disposable income, which is held in equities, enables us to identify how wide put into savings and becomes capital. The imme- and how deep the impact of the market decline diate impact of the crisis has been on capital; the has been across age and wealth bands. There are knock-on effects will be on disposable income. distinct differences among countries:1 Substantive wealth creation is a function of large • Australia has the most even distribution, driven asset bases (capital) that can withstand market by a combination of compulsory pension sav- 1 Similar analyses for Germany, Italy, China, and other countries will follow in a subsequent phase of work. THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney 3
  5. 5. ings and a lower cost of living relative to other between a Lorenz Curve and the line of equal dis- countries. tribution, measures the equality of that distribu- • The United Kingdom’s curve looks similar to tion; 100 is perfectly equal, zero is perfectly what we would expect to find in an emerging unequal. The Gini coefficients quoted here, market, with 1 percent of the population compiled by the United Nations, measure income owning 70 percent of the assets. Ninety percent distribution. At 28, Italy has the most even distri- of the U.K. population has an average £7,000 in bution of income here; China, at 47, has the most liquid assets. They lost very little money in the unequal, followed by the United States at 41. crisis because they did not have much to begin Australia, Germany and the United Kingdom all with. The immediate impact has largely been have similar scores (35, 36), which is perhaps sur- contained to high-net-worth individuals with prising given the significant differences in wealth very large capital bases who have seen their concentration among the three countries. This portfolios recover significantly in the recent points to a weak correlation between income and market rally. wealth creation. • The United States’ more even distribution Germans and Italians simply save more money reflects a much larger base of affluent individuals. and keep a higher proportion of it in cash (see The Gini coefficient, a function of the delta figure 2), a result of the impact of World War II Figure 2 Sharp increase in savings rates forecast for 2009 14 Italy United States Germany Australia 12.5 12 United Kingdom 11.3 11.4 11.2 10.6 10.8 10.5 10.3 10.4 10.5 10.2 9.9 9.9 10 9.5 9.4 10.2 9.3 9.2 9.0 8.4 7.9 8 (% of disposable income) Household savings 6.0 6 5.4 5.2 5.1 5.1 4.7 4.8 4.0 4.2 5.1 4 2.4 2.4 2.6 2.3 2.1 2.1 2.2 2.0 2.0 2 1.4 2.1 1.9 1.8 1.8 1.8 0.4 0.6 0.7 0 –0.8 –2 –2.3 –2.5 –3.1 –4 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 estimated Note: China estimated 25% to 40% over period Sources: OECD, ONS, IMF, China Daily; A.T. Kearney analysis 4 THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney
  6. 6. and hyper-inflation. The relatively poor savings mental differences in asset allocation and the rates in the Anglo-Saxon countries—less than half structure and maturity of the private pension sys- those of their continental European counter- tems (see figure 4 on page 6). The strong preference parts — are well documented, although savings of the Chinese for cash, which accounts for an rates more than doubled in the United Kingdom average 85 percent of their liquid assets, enabled and the United States from 2007 to 2008. Australia’s recent increase demon- strates how effective their compulsory pensions savings scheme has been—the The immediate impact of the impact on savings rates and wealth distribution in a five-year time period has crisis has been on capital; been dramatic. U.K. and U.S. take note. the knock-on effects will be Different Fates on disposable income. While stock indices lost almost half their value over the period 2007-2008, declines in individual liquid assets were a fraction of market losses (see figure 3). Index gains and losses them to increase their wealth during the financial are not a suitable proxy for estimating losses by crisis, although this is likely driven by new funds individual investors, which is why many estimates flows from income rather than returns on existing of wealth destruction are greatly overstated. assets. They also made money in securities. In Investors in the countries analysed fared very Germany, where investments in mutual funds and differently in the market downturn due to funda- direct equities have declined around 25 percent Figure 3 Decline in liquid assets by country compared to market losses1 United Kingdom United States Australia Germany Italy China 10% –4% –9% –11% –13% –18% –43% –50% –52% –53% Wealth reduction Stock market reduction –62% –63% 2007-2008 except Australia, which is 2007-2009; peak to trough (August 2007- February 2009) 1 Source: A.T. Kearney analysis THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney 5
  7. 7. Figure 4 Overall market losses compared to average portfolio losses US$ billions 23.25 Cash 3.85 19.11 3.85 Securities1 9.76 7.32 6.07 5.83 5.13 4.71 4.76 2.26 4.50 3.75 2.42 1.35 3.25 1.44 1.51 1.60 3.99 DC pensions2 11.39 2.01 1.60 3.81 9.69 1.36 3.79 1.04 1.20 1.08 3.32 0.27 0.33 1.21 0.29 0.19 1.51 1.54 0.94 0.73 0.65 0.69 0.72 Unsecured –1.75 –1.75 –0.34 –0.34 –0.09 –0.09 –0.28 –0.28 debt 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 United States United Kingdom Australia Germany China Italy Stock market decline (peak –53% –43% –50% –52% –62% –62% to trough) 1 Defined as cash, securities and DC (defined contribution) pensions minus unsecured personal debt 2 All figures are quoted in US$ at constant exchange rates, defined as the prevailing rate at December 31, 2008 Source: A.T. Kearney analysis since 2005, the well documented preference for the period of highest capital accumulation, due cash and more conservative investments also cre- both to capital gains on existing investments and ated a strong buffer to the downturn. to an increase in disposable income available for The 18 percent loss in the United States, the investment. They have entered their peak earnings highest of any country analysed, is driven by years and tend to have lower expenses, having a high proportion of assets invested in equities. paid off mortgages and seen their children leave The United States and United Kingdom, which home. Because they have the largest pools of both have well established defined contribution assets, it isn’t surprising that baby boomers also (DC) pension sectors, experienced 15 to 20 per- lost the most during the credit crunch. In the cent drops in pension assets, triggering signifi- United States, 63 percent of the total $4.1 trillion cant concern about the fate of baby boomers lost from 2007 to 2008 belonged to boomers, approaching retirement age and their ability to with 38 percent ($1.6 trillion) owned by those 55 recoup their losses in time. to 64 years of age. British boomers account for 54 Baby boomers typically make up 30 to 35 percent of UK losses, the 55- to 64-year-olds 36 percent of the population in these countries, but percent of the total. Figures for Australia are lower, hold 50 percent or more of the total assets. Older with baby boomers experiencing around 40 per- boomers, those in the 55 to 64 age bracket, are in cent of the decline. 6 THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney
  8. 8. Detailed segmentation of markets in the There are two primary drivers of this smaller loss: United States, United Kingdom and Australia the dominance of multi-manager life stage funds, reveals fundamental differences in asset allocation and a high incidence of pre-retirees taking financial between cash, securities and pensions by age advice. For retail investors, about 30 percent of the band, as well as gains and losses by age and wealth band. Figure 8 shows the portfolio losses for all three countries. Because baby boomers have the Australia. An important feature of the Australian market largest pools of assets, it isn’t is its compulsory superannuation scheme (a form of defined contri- surprising that they also lost the bution pension), which has been highly effective in recent years most during the credit crunch. at increasing the savings rate and indeed at balancing out the dis- tribution of wealth (see sidebar: Australia Bets on Superannuation and Wins). market, the products sold through financial adviser Securities portfolios consistently lost about 35 networks are almost all unitized multi-manager percent of their value, while superannuation plans managed funds; they have typical asset allocations lost about 11 percent—less than half of that suf- of 20 percent cash, 25 percent fixed interest, fered by some American and British investors. 30 percent Australian equities, 15 percent global Australia Bets on Superannuation and Wins Concerned about the demographic itants are the beneficiaries of one agement industry has emerged to impact of an aging population and of the world’s largest pools of desig- provide superannuation fund man- the inevitable strain on public cof- nated retirement assets: A$1 trillion, agement and advisory services to fers, in 1986, the Australian govern- equivalent to 119 percent of GDP, employers and employees. Currently ment and the country’s largest trade which is expected to double by 2015. there are more than 500 different union agreed that employers would Some Australians are retiring with superannuation funds active in the invest 3 percent of wages in a retire- more disposable income than they market and a network of approxi- ment savings account in their name, had during their working lives. mately 13,000 trained, licensed and a number that eventually rose to The basis of the plan—choice, regulated financial advisers, which 9 percent. By 2005, 90 percent of mobility and the option of self- has become a formidable force in wage earners were participating in management—have all stimulated the Australian economy. the country’s Superannuation Plan. competition and fostered industry Today, Australia’s 22 million inhab- innovations. A sizable wealth man- THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney 7
  9. 9. Figure 5 Australia: Total liquid wealth by age group and year AUD$ Age 15 to 44 Age 45 to 54 Age 55 to 64 Age 65+ (billions) Baby boomers: 36% of households, 54% of total wealth 464 476 358 74 409 86 426 423 314 394 Cash1 77 91 105 87 66 147 94 Equities 63 57 43 179 41 100 309 65 Super- 262 320 annuation 283 274 232 153 135 Trusts 31 15 10 30 20 19 28 18 –33 –32 –4 –4 Unsecured –74 –73 –15 –15 debt 2007 2008 2007 2008 2007 2008 2007 2008 Households 3.6 1.67 1.31 1.65 (millions) Cash is generated from existing assets including land and buildings, labor and other productive assets. 1 In addition, it can be generated through other contractual obligations, including annuities and defined benefit pension payouts. Source: A.T. Kearney analysis equities and 10 percent property or infrastructure United Kingdom. The largest net declines in (there is some debate about whether listed prop- assets, about 15 percent, were among the younger erty behaves similar to equities or property). Asset or wealthier segments of the market (see figure 6). allocations are automatically rebalanced toward Compared to Australia and the United States, losses more secure investments as the investor nears in securities investments were considerably lower, retirement and needs to protect principal. primarily because 44 percent of these investments The flight to cash by Australian investors in were in actuarially based, illiquid life-assurance 2007-2008 was dramatic (see figure 5). A large per- products such as investment bonds and with-profits centage of the 25 percent drop in securities was funds, which have a greater proportion of assets due to positions being liquidated and parked in invested in corporate and government bonds. Only deposits. As a result, the majority of Australians 12 percent of assets are held in direct mutual fund over age 45 and with assets less than $180,000 investments, in stark contrast to the United States. (A$200,000) actually made money in 2008, with Although funds flows into cash are nominal com- the highest losses concentrated in the youngest pared with Australia, Germany and Italy, invest- and wealthiest segments—those who are best able ments into cash ISAs, a form of tax-deferred savings to take paper losses and ride the markets back up. account, increased 1300 percent 2007-2008. 8 THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney
  10. 10. Figure 6 United Kingdom: Total liquid wealth by age group and year £ (billions) Age 15 to 44 Age 45 to 54 Age 55 to 64 Age 65+ Baby boomers: 34% of households, 54% of total wealth 918 868 794 122 328 751 232 82 357 240 458 397 311 272 305 DC 265 209 pensions 178 157 152 Securities1 155 131 447 99 409 79 323 334 Cash2 149 137 154 156 Unsecured –60 –44 –43 debt –100 –102 –68 –20 –18 2007 2008 2007 2008 2007 2008 2007 2008 Households 9.9 10.1 4.4 4.5 4.2 4.2 6.5 6.6 (millions) The net including capital losses, new capital flows and intra-asset capital flows. 1 Cash is generated from existing assets including land and buildings, labor and other productive assets. In addition, 2 Source: A.T. Kearney analysis it can be generated through other contractual obligations, including annuities and defined benefit pension payouts. The largest declines in assets, 30 percent or business flows down 25 to 40 percent depending more, were in defined-contribution pension plans on the type of pension. Few British pension inves- held by those aged 55 or older—those at or near- tors, except the very wealthy, are offered financial ing retirement age. Almost 90 percent of all indi- advice in managing their pension. This is a major viduals with a DC pension choose the default gap — and an opportunity — for the industry. fund (made up entirely of equities until approxi- Managed funds, similar to those offered in mately 10 years before retirement, when a propor- Australia, could provide British investors with tion of assets is shifted into bonds). There is a a valuable alternative to default funds. perception in the U.K. life and pensions industry United States. There are three striking obser- that investors don’t know enough or care enough vations in the United States: the high concentra- to take an interest in actively choosing their pen- tion of money held in securities within all age sion funds or managing their money; there is groups and consistent losses among baby boomers a significant amount of market data to support in the affluent and higher wealth bands; a decline this perception. The financial crisis hasn’t helped. in cash positions; and an increase in unsecured Contributions to personal pensions are one debt (see figure 7 on page 10). The proportion of of the casualties of the financial crisis, with new equity ownership is far higher than in any other THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney 9
  11. 11. Figure 7 United States: Total liquid assets by age group and year US$ Age 15 to 44 Age 45 to 54 Age 55 to 64 Age 65+ (billions) Baby boomers: 38% of households, 55% of total wealth 8,113 7,455 6,733 5,887 3,143 5,622 3,865 2,816 4,559 2,944 3,033 2,449 2,342 3,825 1,777 DC 2,816 pensions 1,529 2,899 1,393 2,148 2,200 1,625 Securities 1 1,004 721 941 922 1,006 991 1,316 1,298 Cash2 621 576 –410 –437 –316 –337 Unsecured –813 –913 –171 –196 debt 2007 2008 2007 2008 2007 2008 2007 2008 Households 47.8 48.3 24.1 24.4 19.7 19.9 24.4 24.6 (millions) 1 The net including capital losses, new capital flows and intra-asset capital flows. 2 Cash is generated from existing assets including land and buildings, labor and other productive assets. In addition, Source: A.T. Kearney analysis it can be generated through other contractual obligations, including annuities and defined benefit pension payouts. 3 Assumes annual household growth rate of 0.5% major economy and is consistent across age bands. Although life-cycle funds are available for 401(k)s, Strong stock market performance over many years few Americans invest in them. As of year-end has resulted in more equity exposure than is pru- 2007, the typical 50-year-old had 48 percent of dent, particularly for retirees, who hold a smaller his 401(k) assets in equity funds and another 11 proportion of their assets in cash than their peers percent in company stock. The typical 60-year- in other countries. The United States is the only old had 40 percent in equity funds and 9 percent country we analysed that actually showed a net in company stock. (The impact of high concen- reduction in cash wealth among those over 65, trations of company stock is explored in the next compared with an average 9 percent increase in section). Like their British counterparts, few the United Kingdom. One American we inter- Americans, with the exception of the hyper-affluent viewed summarized the pro-equities cultural men- and high-net-worth individuals, use a financial tality well: “My father, who is 85, had a lot of advisor to help them manage their 401(k)s. Few money in stock. I know this was risky, but the company plans make this service available to their markets had been so good for so long, that you felt employees. It is a massive gap in a massive market foolish not keeping money in stocks. You felt if that poses a significant opportunity for advisors you weren’t you would be missing out.” and for 401(k) plan providers. 10 THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney
  12. 12. Figure 8 Portfolio losses are concentrated in younger and wealthier segments1 United Kingdom United States United Kingdom Age 18-44 45-54 55-64 65+ Age 18-44 45-54 55-64 65+ Age 18-44 45-54 55-64 65+ 0 to 0 to 0 to 49,999 –9% –12% –9% –2% 49,999 9% 61% 8% 2% 49,999 11% 10% 8% 0% Portfolio value (AUD$) 50,000 to 50,000 to 50,000 to Portfolio value (GB£) Portfolio value (US$) 99,999 –12% –11% –8% –4% 99,999 –6% –10% –11% –5% 99,999 –2% 11% 9% 4% 100,000 to 100,000 to 100,000 to 199,999 –16% –13% –9% –6% 199,999 –12% –15% –19% –9% 199,999 –15% 7% 9% 5% 200,000 to 200,000 to 200,000 to 499,999 –15% –14% –11% –8% 499,999 –13% –19% –18% –11% 499,999 –12% –12% –6% –2% 500,000 to 500,000 to 500,000 to 999,999 –16% –15% –13% –9% 999,999 –16% –20% –21% –15% 999,999 –12% –14% –13% 1% 1 million + –15% –13% –12% –8% 1 million + –17% –17% –20% –19% 1 million + –24% –21% –19% –19% Gains: Losses: <4.99% <5.00 to 9.99% <10.00% to 11.99% >12.00% Losses December 2007- December 2008 measured in local currency 1 Source: A.T. Kearney analysis Wealth Concentration=Loss Concentration holds with liquid assets of £500,000-£1 million — So far, we have talked about some large declines in accounted for 23 percent of losses, with the asset values, over half of which are held by baby balance of £30 billion or just under 7 percent boomers on the cusp of retirement and more than evenly distributed among the affluent and mass one-third by retirees in the United States and the market. In Australia, the affluent and the rela- United Kingdom. Do we need to prepare our- tively small hyper-affluent segment took the bal- selves for a massive increase in demand for govern- ance of losses, 15 percent or A$33 billion. In the ment pensions? Perhaps, but not because of losses United States, which has large middle and affluent in portfolio values incurred from 2007 to 2008. classes relative to other countries, losses are evi- Impact outside high-net-worth households. dent in every wealth segment: the mass and mass- In the United Kingdom, the United States and affluent (6 to 7 percent), the affluent (14 percent) Australia, high-net-worth and ultra-high-net- and the hyper-affluent, which accounted for 18 worth households—those with the largest capital percent with close to $1 trillion in total losses. bases and therefore best positioned to ride out These small percentages make for some very sig- the market turmoil — took 70 to 75 percent of nificant absolute losses. Not surprisingly, because the losses. However, there were fairly significant they hold the greatest concentration of assets, differences in how the remaining losses were dis- baby boomers aged 55 to 64 account for the vast tributed among the other wealth bands in these majority of losses (70 percent or more) in each countries (see figure 9 on page 12). wealth band. In the United Kingdom, where 90 percent Overall, these losses have not been sufficient of the wealth is controlled by the top 2 percent to effect any dramatic proportional shifts in of households, the hyper-affluent—those house- wealth distribution in the United States or the THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney 11
  13. 13. Figure 9 Relative losses among wealth bands (2007 versus 2008) United Kingdom United States Australia Top 1% hold 70% of liquid wealth Top 1% hold 48% of liquid wealth Top 1% hold 34% of liquid wealth 11 1 £ (billions) US$ (billions) AUD$ (billions) 2 4 3 3 4 4 9 16 High- and ultra- 523 high net worth 658 8 9 11,883 21 14,855 1,760 1,530 168 Hyper affluent 187 21 89 411 Affluent 444 66 2,481 190 3,101 270 Emerging 180 37 253 affluent 190 2,766 251 3,293 90 100 70 70 130 Mass market 1,420 1,235 128 170 160 58 Lower 776 753 53 mass market1 Percentage 2007 2008 Percentage 2007 2008 Percentage 2007 2008 of house- liquid liquid of house- liquid liquid of house- liquid liquid holds wealth wealth holds wealth wealth holds wealth wealth Liquid wealth 2.5 2.2 Liquid wealth 23.5 19.0 Liquid wealth 2.6 2.2 trillion trillion trillion trillion trillion trillion Note: All figures are in domestic currency and rounded. 1 Lower mass market, on average, are net debtors. Source: A.T. Kearney analysis United Kingdom, although our analysis indicates a conservative scenario that references historic that approximately 220,000 U.K. households stock market performance post corrections. actually “traded down” in wealth band over the past twelve months. Australia is a different story: Citigroup: The Impact of Equity high-net-worth individuals own 4 percent less of Compensation on Wealth Destruction the total pool of wealth than they did a year ago, The use of company stock as a core element of most likely because their average liquid assets sit compensation has accelerated rapidly since the close to the A$1 million lower boundary of the 1980s, coinciding with a sustained bull market wealth band. and the baby boomer generation entering its peak It is highly likely, however, that many inves- earnings years. The financial services sector was tors recouped a significant proportion of their one of the leading proponents of equity compen- losses in the recent market upswing. Our models sation, a practice far more common in the United indicate a time horizon of three to four years to States and among large multinationals than in recoup all losses incurred 2007-2008, based on Europe. Options were the ultimate form of pas- 12 THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney
  14. 14. Figure 10 Findings in Citigroup survey Composition of losses from Citi Retirees lost an average Average net losses to net worth stock collapse by wealth band of $843,000 ranged from 10% to 45%+ $620,000 average loss Total losses (US$ thousands) Percentage of respondents $280,000 $530,000 $930,000 $800,000 $840,000 $843 9% 5% 6% 10% 7% 17% 11% 12% $698 2% 3% 2% 25% $632 2% 2% 1% $456 87% 82% 78% 78% $297 64% <$0.50 $0.50 $1.00 $2.50 >$5.00 Retired 0 to 5 6 to 10 11 to 15 >15 <45 45 to 54 55 to64 65 to 75 >75 to $0.99 to $2.49 to $5.00 Years until retirement Age US$ millions Capital losses Dividend income >45% 26% to 45% loss (1 year) 10% to 25% <10% Estimated loss Loss on expired on live options options Notes: Total number of respondents = 78; average losses since June 2007 (assuming negligible trading volume within period); Sources: Citigroup alumni survey; expired options assumed to have strike price of three years prior value with no discount; dividend income losses annual A.T. Kearney analysis sive savings, providing baby boomers with a capi- Chuck Prince claimed that Citigroup was “still tal base that offered the potential for significant dancing,” the stock price was at $51.64. It went wealth creation with very little effort. Then the into free-fall soon after and is currently trading market crashed, taking down such prominent at $4.04. While 30 percent of Citigroup alumni institutions as Lehman Brothers, Bear Sterns, responding to our survey lost nothing (“I sold Merrill Lynch, RBS and Citigroup. How much everything in 2006. It is the best decision I ever wealth was destroyed for employees of these made”), the remainder suffered an average banks who had substantial stock positions, either $620,000 hit to their net worth—roughly 25 to via outright ownership or options? We tapped 45 percent of their portfolio value—the majority Citigroup’s alumni network to ask them about of which was via outright share ownership (see what the impact has been on their net worth.2 figure 10). “I have lost about $400,000,” one told In July 2007, the month in which CEO us. “The impact is material. I was hoping to take 2 Note: Among study respondents, 85 percent are baby boomers primarily 55 to 65 years of age. More than half are high-net-worth individuals with more than $1 million in liquid assets. The rest are considered affluent, with assets ranging from $100,000 to $1 million. Most are Americans; 65 percent are vice presidents, 20 percent senior and executive vice presidents. Roughly 25 percent are now unemployed, with several reporting that they are victims of Citigroup’s layoffs after many years of service and express concern about finding work at their age. The average tenure is close to 20 years. Additionally, 89 percent of respondents over the age of 45 are members of the Citigroup final salary pension plan, which they anticipate will contribute 20 to 30 percent to their monthly retirement incomes. THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney 13
  15. 15. my capital base in Citi stock and diversify it so that less, while another one-third have an exercise date I could grow further. Now I can’t.” Those within for the fourth quarter of this year. “I have lost five years of retirement have serious decisions to $250,000 to $500,000. If they had given me my make about when they will stop working. “I would bonus in cash rather than stock, I would have have been able to retire comfortably in five years. been able to pay off my mortgage.” Now I may have to work at least another five.” While the majority of these losses are still on On a percentage basis, the affluent and paper, few are optimistic about the stock returning the lower end of the high-net-worth group lost to pre-crash levels any time soon. Most are recali- the largest proportions of their portfolios. Many brating their expectations for their retirement, as respondents admitted falling foul of a fundamental tenet of sound invest- ing: they put too many eggs in one basket. The Citigroup dividend is “The real crisis for me is the one rational justification for this. Retired respondents estimate an dividend, which is a major por- annual dividend income loss of close to $15,000, those aged 55 to 65 tion of my retirement income. losing approximately $10,000. “The I am going to have to sell part portfolio loss is bad, but I could have ridden that out. The real crisis of my portfolio at a loss and for me is the dividend, which is a major portion of my retirement switch to other equities that income. I am going to have to sell part of my portfolio at a loss and have a steady dividend income switch to other equities that have a steady dividend income stream.” stream.” Citigroup’s policy since 2003 of — Former Citigroup mandating that 25 percent of all employee bonuses be put in restricted com- pany stock—and then strongly dis- couraging trading when they vested—was also they will be considerably less wealthy than they one of the drivers of excessive portfolio concentra- expected. “I thought I would be really well off and tion in Citi stock. The false promise of anticipated not have to worry about anything. Now I think I wealth from options has had a significant impact. will just be comfortable — I hope.” “I am at least 10 years behind where I thought I would be,” said one alumnus. Our small sample The Findings of respondents had more than 300,000 options Our analysis has enabled us to construct a fact between them with an average strike price of base for dissecting the real impact of the global $42—ten times the current stock price. One- financial crisis by age and wealth band. There is third of these options have already expired worth- minimal evidence of widespread wealth destruc- 14 THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney
  16. 16. tion, with the majority of losses being on paper pulsory superannuation plan has had a dramatic and concentrated among high-net-worth individ- impact on evening out wealth distribution and uals and pension funds. The global financial crisis driving up savings rates from a very low base in is primarily a U.S. and U.K. issue. The following a short period of time. The use of financial are the major observations from our study: advice and managed funds protected Australian • True wealth destruction is contained to cer- investors in the downturn. The United States tain groups. Wealth destruction has been lim- and the United Kingdom have a lot to learn ited to specific and unfortunate segments of the from this. population, such as employees of businesses, • The role of company stock in employee com- including Citigroup, who have seen 40 percent pensation leads to dangerous portfolio over- or more of their wealth go the route of the share concentration in one equity. To what extent do price, individuals who have lost their homes, companies need to take on greater fiduciary and victims of the Madoff Ponzi scheme. responsibility to their employees? Given the • Most losses are concentrated among the sustained bull market, many, particularly in the wealthy. About 70 percent of losses — the financial services sector, thought their stock majority of which are on paper and being would only go up. Unfortunately this hasn’t recouped—are concentrated among the wealthy, proven to be the case for employees of Citi- who, with their large capital bases, are the best group, RBS, Lehman Brothers and Bear Sterns, positioned to ride out market volatility. among others. • Baby boomers have been hit hardest. Baby • The latest crash is part of a cycle rather than boomers aged 55 to 64 have the greatest con- an inflection point. The rally that began in centration of assets in all countries studied, March 2009 has seen assets flow from low- given that they are in peak earnings years and yielding cash back into equities, evidence of have more disposable income. Because they are rational behavior on the part of investors. The the segment with the most money, they are also pattern is comparable to what happened after the segment that lost the most in the crisis, 1987 and following the dot com crash. This particularly from their pension funds. makes the latest crash look more like part of • The wealth of U.S. and U.K. baby boomers was a cycle than an inflection point. not well diversified. They had too high a per- • The after-effects will be worse than the impact centage of their pensions invested in equities, of the initial crisis. The knock-on effects of the violating the basic principle of shifting a greater crisis — unemployment, higher taxes and cut- proportion of investments into cash and bonds backs in company benefits, for example — will as the date of retirement approaches. have a far more substantive impact on baby • The general lack of financial advice taken by boomers and the age group behind them than Americans and Britons in setting up and man- will the drop in the markets. aging their defined contribution pensions is • The global financial crisis is most likely the a significant gap, as is the use of managed or final nail in the coffin of defined benefit life-stage funds that can guide asset allocation. pensions. For years, defined-benefit pensions • Australia’s superannuation plan helps bal- have allowed people to avoid taking responsibil- ance wealth distribution. In Australia, the com- ity for saving for retirement — their employer THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney 15
  17. 17. did it for them. Well over half of all U.K. and cial services sector, 55 percent of them in the U.S. boomers will receive retirement income United States and 45 percent in the United from their employers. These plans have become Kingdom. Search professionals estimate that far too expensive for companies to sustain, and investment bankers could see an average are cited as one of the major causes of the bank- $500,000 to $1 million decline in compensa- ruptcies at Chrysler and General Motors and tion owing to political fallout over bonuses economic difficulties at Ford, British Airways, (although several senior bankers report that BT and others. The result has been a flood of there will be minimal disruption to compensa- tion policies, the majority of which are structured accord- About 70 percent of losses are ing to long-term incentives). High earners will also bear the concentrated among the wealthy, brunt of proposed tax hikes, which will further dent dis- who, with their large capital bases, posable income and hence wealth creation. Already, the are the best positioned to ride out United Kingdom is seeing an outflow of wealthier profes- market volatility. sionals to countries such as Switzerland after the govern- ment announced a 50 percent tax rate for those with incomes plan reviews, with many prominent global com- above £150,000. These segments of the popula- panies either closing their plans to future accru- tion are the “sweet spot” for private banks, bro- als or capping benefits. U.K. corporations have kers and wealth managers, who may find saved an estimated £1billion over the past 12 themselves with fewer new clients to target over months by cutting back final salary benefits. the short-term and lower average asset inflows. Similar cuts are also being made to defined con- tribution plans, which already offer far lower Implications for the benefits to employees. Saving more is the only Financial Services Sector way to make up for the loss in these benefits. We don’t expect the global financial crisis to drive The proposed tax increases in the United States seismic, transformative change in investor behav- and the United Kingdom will certainly not ior; rather, we expect the change to be additive help. In addition, the United Kingdom’s pro- and incremental. There are substantial growth posed elimination of pension tax benefits for opportunities for the fleet of foot, however, and high earners seems ill-advised. threats for those in the industry pursuing business • The speed of wealth creation in the tradition- models that are at risk of obsolescence: ally high-income professional services sectors Work out how to make money from lower is likely to slow over the next few years. Close margin products. It is inevitable that margins will to 500,000 jobs have been lost from the finan- shrink further. The trend for transparency will only 16 THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney
  18. 18. accelerate, as the crisis has made investors even seems to provide only basic model portfolios. As more aware of the prices they pay for advice, trades one Citi alumnus said in frustration, “I don’t need and funds. The industry will need to determine some company I have never heard of to draw me a how to make money out of index funds, exchange pie chart. I want someone to help me figure out traded funds and cash. The heightened awareness how to fill the gap between what I have and what of risk also requires more rigorous reporting of I need to retire.” underlying investment vehicles, requiring large Develop compelling propositions for baby systems investments by most wealth managers. boomers. Baby boomers, particularly those 55 to Get back to the basics of sound investing. 64 years of age, are an important opportunity. Diversification, asset allocation and mitigation of The considerable drop in many of their portfolios principal risk within older age groups are all basic creates a catalyst to engage them in advisory rela- principles of sound investing. Equities become tionships that could span 25 years. The financial a bad investment when they are an individual’s services industry needs to begin building value sole or primary asset class, particularly for those propositions based on service, advice and prod- approaching or in retirement. The crisis has been ucts that span multiple phases — peak income a reminder that markets go down as well as up. accumulation, quasi-retirement that often involves Prepare to adapt business models for the part-time work, active retirement, and the later end of defined benefit pensions. Asset managers phases, where capital release and cash flow become need to prepare for the fast approaching day when paramount. These value propositions should the large pools of institutional assets that they include innovative ideas around health insurance manage for corporate defined-benefit plans go and health care provision. into run-off. Defined contribution plans have Find ways to engage profitably with the less lower monthly deposits, higher administration wealthy. The industry needs to be able to provide costs and less scope for economies of scale. advice to individuals with assets less than $500,000 Bring new advice and distribution proposi- in the United States, and less than £250,000 in tions to the DC pension sector. Providing finan- the United Kingdom. Provision of financial advice cial advice to defined-contribution pension is woefully inadequate among these mass-affluent investors is wide-open territory, as are model port- and affluent segments. folios and multi-manager products that can support investors in finding the optimal asset Conclusion allocations for their risk profile. Targeting corpo- The global financial crisis triggered a barrage rate benefits and HR departments will be the of news reports over the past 12 months with most effective route into this group. big numbers: $30 trillion in market value wiped Deferred DC pension plan members are also out; £200 billion crisis hits company pensions; a significant and potentially more urgent oppor- 350,000 people may have to delay retirement or tunity. As ex-employees, they are an expense at risk living on a smaller pension; millions set to suffer a time when companies are cutting their benefits as financial crisis ravages retirement nest eggs. The programs. Our research with former Citibankers tone has shifted 180 degrees with the recent reveals that the company has outsourced deferred market rally: Rallying market recoups $10 trillion members to a relatively unknown company which in losses; flood of investor dollars flows back into THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney 17
  19. 19. equities; levels not seen since the dot com boom. recouped a significant proportion of these losses Our analysis has enabled us to look behind in the rally that began in March 2009. However, the headlines at the real impact of the global finan- many baby boomers have endured substantive cial crisis in key countries by age, wealth band and losses to their pension plans and have watched major asset class. While there have indeed been the promise of a well-off lifestyle in retirement significant declines in portfolio values, there is evaporate. This perceived gap between actual and very little evidence of widespread wealth destruc- anticipated wealth warrants closer consideration tion. Losses tend to be concentrated among afflu- by the financial services industry as boomers retire ent and wealthy individuals, who have in fact a whole lot less wealthy than they had hoped. Authors Penney Frohling is a partner based in the London office and head of the firm’s financial institutions group in the United Kingdom. She can be reached at Neil Dennington is a principal based in the London office. He can be reached at The authors wish to thank their colleagues for their contributions in developing and analyzing the study findings and insights in writing the article, including James le Chevalier, Oliver Whittle, Ralf Baldeweg, Fabien Bez, Peter Munro, Gregory Smith, Brendan Ratter, Stephanie Myers, Marco Bernasconi, Olaf Foschi, Ronnie Ahluwalia and Martin Windle. 18 THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney
  20. 20. A.T. Kearney is a global management consulting firm that uses strategic For information on obtaining insight, tailored solutions and a collaborative working style to help clients additional copies, permission achieve sustainable results. Since 1926, we have been trusted advisors on to reprint or translate this work, CEO-agenda issues to the world’s leading corporations across all major and all other correspondence, industries. A.T. Kearney’s offices are located in major business centers please contact: in 36 countries. A.T. Kearney, Inc. AMERICAS Atlanta | Boston | Chicago | Dallas | Detroit | Mexico City Marketing & Communications New York | San Francisco | São Paulo | Toronto | Washington, D.C. 222 West Adams Street EUROPE Amsterdam | Berlin | Brussels | Bucharest | Copenhagen Chicago, Illinois 60606 U.S.A. Düsseldorf | Frankfurt | Helsinki | Kiev | Lisbon | Ljubljana 1 312 648 0111 London | Madrid | Milan | Moscow | Munich | Oslo | Paris email: Prague | Rome | Stockholm | Stuttgart | Vienna | Warsaw | Zurich ASIA Bangkok | Beijing | Hong Kong | Jakarta | Kuala Lumpur PACIFIC Melbourne | Mumbai | New Delhi | Seoul | Shanghai Singapore | Sydney | Tokyo MIDDLE Abu Dhabi | Dubai | Manama | Riyadh EAST Copyright 2009, A.T. Kearney, Inc. All rights reserved. No part of this work may be reproduced in any form without written permission from the copyright holder. A.T. Kearney® is a registered mark of A.T. Kearney, Inc. A.T. Kearney, Inc. is an equal opportunity employer.
  21. 21. PDF ATK1109115