Addressing the Challenge of Global Ageingâ€”Funding Issues

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2 Addressing the Challenge of Global Ageing—Funding Issues and Insurance Solutions This report serves as a valuable starting point for what will need to be an ongoing dialogue. It not only highlights the challenges ahead, but also, importantly, outlines potential solutions that will help address this global issue. John R. Strangfeld, Chairman & Chief Executive Officer, Prudential Financial
Editorial and executive summary Editorial and Executive Summary Patrick M. Liedtke and Kai-Uwe Schanz The notion of formal retirement is relatively young. In 1881 Chancellor Otto von Bismarck introduced the world’s first pension scheme in Germany. Prior to that, people generally worked “until they dropped”. However, when von Bismarck introduced his revolutionary scheme of protecting workers in their old age, it was only a very small minority of the population that ever reached the official retirement age of 65 years—then a full 20 years higher than the average life expectancy of a German worker. The scheme was never meant to become a social achievement that would allow almost all of its contributors to spend an increasing period of their lives in (relatively) good health while drawing a pension. Nevertheless, due to the extraordinary increase in life expectancy during the 20th century, it became one of the key components of the social contract and is often regarded as one of the great achievements of modern civilisation. Following the Second World War, pension schemes in the developed world became ever more generous on the back of economic prosperity and relatively contained dependency ratios, i.e. the ratio of beneficiaries of the system to its contributors (usually approximated by the ratio of the over 65-year-olds to the 15-64-year-olds). From the 1990s, however, the awareness of a massive demographic shift has started to grow with the retirement of the post-war baby boomers looming. Average dependency ratios in the developed world have halved from their post-war high of around seven people. Governments in advanced economies generally acknowledge that their pension and healthcare schemes are becoming increasingly unaffordable and unsustainable. Some have started responding by raising retirement ages, lowering payouts and encouraging more private old-age provisioning through higher savings. The need for individuals to take their post-retirement destiny in their own hands has also been heightened by an inexorable shift from defined corporate pension benefits to defined contributions. The current debate about sustainable pension systems is all about spreading the burden over several pillars. There should be (1) a state pension to meet basic needs in old age and avoid people falling into poverty, (2) a private occupational pillar, funded by employers and employees that tops up the first to keep living standards on a higher level, (3) a voluntary individual savings pillar that contributes additional income and risk diversity and (4), as conceptualised by The Geneva Association as early as 1987, a fourth pillar based on part-time post-retirement work. But it is also clear that the balance between the various pillars is set to change: state pensions are being reined back and occupational schemes are getting not only less generous but also less predictable. In order to offset the accelerating erosion of Pillars I and II, the two remaining pillars, i.e. private savings 3
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: Foreword John R. Strangfeld Ageing
Page 11 and 12: Editorial and executive summary per
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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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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Addressing the Challenge of Global Ageingâ€”Funding Issues

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