RETHINKING DISTRIBUTION

The move from pay-as-you-go systems will leave future pensioners to deal with critical investment decisions

so. Will the risks fall to the retirees, who must ensure that they set aside sufficient savings to draw down in the future, and if they fail to do so, end up suffering the consequences i.e. old age poverty? Or will the investment industry be bound to carry the risk, whereby if assets under management fail to produce the required returns needed for the steadily larger outflows of retiree income, the losses must be covered by the product manufacturer? In this case, what would be the impact on the competitiveness of the asset management industry, considering that today, the fund industry is not fully equipped to offer pension and retirement solutions?

The greying of Europe, coupled with the increased longevity of the population, will pose a problem to pay-as-you-go pension schemes. European governments are reacting to this issue by shifting the responsibility of retirement planning to the working-age individuals. This, however, creates a new challenge for individuals who now have tomake investment decisions for their own long-termfinancial well-being. These decisions need to take into account the savings required to meet the longer period of retirement due to the increase in life expectancy (longevity risk), as well as considering the risk of investment and inflation. The asset management industry has a critical role in supporting individuals by delivering products suited to their retirement needs. Products must be designed, not only to save for retirement, but also to allow steady income flow after the accumulation phase to safeguard the investor against insufficient cash flows in old age. Looking forward: how do AM distribution strategies need to adapt to tackle the risks and opportunities arising from the ageing population? As governments withdraw frompay-as-you-go systems, it raises the obvious question as to who will accept the future risks of providing for retiree income when the state will no longer do The challenge of the AM industry to propose pension and retirement solutions

Figure 9

Increase in public pension expenditure by 2050 (% expected GDP)

Current level (GDP pp) Additional expense (GDP pp)

20%

0.7%

15%

1.2%

2.3%

2.1%

1.5%

7.1%

3.6%

2.4%

2.6%

10%

8.2%

1.5%

4.0%

14.0%

13.0%

11.0%

10.9%

10.4%

10.3%

5%

6.8%

7.8%

8.4%

6.8%

6.5%

6.6%

4.0%

0%

PL 2.5%

ES

RO

IT

FR

HU

DE

LT

CZ

SK

UK

IE

Total

-5%

Source : European Commission

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