Harvard 2019

Disruption in demographic trends

Demographic trends will have a profound impact on pension funds’ investment returns, argued Patrick Zweifel, chief economist at Pictet Asset Management speaking at the Fiduciary Investors’ Symposium at Harvard University. Ageing populations mean retirement ages need to rise and will see pension funds increase risk to stretch for returns. It could also see tougher economic conditions as increased longevity impacts on economic growth and falling saving rates could also lead to rises in interest rates, he told delegates.

World population growth has been slowing since its peak in the 1970s, said Zweifel. Population growth in Europe and America is slowing faster than Asia (also in decline but from a higher base) which will represent 60 per cent of the world’s population in the future. In another trend, the world’s age structure is changing with “less and less young people” in an accelerating phenomenum. The fertility rate is declining so that global population growth will be below “the replacement rate” by 2030, he said.

In contrast, improved healthcare means people are living much longer.

“The impact of a lower fertility rate and increased longevity will drive the share of the working population lower and effect growth,” he said.

It will also impact savings and investment, with an accompanying impact on interest rates which he forecast will rise, reversing the trend in falling rates, to counter the decline in savings in “many moving parts.”

Turning to China, Zweifel told delegates that despite China’s declining working population, employment has risen on account of China’s higher economic participation rate. Older people are working longer and there is an increased share of women in the workforce.

“If the right policies are implemented by governments, you can maintain productivity growth to offset the negatives of demographic transitions,” he said. Governments are responding to the demographic transition with policies, but he said policies to support savings or boost productivity “are the hardest.”

Regarding productivity, governments can increase working years and push the retirement age higher. Alternatively, they can support the fertility rate. For example, France and Sweden actively support women in having more children. In another strategy, governments can boost the labour supply by favouring migration. However, migration flows are not constant with populism, he said.

“Populism has had an impact on migration.”

Zweifel said that on one hand the rising number of old people puts more pressure on savings. On the other, it could also encourage people to save more. If people know they are going to live longer, they may start to save more for retirement, he predicted, noting this could particularly be the case in Asia. A natural response to living longer is to increase savings, he said.

“Households are rational and anticipate these things.”

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