As the world shifts at an unprecedented pace, leaders in the retirement industry must embrace uncertainty, adapt swiftly, and commit to continuous learning.
Carina Wessels (pictured), executive for governance, legal, compliance, and sustainability at Alexforbes, unpacked this in her talk “Retirement fund of the future” at the 2024 EBnet Evolutionaries Conference, stating that “the rate of change we are dealing with is absolutely staggering, yet it’s possible that it will never be this slow again”.
With research showing that change doubles every decade, Wessels noted that retirement funds face decades-long horizons, where members could retire into a vastly different world.
“There are clear indications that we are in the early stages of the next economic revolution. As Al Gore put it, the emerging global sustainability revolution has the magnitude of the industrial revolution and the speed of the digital revolution. It’s likely to have an impact on every aspect of life as we know it, including our societies, our economies, and our physical environment,” she said.
The only way for business leaders in the retirement industry to stay ahead of this game of uncertainty is to be active, participating players.
“It’s therefore necessary to lean into the discomfort, the changing dynamics, and this transforming world, acknowledging that there is no silver bullet and none of us have the answers to all of these uncertainties. And quite frankly, if we have the answers today, they’d probably be outdated by tomorrow, requiring us to learn forward as we lean forward,” she said.
Shifting global trends and their impact on retirement funds by 2050
Wessels envisions a future shaped by transformative trends.
The world economy is shifting, with projections suggesting that by 2050, China’s GDP could expand over six times and India’s nearly 13 times, signalling a shift in economic power toward the Asia-Pacific.
Although Covid-19 feels like a distant memory, Wessels cautions that future pandemics may be inevitable, with evidence indicating that such disruptive events will likely become more frequent, a trend set to accelerate and test global resilience.
With the global population expected to reach 9.7 billion by 2050, predominantly in less developed countries, she highlighted that population dynamics will significantly impact economies and retirement funds. It’s predicted that by 2050 about 74% of people will have a life expectancy of more than 70 years and 20% a life expectancy of more than 80 years
“It’s very clear that people are living longer than they do now, and we have to consider what this means for our economies, our investment strategies, individuals and retirement funds, holistically,” Wessels noted.
She also pointed out that life expectancy increases, coupled with plateauing population growth predicted beyond 2050, will further exacerbate the obligation of smaller, younger generations to care for a growing ageing population.
She added that in South Africa the situation is worsened by the country’s rate of unemployment.
“If we maintain the current unemployment rate and we predict this to 2050, the ratio of retirees compared to those employed almost doubles. This, of course, reaffirms the fact that social security in its current form is absolutely unaffordable, and the cost to pay for pensions on a partially funded basis is predicted to increase by close to 90%,” she said.
The rapid pace of change also impacts businesses’ longevity, as the average lifespan of an S&P 500 company has shrunk from 50 years to just 12.
“A company that entered the S&P 500 in 1935 could expect to spend an average of 90 years in the index. Nowadays, they are replaced every two weeks. The changes impacting the longevity and sustainability of companies have a direct impact on the resilience and sustainability of retirement funds,” she said.
Adding to this dilemma globally, inequality is likely to increase, presenting further risks. Research has shown the relationship between a higher Gini coefficient (the country’s position on the fragile state index and its credit default spread).
“Inequality impacts social and economic risks,” Wessels noted, referencing South Africa’s 2021 riots as a stark reminder.
Monitoring these trends and seeking solutions, she said, is essential for future stability.
Climate risk: understanding and planning for the future
It’s also important to consider how risks are expected to evolve over time.
According to the World Economic Forum, climate change and environmental issues now rank as the most severe global risks over the next decade.
“It’s critical for retirement funds to start to understand and plan for these risks, and not from a generic global perspective, but with the clear South African lens, taking our unique circumstances into consideration,” said Wessels.
Although there has been progress in recognising and responding to climate risks – evidenced by the growing number of companies pledging net-zero carbon emissions by 2050 – the feasibility of meeting these goals remains uncertain.
“And from what we can currently tell, the majority of companies with published net-zero targets are unlikely to meet these commitments, and certainly not by 2050. Recent research by the World Bank confirms that retirement funds are lagging in terms of both measurement and disclosure of sustainability issues, and this lag is even more pronounced when considering climate change. So, discussions on climate change have to move onto the agenda of retirement funds and upwards in its importance.”
Evolving to meet future challenges
To help retirement funds rethink their future, Wessels emphasised the importance of considering practical solutions. She highlighted research that shows a strong correlation between company and portfolio performance and the integration of ESG (environmental, social, and governance) considerations.
“Some 71% of meta-studies concluded that integrating ESG delivers similar or better performance for companies, and close to 60% of studies found that integrating ESG into investment portfolios delivered similar or better performance. And importantly, this is an ‘and’ game and not an ‘all’. It’s not performance or ESG, sustainability or returns, it’s both,” Wessels explained.
Alexforbes believes trustees must envision what the future of retirement funds should look like. Wessels stated that the best way to predict the future is to create it.
“As asset owners and custodians of capital, you have an essential role to play in creating the markets of the future. Not only do you have an opportunity to use the influence to create the markets of the future and structure the retirement funds of the future to ensure they are future fit, quite frankly, you have a fiduciary duty to do so.”
She also pointed out the growing importance of shifting values among younger generations. “The values and expectations gap between generations is widening,” she said, noting that retirement funds must adapt to the evolving needs and expectations of their members.
“These members of the future expect their fund to behave differently. They expect to be treated differently. These generations are more socially and environmentally aware. They care where their money is invested and the impact of their investments beyond financial returns. So, with this in mind, funds should be getting to grips with how to treat people as individuals, how to better utilise digital technology, and the integration of sustainability into investment portfolios,” she added.
Wessels concluded that by reimagining their structure and goals, funds can ensure long-term sustainability, fulfil member mandates, and positively impact society and the environment.
