Tectonic shifts in demographics will change the way we think about retirement planning. Structured products can play a key role in navigating these changes.
Global demographic shifts are increasingly under the spotlight and investment professionals and investors alike are having to think about what this means for their portfolios.
For a while the demographic shift of people living longer and having fewer children has been associated with Asian countries such as Japan, South Korea and China, as well as parts of Southern and Eastern Europe, but it’s becoming clear that most countries are going through this shift, including many emerging market countries.
Since the 1950s the global total fertility rate (the average number of babies born per woman) has fallen from 5 to about 2.3. This is close to what is known as the replacement rate of 2.1 (the fertility rate required for the population to remain stable over time) and many countries are well below that.
According to United Nations data for 2023, Italy (1.3), Japan (1.3) and China (1.2) are well below the replacement rate, but emerging economies such as India (2), Bangladesh (1.9) and Iran (1.7) are also below the replacement rate (South Africa is at 2.3).
Many of the countries with the lowest fertility rates also have the highest median ages, based on Central Intelligence Agency (CIA) figures: Japan, Germany and Italy all feature in the top 10, though India (143rd), South Africa (144th) and Bangladesh (145th) still have young populations. It’s clear though that for most countries, median ages will continue to rise.
Reassessing the old models
As these trends deepen and societies continue to grow older, so the traditional models for pensions and other forms of contractual saving will need to be reassessed. Much of the industry is built on the idea of inflows coming from the incomes of younger workers, which then provides the base for the drawings by older retirees.
However as the proportion of younger, working-age investors and pension fund members falls, and the number of retirees grows (and live longer) so the ability of traditional retirement vehicles to support retirees diminishes.
Policymakers around the world are having to grapple with these problems and find solutions, including potentially raising the retirement age of workers.
At the same time, advisers and their clients will also need to re-examine their approach to questions about risk and asset allocation. Given longer lifespans, is it right to de-risk portfolios as investors approach retirement and immediately thereafter? And should investors look to keep a higher weighting in equities at a time when the textbooks tell them to increase their weighting in fixed income, cash and high dividend-paying equities?
Instinctively many investors will want to reduce equity exposure as they approach retirement, but this may not be the best approach if they have a longer life to look forward to in their retirement. Investors will need to look for ways to grow their capital.
Structured products: an investment for managing the demographic shift?
In this environment, structured products have a key role to play. In recent years, investors have been drawn to this particular alternative asset class as an excellent way to reduce volatility in their portfolios in the years just before and after retirement. This is an especially pertinent issue at the moment, with many of the world’s leading indices, including the S&P 500, Nasdaq, Nikkei 225 and Eurostoxx 600 hitting record highs. Structured products can be an excellent tool for hedging the risk of a market sell-off while also allowing participation in the upside.
However, structured products can also help investors negotiate the tectonic demographic shifts discussed above. By incorporating structured products into portfolios well into retirement, investors have a way of managing their risks while also continuing to participate in equity market gains in the future.
Of course, such will depend on the design of products and the underlying investments chosen as reference, as well as the liquidity needs of the investors over the term of each structure (remember structured products don’t pay dividends).
In conclusion, while demographic shifts look set to disrupt traditional retirement planning, structured products could play an increasingly important role in helping investors make the transition to the new retirement world.
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