Fully-funded retirement provision on "autopilot"

Rising life expectancies and declining birth rates have changed age structures in many industrialized nations. For that reason, systems financed on a pay-as-you-go basis will no longer suffice to safeguard seniors’ future standards of living. If we want to avert impending impoverishment in old age, we need the largest possible contribution from fully-funded retirement plans.

Many Central and Eastern European countries are confronting the problem by introducing fully-funded mandatory insurance plans intended to provide income in old age. In Australia as well, the state provides only basic insurance coverage; citizens must make mandatory contributions to private pension funds.

Voluntary private coverage will have to make an important contribution to safeguarding retirement. For this one needs a reasonable investment mindset. Until now, many European savers have relied primarily on fixed-yield investments or "familiar" stocks from their home markets. But these do not really allow one to take advantage of the opportunities on the global capital markets.

For that reason, apart from adding a larger proportion of stocks, investors should give up their "home bias" in favor of a global diversification, such as has been common practice in the United States for some time now. Asset managers should get this message across more effectively to their clients when they provide advice. But they also have to have the necessary products at hand – funds or portfolios from all over the world, which thanks to their managers’ experience offer opportunities for added value and the advantages of diversification.

Risk-friendliness, the investment horizon, and the standard of living to be safeguarded will define the right investment strategy and portfolio composition for each client. Since these factors are perpetually becoming more and more differentiated, asset managers and insurers are undergoing a metamorphosis from pure product makers to providers of complete solutions.

In asset management, for the same reason, we see a trend away from inflexible investment strategies based on benchmarks to flexible mixed funds focusing on wealth management. Such products have the advantage that they relieve investors of decisions about allocations – which usually are too burdensome for the end customer.

Life-cycle or target-savings products go even further. These reduce portfolio risk as an investment matures by reallocating asset classes, while a steady flow of income moves to the foreground after a certain phase. Similarly to "asset liability matching" for institutional investors, the payout profile for the private client is more closely attuned to the structure of the client’s portfolio.

With such products an investor essentially switches on an "autopilot," which is a particular relief for older clients or those less interested in finance. Earnings-oriented investments with major potential also include fund-based retirement or life insurance policies with a capital protection component, which combine opportunities in the capital market with a certain safeguarding against risk.

The future may additionally see solutions that combine asset management products with insurance. Combinations could conceivably mix insurance, pension plans and asset investments, which during the "consumption" phase would be further supplemented with advice and services, analogously to the client’s risk preferences.