The global challenge has been set out by the World Economic forum (WEF)
The world’s biggest economies are sitting on a $70 trillion (£54 trillion) pensions time bomb that will balloon to more than $400 trillion within four decades unless policymakers take urgent action, the World Economic Forum has warned in a report in May 2017.
Analysis by the WEF showed the six countries with biggest pensions – the US, UK, Japan, Netherlands, Canada and Australia – as well as China and India – the two most populous countries in the world – faced a retirement savings gap of $428 trillion in 2050, up from $67 trillion in 2015.
Retirement ages were set in the 1920s
The fact that people are living longer but still retiring and drawing from their savings at almost exactly the same age as they would have done in the 1920s is one of the main causes of the build up pension deficits in both the developed and developing world.
The age of retirement for men was set at 65 for men in the United States and the UK in 1920 and 1925 respectively. In the UK, on any measure of life expectations between 1920 and 2010 life expectancy have risen by 10-22 years depending on how they are measured. Life expectation at birth for a male has risen from 57 to 79.
Chart 1: Median age at death UK for male 1841-2010
Sad lack of financial planning and saving by the vast majority of approaching retirees.
The World Economic Forum set out five other factors other than demographics that are exacerbating the gap between what is being saved and what is needed in order to have a fully funded pension for each individual at retirement.
1. Lack of easy access to pensions
50% of workers globally are in the informal/unorganized sector where savings plans are completely in the hands of the individual and not promoted by an employer
2. There is an expectation that investment returns in the future will be materially below those of the past
Investment experts expect long-term returns of just 3% from bonds and 5% from equities
3. Low levels of financial literacy
Majority of people cannot answer questions on financial literacy
4. Inadequate savings rates
Even defined contribution plans have returns significantly lower than 10-15% target
5. High degree of responsibility placed on the individual to manage pensions
Defined contribution plans account for 50% of pension assets but the individual may not be the best judge of the correct levels of risk and asset choices for each stage of their working life.
This article was attributed and provided by PG International