Pension funds today should be investing for a horizon of 80 years or more. While it’s impossible to predict what the world will be like in 2100, it’s safe to assume it will be radically different to the one we live in today.

We can expect the retirement industry to be disrupted by many unpredicted changes, but for now it’s more useful to consider the trends we can identify. How are these likely to impact long term savings outcomes, and what should pension funds do now to capitalise on the opportunities and mitigate risks?

Below are some factors the retirement industry should be considering in order to transform its traditional approach and ensure it is able to meet future expectations.

Increasing longevity
Life expectancy has increased dramatically across the globe and will continue to do so as technology and medical research advance at a rapid pace.

This means we are likely to be working for longer, and spending a more time in retirement too. Increasing longevity will have a significant impact on retirement contributions required, asset allocation, risk levels, and investment strategies for pension funds.

We may also see a fundamental shift in the way we accumulate savings over time. The old model of studying or training for a job and then building a long-term career in that field until retirement may soon be outdated. Increasingly, people may opt to stop and retrain mid-career – possibly even a few times over. This could change the nature of the traditional retirement journey, and the retirement industry may need to adapt accordingly.

In addition, many pension funds are likely to face the challenge of an ageing membership base with fewer new members coming in due to the impact of automation and AI in future. Are their current investment strategies designed to support and survive this?

Impact investing
As Millennials, Generation Z, and future generations form an increasingly large proportion of pension fund members, their voices will become impossible to ignore. What do they want and expect from their investments? Investments that will yield the required return and have a positive impact on society and the environment.

Pension funds have been incorporating ESG for some time now, but these requirements will only become more critical going forward. What should pension funds do now to position themselves for meeting the increasing demand for products offering strong returns and positive social impacts?

Climate risk
According to the Intergovernmental Panel on Climate Change (IPCC) – a United Nations body for assessing the science related to climate change – Southern Africa is a climate change hotspot. The Intergovernmental Panel on Climate Change notes that temperature increases in South Africa are rising twice as fast as the global average.

The impacts of this will be far-reaching and will affect food security, water security, and ultimately economic growth in SA. Any long term investment strategy today needs to be cognisant of climate risk and take steps to mitigate against this.

Technology
Robo advisers will become more prominent in the investment world in the coming decade and beyond. These will be a good option for “DIY” investors, since they are likely to offer the same advice at a fraction of the cost of traditional financial advisers. When it comes to larger pools of money – pension funds, or ultra-high net worth individuals, for example – we anticipate a hybrid approach to investment advice. Artificial intelligence will work alongside human advisers who have embraced new technologies. Are pension fund trustees doing enough to ensure they – and their advisers – keep abreast of the technological developments and innovations that are likely to disrupt the industry?

Increasing regulation
Corporate scandals and the need for more oversight are increasing regulatory requirements. This is placing strain on pension funds across the globe, and South Africa is no exception. Busy trustees simply don’t have the governance bandwidth to deal with the ever-increasing requirements. Additional resources need to be allocated to ensure funds remain compliant and this ultimately comes at a cost to the members of the fund.

Each of these trends presents new challenges for pension funds and innovative solutions are needed. Investment advisers can answer the call by providing future-focused alternatives for trustees to preserve the best outcomes for their members while meeting industry requirements.

– Petri Greeff
Head of Investment Advisory , RisCura

This article was originally published online by SA financial Markets Journal.

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