Report: Population Aging, Inequality to Hit Younger Generations Hardest

OECD says younger generations will face more challenges in retirement than current retirees

Shrinking family sizes, higher inequality over working lives, and reforms that have reduced pension incomes mean younger generations will face greater risks of inequality in old age than current retirees, according to a report from the Organization for Economic Co-operation and Development (OECD).

According to the report, “Preventing Ageing Unequally,” the rate at which the population across the OECD countries are aging is rapidly increasing. It said there were only 20 people aged 65 and over for every 100 of working age across the OECD in 1980. This figure rose 40% to 28 by 2015, and is projected to increase by 89% over the next 35 years to 53 in 2050.

“The future elderly will be in more diverse situations,” said the OECD. “People will live longer, but more will have been unemployed at some point in their working lives and earned low wages, while others will have enjoyed higher, stable earning paths.”

The report said that inequalities in education, health, employment, and income start from early ages. For example, it said a 25-year old university-educated man can expect to live almost eight years longer than a lower-educated peer, on average across OECD countries, while for women the difference is 4.6 years. It also said that at all ages, people in bad health work less and earn less than those in good health, and that over a career, bad health reduces lifetime earnings of low-educated men by 33%, while the loss is only 17% for highly-educated men.

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“Low earners tend to have a lower life expectancy than high earners and this reduces further their total pensions,” said the report, adding that “raising the retirement age tends to widen inequality in total pensions between low and high earners.”

Gender inequality in old age is “likely to remain substantial,” according to the report, as women over 65 receive about 27% lower annual pension payments on average than men. It also said old-age poverty is much higher among women than men.

In emerging economies, inequality issues are even more acute, the report said, and pointed out that Brazil, China, and India are facing rapid ageing at a relatively early stage of development, have wider health inequalities than OECD countries, and a less effective social safety net.

To confront these issues, the OECD says that countries should focus on three main areas:

  • Preventing inequality before it cumulates over time. Measures should include providing quality childcare and early education, helping disadvantaged youth into work, and expanding health spending on prevention to target at-risk groups.
  • Mitigating entrenched inequalities. Health services should move to a more patient-centered approach, and employment services should boost efforts to help the unemployed back into work, as well as remove barriers to retain and hire older workers.
  • Coping with inequalities at older ages. Well-designed first-tier pensions can limit the impact of socio-economic differences in life expectancy on pension benefits. Some countries have pension adequacy risks, especially for women. Making home care affordable and providing better support to informal caregivers would also help reduce inequalities in long-term care.

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Canada, Europe Lead List of Most Responsible Asset Allocators

Six of the 25 most responsible asset allocators were based in Canada, while only two came from the US.

Canadian and European funds lead the way among the most responsible asset allocators, according to a new report from non-partisan think tank New America.

The recently released Bretton Woods II Leaders list of the 25 “most responsible” asset allocators was culled from among hundreds of sovereign wealth funds (SWFs) and government pension funds (GPFs) representing more than $20 trillion in assets under management. The top funds were chosen for their “high conviction in responsible investing,” and their belief that “ESG is material to long-term returns,” according to New America.

The group was then screened for availability of information, minimum size of assets, and investment activity, which resulted in a final list of 121 SWFs and GPFs, comprising $15 trillion in assets. Each of the 121 asset allocators was rated by two to three independent expert reviewers, until the list was whittled down to the 25 highest-scoring SWFs and GPFs.

Although Canada had the highest representation, claiming six out the top 25 funds, and another nine were from Europe, the leaders list was rather diversified, and included funds from Brazil, South Korea, and South Africa. New America said one main characteristic of the leaders is that they “are constantly looking for ways to improve and deepen their responsible investing programs and they are committed to learning from peers and sharing their insights.”

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The leaders include 18 GPFs and seven SWFs with a total of $4.95 trillion in combined assets, and individual funds ranging from $10 billion to $1 trillion in assets. According to New America, the combined asset base of the group is larger than the GDP of every country in the world except the US and China.

Among the largest funds represented on the list were Norway’s $981 billion Government Pension Fund – Global; the Netherlands’ $532 billion APG Groep; South Korea’s $522 billion National Pension Service; and the $332 billion California Public Employees’ Retirement System (CalPERS). The only other US fund to make the list was the $192 billion New York State Common Retirement Fund.

The report also provided “recommendations for success” identified by the leading asset allocators, which included:

  • Understand the non-traditional financial risks that could impact long-term value creation in your portfolio, and make sure those risks are properly priced and addressed.
  • Develop a culture of transparency, and continually refine your communication protocols. If you don’t communicate your responsible investing principles and investment framework effectively, it will limit your chances for success.
  • When it comes to implementation, begin with the tasks that are easiest for your organization, such as introducing ESG into the due diligence process for private equity.
  • Make sure the companies you invest in know what they are doing, operate with a long-term perspective, understand both traditional and non-traditional risks, and price and address those risks properly and consistently.

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