Guest Post: Pensions ‘Perfect Storm’ Looms?

Submitted by Leo Kolivakis, publisher of Pension Pulse.

A ‘Perfect Storm’ of demographic, individual and financial elements is poised to derail people’s retirement plans unless they prepare properly now, a global survey from HSBC Insurance revealed on Wednesday:

A ‘PERFECT STORM’ of demographic, individual and financial elements is poised to derail people’s retirement plans unless they prepare properly now, a global survey from HSBC Insurance reveals today (Wednesday 10 June).

The fifth annual Future of Retirement study, It’s Time to Prepare, shows:

  • people’s short-term survival strategies in the midst of recession are creating a serious long-term pensions ‘downturn deficit’
  • there is a continuing lack of pensions planning, even though people are aware that they are likely to live longer
  • this is being exacerbated by poor levels of financial understanding, education and access to advice
  • people are more concerned with protecting their possessions in the short-term than ensuring they can look forward to a financially secure retirement

The consequence of these combined factors is that many people will struggle to make ends meet when they come to retire, unless they urgently review their priorities and planning.

Stephen Green, Group Chairman of HSBC, said: “A perfect storm is confronting pensions planning, created by an ageing population, falling pension funds values, a drop in state and employer contributions and an economic downturn which is forcing people to make tough financial choices.”

The preparedness gap

It’s Time to Prepare has identified a ‘preparedness gap’ in people’s pensions planning across the world with nearly 9 out of 10 people not feeling fully prepared for their retirement.

The Future of Retirement survey, which questioned 15,000 people in 15 countries, making it the largest study of its kind in the world, reveals:

  • Only 13% of respondents feel fully prepared for their retirement
  • 86% do not know what income they will receive in retirement
  • Only a quarter (27%) feel they fully understand their long-term finances
  • Approaching half (43%) have undertaken some planning for later life, but still remain unclear about what their retirement income will look like
  • 14% have done no retirement planning at all.

Stephen Green continued: “The ‘preparedness gap’ reveals that families need greater support and guidance to effectively handle their finances, not simply in schools and colleges but through ‘trusted advisers’ providing professional financial guidance.

“If people prepare adequately for the long-term an extended later life can present a golden opportunity for many – but now is the time for people to seriously consider boosting their pensions contributions to improve their prospects of a comfortable retirement. The cost of procrastination is likely to be high.”

Advice gap opens up

It’s Time to Prepare also reveals a parallel ‘advice gap’ linking a lack of preparedness to insufficient financial education and guidance:

  • 43% of respondents have never had any form of financial education
  • And 29% also feel ‘fairly’ unprepared for their retirement
  • Almost half (47%) have never had any form of professional financial advice

Clive Bannister, Group Managing Director, HSBC Insurance, said: “This year’s Future of Retirement report reveals a need for people to have access to more and better financial advice and guidance to help them survive the downturn while making the right financial decisions for the long-term.”

Coping with the downturn – possessions not pensions?

People are paying little attention to long-term considerations such as their likely retirement needs, focusing instead on purely practical short-term concerns which they better understand, It’s Time to Prepare reveals.

General insurance solutions – motor, travel, home and even pet insurance – are seen as a greater priority than addressing longer-term needs around insuring health or income, even when job security is in question.

Despite global economic uncertainty, only 6% intend to take out income protection insurance in the next 12 months compared to 16% insuring their home.

The Future of Retirement survey shows that, as a result of the economic downturn:

  • 92% of people have changed some element of their finances
  • Only 19% will now retire as planned
  • 17% are reducing retirement savings or stopping saving for retirement altogether
  • 18% have used savings to pay off debt
  • 9% expect to delay their retirement

Mark Twigg, Director at financial services consultancy Cicero Consulting, which undertook the survey for HSBC Insurance, said: “It’s Time to Prepare reveals the lack of understanding people have around their long-term retirement needs. They are less well educated or aware when trying to understand these needs and to act on them, than with their short-term requirements.

“As the economic ‘perfect storm’ threatens it is important that people are encouraged to understand long-term risks and to manage them effectively. While people are taking more responsibility for themselves, there is also a definite role for financial institutions to continue, and to build on, their work to educate and inform.”

Reuters reports that HSBC Insurance said a tenth of all people have stopped paying into pensions as a result of the global financial downturn, in a new survey published on Wednesday:

The study, polling 15,000 people in 15 countries, reveals that 18 percent of respondents have started using savings to pay off debts, whilst one in six people have reduced pension contributions.

More worryingly for global insurers, 14 percent are considering stopping their insurance products.

Clive Bannister, head of insurance, told Reuters it is investing more in recovery groups, which aim to keep people paying into pension and insurance programmes, one of the key consequences of a downturn.

The overall impact on HSBC’s business is mixed. “People who can afford to protect themselves more and provision more are doing that. People who are under the gun in terms of their own debtload, they by default have to cut back,” said David Neenan, head of marketing and sales at HSBC insurance. “It’s the people in the middle who are procrastinating more,” he added.

The profits of $2.6 billion (1.6 billion pounds) last year represented about 13 percent of group profits before goodwill charges.

In 2007, the bank said it wanted insurance to contribute 20 percent of profits, from about 10 percent at that time, but it is now aiming to get 20 percent of clients to buy insurance rather than a profit target.

“What we now say is we want one in five of the group’s clients to have some form of insurance relationship,” said Bannister.

The group, which has expanded aggressively in emerging markets, said on Tuesday it received regulatory approval to launch an insurance joint venture in China.

Markets such as China and India are seen as huge growth areas, with the ratio of workers to dependents in China set to decline from 8 to 1, to just 2 to 1 by 2040, said Bannister.

But premiums are likely to be impacted in India, one year after the group started its operations, where one of the largest products is assistance with burials costing a few rupees a month.

“I don’t know the statistics yet in India … but I think they will be down because of the exposure to the Indian stock market,” said Bannister.

Premiums in other Asian markets are robust, he added.

The global economic has led to belts being tightened across the globe, with leisure spending and ‘big ticket’ items the largest casualties. 42 percent of respondents said they will be cutting back on leisure spending and 38 percent on cars and holiday.

Finally, the Guardian reports that fear of pension crisis grows as study show more workers raiding savings. I have stated in the past that the pension crisis will define President Obama’s legacy. While the perfect storm isn’t upon us yet, the clouds are looking darker and darker on the pensions front. Unfortunately, so far, policymakers are ignoring the problem, trying to reflate it away.

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  1. maynardgkeynes

    Maybe if the Fed would allow people to get a decent interest rate on their savings accounts, they might actually start saving for retirement. When government policy since 1998 has been to encourage magical thinking about stock market returns instead of telling them to spend less and start saving more for their retirement, is it any wonder we are in this situation? It's not a Perfect Storm, its government capture by Wall Street and business interests.

  2. Chappy

    You lost me at perfect storm. Didn't we already see that with pension plans in 2001/2002? Anyway, all of these 'problems' are not new. They have been with system for a very long time.

    Also, no need to blame interest rates. What is going to happen if interest rates peak in the near future? Will companies get out of the pension business because it will be easier to buy annuities? For DC plans does higher interest rates necessarily mean a run up in the stock market? Nobody knows–and if you do then you should stop posting and spend your time making millions on stock market.

  3. DownSouth

    Gulling and milking the investor were taken as a matter of course, and the stock market was regarded as a kind of private casino for the rich in which the public laid the bets and the financial titans fixed the croupier's wheel. As to what would happen to the general run of bets under such an arrangement–well, that was the public's lookout, an attitude that might have been more commendable had not these same titans done everything in their power to entice the public to enter their preserve.
    –Robert L. Heilbroner, The Worldly Philosophers, from the chapter "The Savage Society of Thornstein Veblen"

    Excuse me, Leo, but this post comes across entirely too much like an advertisement for the financial services industry.

    To make my point I'd like to relate a personal story.

    My mother banked at a small, locally-owned bank in the small central-Texas town of Belton for many decades. My mother kept her life savings in a savings account in that bank. By today's standards, it wasn't a great deal of money–in the low six figures. But it was everything she had.

    About five years ago my mother's bank was acquired by one of the nationwide conglomerates.
    My mother, being in her late 80s at the time, no longer drove. So my sister, who wasn't any spring chicken, pushing 70 years-old herself, took my mother about to conduct her business.

    One day soon after the acquisition of her bank, one of the bank officers approached my mother and sister and recommended that, since my mother was making such a pittance on her savings, she should invest her money in some sort of mutual fund which had a much higher yield. My sister explained that my mother had to make periodic withdrawls from her savings, as her retirement income was insufficient to meet living expenses. The banker assured them there was no problem.

    The net result was that my mother and my happy-go-lucky sister ended up investing 100% of my mother's life's savings in some mutual fund.

    Everything appeared OK untill some months later when my mother and sister went to the bank to transfer some of my mother's money to her checking account so she could pay her living expenses. The bank officer who sold them the mutual fund was by this time long gone. They were informed that if she withdrew money from the mutual fund there would be an early-withdrawl penalty.

    My sister immediately got on the horn to me. I told her that someone my mother's age, with as little money as she had, had absolutely no business investing any of it in stocks. I told her to go down to the bank immediately and get my mother's money out of those stock investments, regardless of the penalty.

    The net result was that my mother lost about $7,000 in this unhappy affair.

    I'd like to point out that my sister, despite her happy-go-lucky outlook on life, is no dummy. She married very young–16 years-old–but worked to put her husband through medical school. He is an anesthesiologist and retired army colonel. She sold real estate for many years and was very successful at it. They have a very comfortable retirement.

  4. DownSouth

    Leo, I know you love to play the markets. But I would venture that 99% or more of the public have little if any understanding of them, nor do they have any interest in learning. Their interests lie elsewhere. In this game most people are like sheep being led before wolves.

    If you haven't seen it, PBS Frontline did a very informative expose a couple of years ago on the dilema facing baby-boomer retirees. If you haven't seen it, I highly recommend it as I believe it gets closer to the root of the problem than you do:

    As I commented above, I know you have a passion for the markets, and that you are a pension-fund professional. Being obsessive myself, I certainly understand passions. I also believe your heart is in the right place, so I'm not interested in pronouncing some blanket indictment of everyone in your profession. But please, even though I understand the difficulty in doing so, try to see this thing from the perspective of the everyday person.

  5. Leo Kolivakis


    I want to warn the sheep BEFORE they get slaughtered. But your comments are correct, most people do not care about stocks or investing. I say to them to stick to ETFs (QQQQ, SHM and TAN for solars) and bond funds.



  6. David

    I would be curious how you think underfunded pensions will affect corporate earnings over the next few years. There is a nice post here about it

    That shows a deficit of roughly $100B for these S&P 500 companies. S&P 500 normalized earnings are roughly $500B per year. So that is roughly a 10% earnings decline per year for two years if they use the next two years to fully fund the pensions.

    There is also the feedback affect that lower earnings will result in lower stock prices which will
    result in further pensions losses.

    Add this affect to all the other things affecting earnings, lower revenues due to high unemployment, higher taxes, higher interest rates etc. It looks to me like corporate earnings will decline to 3% of GDP from nearly 10% of GDP. That would reduce S&P 500 earnings from the peak level of $90 to $30 making the S&P 500 PE multiple over 30. That would be grim news for stocks and therefore pension returns.

  7. maynardgkeynes

    Leo, my point and I think Down South's if I understand him, is that savings accounts with decent interest rates are what serve the interests of average, non-rich people best. My parent's experience was similar to Down South's, except that they decided to keep their money in a decent FDIC insured CD. They lived within their means but were certainly not misers, and along with Social Security and supplemented by their modest savings they had a long, happy, active retirement. I doubt that in today's dollars they ever made more than $75K a year, and that was at their peaks (both of them worked). Yet, when my mother passed away at age 89, she had almost $400K in savings, which she left to her 7 grandchildren. The financial industry is good at telling people that they need to take on more risk in stocks and other exotica, and the simple reason is that it serve's the industry's interest, not the public's. Would you or any of your colleagues have told my Mom and Dad at any point in their "working years" that they were going to do just fine? You know that the answer is no, and since you are obviously a decent guy with good intentions, I hope you will ask yourself why that is.

  8. DownSouth


    I know you want to warn the people BEFORE they get slaughtered. And I applaud your efforts. The plight of older people is especially poignant because, unlike young people, their options are more limited. They are more vulnerable because they may not be able to return to work if something happens to disrupt their retirment income.

    But I just don't see how admonitions like this one are helpful: "[F]amilies need greater support and guidance to effectively handle their finances, not simply in schools and colleges but through ‘trusted advisers’ providing professional financial guidance."

    Gosh, if life were so simple! The world, unfortunately, is a little more complicated than that. My mother, after all, followed the guidance of a trusted finance professional from a bank she had done business with for many years. And look what happened to her!

    And I'm not just picking on your profession. The problem far transcends just finance and economics. I would refer you to these comments by Jane Roughgarden (beginning at minute 16:25). Where she says "scientifically literate" just insert "financially literate" and I think you'll get my point:

    Secondly there’s an issue of whether science is correct. You see if we’re going to work with people who are at the moment anti-evolution or anti-science, and if you see these people saying well I believe the Bible I don’t believe scientists, are they idiots, as is in effect implied by the previous discussion? Now on the other hand is the science correct? I mean what do we have to go by? Not a little while ago estrogen was being recommended for breast cancer. Now it’s a no-no. In point after point, you just never really know, if you’re in the general public, what scientific assertion is correct. That’s a big problem. OK, you can say it would be great if everybody was scientifically literate. But they have to be more than scientifically literate, they actually have to make a decision as to what elements of science at any one time are correct, and some are frequently not tested.

    For the general public, it's a minefield out there. The "ownership society" has proven to be an absolute, unmitigated disaster. And telling people to seek guidance from a "trusted adviser" who is held to no standard of conduct whatsoever, nor to a scintilla of accountability, is not the solution.

    I would venture to say that the thousands of people who invested with Bernie Madoff believed they were following Mr. Green's advice in seeking out a "trusted adviser"?

    I know in the past you have advocated some re-regulation of the financial services industry. But don't you think that, at the very minimum, the recommendation should be to clean the industry up first, before we toss innocent people back upon the caprices of these same rapacious wolves?

  9. DownSouth

    maynardgkeynes said: "The financial industry is good at telling people that they need to take on more risk in stocks and other exotica, and the simple reason is that it serve's the industry's interest, not the public's."


    [T]he one singular virtue of 401(k) plans (for employers) became all the more irresistible: 401(k)s are dirt cheap. In the late 1970s, employers devoted more than 4 percent of workers' payrolls to pensions. By the late 1980s, they were contributing around 2.5 percent. Most 401(k) contributions, after all, are made by workers, not employers…

    If employers were the biggest beneficiaries of Section 401(k), they were hardly the only ones. Mutual funds and investment banks embraced 401(k)s as the Second Coming. One financial planning publication seemed unable to find sufficient praise: "A culturel icon, a measure of our financial well-being, and a symbol of democratice power–individuals of all walks of life own Corporate America through their 401(k)s." In 1999 Money magazine offered up a breathless history of mutual funds and the 401(k). "Over the full sweep of time, mutual funds have shown that they are probably the greatest contribution to financial democracy ever devised," the review began…

    As early as 1983, (the Heritage Foundation's) Stuart Butler–the Waldo of the conservative policy movement we met earlier–had co-authored a strategy memo in which he called for expanding tax-free private accounts into "a small-scale private Social Security system," while mobilizing "banks, insurance companies, and other institutions that will gain from providing such plans to the public." In the first Bush administration, officials described the expansion of 401(k)s as a strategy of "empowerment" that "would create a framework within which individuals are free to do the best they can do for themselves." By the time the second President Bush was campaigning for Social Security privitization in 2005, he was speaking of a "401(k) culture"–a culture that, not coincidentally, was wholly in keeping with his vision of a conservative ownership society…

    In the eyes of Wall Street and Washington, section 401(k) was the harbinger of a joyous new era. Unfortunately, it would be the first era since Social Security's creation when, instead of expanding, retirement security began to slip away.
    –Jacob S. Hacker, The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream

    Leo, you do a great job of pointing out the pitfalls facing the defined benefit pension plans. But the other alternative that has been postulated, 401(k)s, is worse. Here there is absolutely nothing standing between the pensioner and the vagaries of the market and those who worship before its altar.

  10. Leo Kolivakis

    @ DownSouth

    I agree with you, 401Ks are a huge mess!


    underfunded pensions could be an earnings nightmare, which is why companies are lobbying hard to extend to the amortization period to 15 years or more! Hell, let's extend it to infinity and wait till the workers die poor!

    Disgusting that this is what capitalism has resorted to: looting the pensions of hard working folks!



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