Addressing the Challenge of Global Ageing?Funding Issues and

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4 Addressing the Challenge of Global Ageing—Funding Issues and Insurance Solutions and insurance solutions as well as working beyond formal retirement ages, will need to be strenghtened markedly. And this is precisely where insurers have a much bigger role to play going forward. They are in a unique position to enhance Pillar III savings by a transfer of longevity risk, the risk of pensioners outliving their savings, as well as the assumption of a sizeable part of associated asset risks. Insurers also have the skills and experience to design (innovative) products specifically catering to those who opt to work beyond the formal retirement age. The current environment makes this crucial contribution from the insurance industry both socially more desirable and economically more challenging: in the wake of the financial crisis, the fiscal positions of rich-world governments have deteriorated dramatically within just a few years, leaving even less room for coping with the inevitable long-term challenges of spiralling public pension and healthcare expenditures. At the same time, employers are confronted with the prospect of protracted subdued economic growth in their core markets. As a consequence, they face an uninspiring outlook for revenue and profitability while the pension obligations to their (former) employees continue to grow. These developments are set to accelerate governments’ and employers’ gradual withdrawal from their traditional role as major and predictable sources of retirement income. Helping to fill this gap is not simply a business opportunity for the insurance industry. It arguably is also its most relevant long-term contribution to economic and social stability. A simple example: a key social benefit of annuities is that those who have bought them are much less likely to fall back on state benefits or suffer the fate of old age poverty. Having said this, insurers face unprecedented challenges in their quest to capture these business opportunities and to meet the accompanying social obligations: returns on investments, a core pillar of life insurers’ business model, have reached record-lows. Government efforts to boost ailing economies and prop up struggling banks have left interest rates at rock-bottom levels, making it challenging for insurers to help strengthen the third pillar of retirement. Against this multi-faceted and intriguing backdrop, The Geneva Association has initiated a comprehensive research effort focusing on the future of retirement systems and insurers’ contribution to their long-term sustainability. This effort builds on The Geneva Association’s multi-decade record of researching into and publishing on the subject matter. With the following collection of 14 articles from leading industry professionals and Geneva Association researchers, we intend to make a meaningful contribution to a debate which has assumed heightened urgency and significance in the wake of the financial crisis, and sharply reduced fiscal latitude. This volume’s collection of articles provides a concise yet authoritative overview of all aspects relevant to the phenomenon of global ageing, the resulting funding issues as well as challenges and opportunities for the insurance industry. We first set out the analytical foundations of the current ageing debate before pointing out specific insurance-based solutions and the prerequisites that need to be in place for these solutions to realise their full potential. The final part of the report looks at specific effects of greying populations on key stakeholders such as governments, employers and individuals. The chapter from Richard Jackson, Senior Fellow, Center for Strategic and International Studies, sets the scene. He describes the dramatic dimensions of the ongoing demographic transformation, with the elderly (aged 60 and over) projected to account for about 40
Editorial and executive summary per cent of the total population in 2040 in countries such as Germany, Italy, Japan and South Korea. Jackson also analyses the daunting fiscal implications of ageing: based on current retirement ages and replacement rates state pension benefits would eat up 17-23 per cent of GDP by 2040 in Germany, France, Italy, Spain and Japan—dramatically up from the current level of 8-12 per cent. “The challenge for most developed countries is how to reduce the rising burden that existing retirement systems threaten to place on the young without at the same time undermining the security they now provide to the old,” Jackson says. This is a particularly tricky task in countries such as Germany, Italy, Poland and Spain where government benefits account for more than 75 per cent of people’s retirement income. In his contribution Jackson also discusses the longer-term socio-economic ramifications of ageing. “The expectation that global ageing will lead to slower growth is largely a matter of arithmetic. Growth in real GDP equals the growth in employment, or more precisely hours worked, times the growth in output per worker hour, or productivity. By the 2020s and 2030s, the growth rate of the working-age population will have fallen to near zero or turned negative in every major developed country other than the United States. In Japan and the faster-aging European countries, the working-age population will by then be contracting by between roughly 0.5 and 1.5 percent per year,” he points out and warns that, “Unless labour-force participation rates surge or economic performance improves dramatically, some developed countries could face a future of secular economic stagnation—in other words, of zero real GDP growth from peak to peak of the business cycle.” Furthermore, Jackson argues that household savings rates will decline as a larger share of the population moves into the retirement years, potentially dampening economic growth. He also highlights the frequently neglected social and behavioural implications of ageing, such as worker productivity, typically declining at older ages and greying workforces potentially being less entrepreneurial. Jackson concludes by outlining six especially critical policy choices: (1) reduce pay-as-you-go benefits, (2) strengthen old-age safety nets, especially in developing countries, (3) increase funded retirement savings, (4) encourage longer work lives, (5) encourage higher birth rates and (6) increase immigration. In their contribution, Christophe Courbage, Research Director, and Patrick M. Liedtke, Secretary General and Managing Director of The Geneva Association, address the root causes and key stakeholder implications of global ageing. The authors point out that populations throughout the world are ageing due to two basic demographic trends: increasing life expectancy and declining fertility rates. While the increase in life expectancy is largely due to lifestyle improvements, rising wealth and medical advances, the decrease in fertility rates is generally explained by birth control, higher female educational attainment and participation in the labour force, and changes in life style and societal values. As a large part of pensions is financed through a pay-as-you-go system, i.e. providing a monthly fixed benefit to retired citizens from taxes or contributions paid by the current working population, ageing will impose a major burden on public finances. As an illustration of the challenge at hand, Courbage and Liedtke present the trend of average life expectancy after pensionable age in the OECD which has increased sharply: from 1950 to 2040 the respective after-retirement life expectancy for women and men has increased from 17 and 13 years to more than 24 and 20 years, respectively. The authors 5
Page 1 and 2: No. 6 June 2012 The Geneva Reports
Page 3 and 4: Addressing the Challenge of Global
Page 5 and 6: Contents Foreword John R. Strangfel
Page 7 and 8: Foreword John R. Strangfeld Ageing
Page 9: Editorial and executive summary Edi
Page 13 and 14: Editorial and executive summary the
Page 15 and 16: Editorial and executive summary mos
Page 17 and 18: Editorial and executive summary nex
Page 19 and 20: Editorial and executive summary thi
Page 21 and 22: Part 1 Analytics 15
Page 23 and 24: How demography is reshaping the eco
Page 39 and 40: 1. Introduction Global ageing: root
Page 41 and 42: persist such as control of chronic
Page 43 and 44: Global ageing: root causes and impl
Page 45 and 46: is provided for more money. The oth
Page 47 and 48: The main and most direct impact of
Page 49 and 50: Global ageing: root causes and impl
Page 51 and 52: Insurance as a funding and risk tra
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Insurance as a funding and risk tra
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Pension funds make pre-agreed fixed
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Sources: Swiss Re Economic Research
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4. The financial crisis: impact on
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The financial crisis: impact on the
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220 210 200 190 180 170 160 150 140
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tors 90 Japan The financial crisis:
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Part 2 Solutions and Prerequisites
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Funding for old age: an overview an
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Through this rider, retirement inco
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1. Introduction 6. Insurance as a s
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Private financing also plays an imp
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4. The markets for LTC insurance Th
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Insurance as a solution to cover lo
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7. Other insurance products to cove
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1. Introduction The insurance indus
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workers have pension benefits that
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The insurance industry’s role in
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The insurance industry’s role in
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A traded longevity index does not p
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etirement age (as is happening in m
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1. The world of finance and the rea
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The holistic view: why all pillars
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What should be done: some recommend
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Retirement security in the United S
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And as for the second question pose
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Part 3 Effects on Key Stakeholders
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1. Introduction The challenge of pu
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The challenge of public pension ref
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Replacement rate 2050 70 60 50 LUX
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It is expected that the market for
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tax pensions at a lower rate. Where
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Figure 2 Funding rules under the Pe
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Asset management strategies such as
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Impact of a pension buy-in Plan spo
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1. Background Although the scope an
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Insurers are experts in managing th
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Figure 1: Inflation-adjusted growth
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7. Insurers as investors 6 Insurers
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(cf. NAIC data for 2002-2009). Over
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Insurers and their role in the econ
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14. Individuals and their financial
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Pension asset accumulation When con
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who continue to take the lead in re
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in 2009 showed that product penetra
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Over one-third of those in their 50
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lead to sub-optimal consumer outcom
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References Individuals and their fi
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About the authors About the authors
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About the authors Margaret (Peggy)
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About the authors Gordon Stewart se
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Publications of The Geneva Associat
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Publications of The Geneva Associat
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Other publications of The Geneva As
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The Geneva Association and Life, He
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The Geneva Reports Risk and Insuran
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