A Global Perspectives White Paper                Asset management &                  the future Global                   P...
Contents         “Prichard is the future, we’re all on the same                                conveyor belt. Prichard is ...
The big change over the next couple        countries are in significant populationof decades will be in the public        ...
Instead state pension coffers around     The hunt for yield will increase the demandthe world will simply run dry. Court  ...
Private sector workers already knowthey are in charge of funding their       Look out for our forthcoming e-bookretirement...
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Asset Management & the future Global Pension Crisis - Global Perspectives White Paper - november 2012 - final

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"In 2009 the small Alabama city of Pritchard, outside Mobile became the first city in America to stop paying pensions to its retired workers. For years the city had been warned that if it did not put more money aside its pension fund would run dry. It was even ordered to do so by the State court.

The City Mayor ignored the court order, deciding it would be better to keep hospitals open, street lights on and paying teachers’ salaries. The additional money to fund the city pension liabilities simply didn’t exist. Many of the affected retirees have now filed for bankruptcy or gone back to work.

This is the future across the developed world.

This White Paper examines the future Global Pension Crisis and the opportunities it represents for the Asset Management industry".

Sign up for all our monthly White Papers at-

http://www.globalperspective.co.uk/#!white-papers

Or email: - shane@globalperspective.co.uk

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Asset Management & the future Global Pension Crisis - Global Perspectives White Paper - november 2012 - final

  1. 1. A Global Perspectives White Paper Asset management & the future Global Pension Crisis By Shane Brett, Managing Director Global Perspectives www.globalperspective.co.uk nd Date 2 November 2012
  2. 2. Contents “Prichard is the future, we’re all on the same conveyor belt. Prichard is just a little furtherIntroduction 2 down the road.” Michael Aguirre, The New York Times, 22ndThe Future of Pensions 2 December 2010What this means for Asset IntroductionManagement 4 In 2009 the small Alabama city of Pritchard,Conclusion 4 outside Mobile became the first city in America to stop paying pensions to its retired workers. For years the city had been warned that if it did not put more money aside its pension fund would run dry. It was even ordered to do so by the State court. The City Mayor ignored the court order, deciding it would be better to keep hospitals open, street lights on and paying teachers’ salaries. The additional money to fund the city pension liabilities simply didn’t exist. Many of the affected retirees have now filed for bankruptcy or gone back to work. The Future of Pensions This is the future across the developed world. Private sector workers in rich countries already know the days of defined benefit pensions on retirement are long gone. Employees in the private sectors have realised that they are in charge of looking after their own retirement. Their existing employers will contribute something but are in no way responsible for providing a comfortable income on retirement nor will they backstop the performance of their private pension fund.
  3. 3. The big change over the next couple countries are in significant populationof decades will be in the public decline.sector. Populations in many European countriesThis will be the inability of rich world have not saved anything whatsoever forgovernments to fund their public retirement, leaving it wholly in the hands ofsector employee pensions. their governments to provide a satisfactory income for their twilight years. These sameGovernments across the rich world governments are now sinking underhave already accrued gigantic massive public debt.unfunded pension liabilities, themajority of which are of the defined The German economy may be healthy now,benefit kind (i.e. guaranteeing a but its population is due to fall 15% by thepension based on final salary). In middle of the century. Trying to maintain amost cases these future liabilities high standard of living and pay generousare not even included in national pension benefits will be impossible. It is nodebt figures. wonder they save so hard.The slow realisation by both Train drivers in France famously retire at 50.governments and their state In Poland army and military officers retireemployees that the money to fund after 15 years. 33 year old pensioners existtheir retirements does not exist, will across the country.be one of the defining themes of thenext 30 years. Other countries are actually going backwards. In an attempt at maintaining hisRich governments are already declining popularity Putin’s Russia has justfinding it difficult to fund even completely scrapped employeeexisting public services under contributions towards their pensions. Thiscrushing national debt. There is no from a country that already has 87way they can feasibly fund additional pensioners for even 100 workers (and whichfuture pension liabilities as is forecast to reach 100 pensioners to 100populations decline, birth rates workers by the end of this decade).stagnate and life expectancyincreases. Worse, some governments have already raided state and private pension funds toIn the US public pension funds from finance their existing economic difficultiesIllinois to Philadelphia to San Diego (for example Argentina & Ireland) leavingare all under enormous strain. This their future national retirement fundingwill exacerbate over the coming particularly precarious.years as more people retire and livelonger, healthier lives. The future global pension crisis will likely come with a bang and not a whimper. ThisHowever, at least the US has a is because large voting numbers of olderreplacement birth-rate. In Europe workers make reform unpalatable and(outside of the UK, France & Ireland) unpopular. Politicians seeking re-electionbirth-rates has plummeted over the will not suggest fundamental pensionlast 4 decades. This has been reform. Unions will not allow it.particularly marked in Eastern andMediterranean Europe where manyGlobal Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843
  4. 4. Instead state pension coffers around The hunt for yield will increase the demandthe world will simply run dry. Court for a variety of assets and investment types.cases will be mounted by those This will expand the reach of Alterativeaffected and probably won by them Investments (such as Hedge Funds) andtoo - but that won’t change a thing. increase their allocation by retail investors.The money to pay the rich worlds The long term nature of many pensionenormous unfunded pension investments may also mean opportunitiesobligations does not exist. for Private Equity managers. Those invested in long term company turnarounds or stable infrastructural projects (roads,What this means for Asset bridges etc) may be an attractive multi-Management decade investment. The future parallel commodities boom willWhy is this so relevant to the asset also mean huge growth opportunities formanagement industry? resource focused managers. The 50% increase in world population by mid-centuryPublic sector workers worldwide will and the declining reserves of manyslowly come to realise what private minerals, metals and energy will result in asector workers already know – you huge increase in demand for theseare in charge of funding your commodities and their related investmentsretirement. (e.g. mining service, technology and exploration).For those in Asset Management thiswill be a very positive development. This could be particularly prevalent in agriculture and energy. The world’sThere will be a long term surge in attempts to feed a burgeoning populationdemand for successful fund and provide cheap renewalable energy to itsmanagers, those who can generate population, could dovetail nicely with anAlpha and provide stable long term expansion of investment in those areas byreturns. global pension funds.All this could mean an avalanche ofnew capital into the industry. Farmore savings and investment will bedirected towards asset management Conclusionas the rich world’s public sectorworkers try and adequately fund Steins Law tells us that "If somethingtheir future retirement. cannot go on forever, it will stop".Individuals will have to contribute This is what Pritchard, Alabama shows us.more of their income. Governmentswill be made to properly fund their The governments of the rich world do notfuture (smaller) pension liabilities – have the financial assets to match theirtheir existing funding shortfalls unfunded pension liabilities. Thehaving been so comprehensively unthinkable can and will happen in theexposed in the years ahead. years ahead.Global Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843
  5. 5. Private sector workers already knowthey are in charge of funding their Look out for our forthcoming e-bookretirement. In the years ahead, in Q1 2013 -government workers will come torealise this too. As people live “The 1% of the 1%” - The Future of thelonger, they will have to save far Hedge Fund Industry.more for their retirement.The long term nature of thisretirement trend indicates a bright To pre-order email:-future for the asset managementindustry. Shane@globalperspective.co.ukThe huge future demand for pensioninvestments represents anenormous opportunity for assetmanagers worldwide.Sign up for all our monthlyWhite Papers at-http://www.globalperspective.co.uk/#!white-papersOr email: -shane@globalperspective.co.ukGlobal Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 (0) 20 3239 2843

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