This latest episode of the AIQ Podcast, we look at the implications of increasing life expectancy for individuals, companies and policymakers. Specifically, we’ll look at what this means for the advisory, pensions and insurance industries.
In The 100-Year Life, London Business School colleagues Lynda Gratton and Andrew Scott argue that the traditional three stage life is breaking down, and is being replaced by a much more fluid, multi-stage life.
Exploring the implications of increasing life expectancy for individuals, companies and policymakers. Find out more in this episode.
Welcome to the AIQ podcast. A new audio series from Aviva Investors that explores the long term themes influencing investment markets and economies. In this episode, we look at the implications of increasing life expectancy for individuals, companies and policymakers. With the very real possibility that the next generation will live to between 95 and 100, the three stage life of education, work and retirement that emerged in the 20th century, which was based on a life expectancy of around 70, is breaking down.
If you think about full time education, full time work, full time retirement, the three stage life is obviously completely ridiculous. And you need to think about a multi-stage life.
We'll hear from co-authors of bestselling book The 100 Year Life, Andrew Scott and Lynda Gratton, as well as our very own Simon Young of what this all means for financial advisors.
When Freddie Mercury mused about living forever in the mid 80s, the increasing trend in life expectancy was already well underway. Since then, give or take a very recent slowdown, it has continued at a seemingly relentless course, posing futuristic questions about what the upper limits to life expectancy are. Well, as Freddy hinted, whether any exist at all. But back down to earth for a moment. London business school colleagues Scott and Grattan argue that the traditional three-stage life is breaking down are being replaced by a more fluid multi-stage one. If they're right, it has some very real implications for all of us. In order to live what they call a good life, they argue that you have to think about four different assets and only one of them is financial. The other three are productivity and knowledge, vitality and transformation. Or in other words, the ability to deal with change, how individuals react to the shifting landscape ie how we choose to live our lives and what we plan to do with all of this extra time has massive implications across society, industries and sectors. For example, you literally can't buy a lifelong friend at 50. In the same way, a steady erosion of health due to consistently poor choices cannot be undone by a magic pill. Here's Lynda Gratton speaking at the World Economic Forum in 2017.
The first thing we did was to work out, you know, in terms of your saving rates and how much you want to retire on and so on. How long do you have to work? I don't know how long you think you're going to have to work if you live to 100, but you basically have to consider in your 80s. So if you think about full time education, full time work, full time retirement, the three stage life is obviously completely ridiculous. And you need to think about a multi-stage life, a multi-stage life where education becomes a lifelong event, a life where the work isn't just about full time work. It's also maybe about exploring is maybe about, you know, building our own business is maybe about building a portfolio. And retirement becomes maybe why do you don't even hear anymore?
Retirement becomes a word you don't even hear anymore. This is radical stuff. It raises some pretty big questions about life and what we all want from it. Too big for us to fully answer here, of course, but we'll do our best. Firstly, Gratton and Scott seem to be trying to spin working longer as a positive thing where most people would intuitively see it as a major negative. Surely we just want to retire, play golf, relax and spend time with friends and family. After all, we won't have the energy or inclination to go on until we're 80. His Grafton's answer to that.
One of the ways that we help people stay in the workforce is we change work. And that's really what corporations need to do. So, you know, if I said to anyone in this audience, you're going to work non-stop, just as you do now at the age of 80, all of us would say, I couldn't possibly do that. But if you say you're going to work, you're going to work to 80. But, you know, you'll be taking gap year like a 20 year old is or you'll be taking time off to do things or there'll be times when you only work three days a week. Then suddenly all seems possible. And I think that we've got to. And this is a real plea to corporations. Corporations have really got to think hard about the way they structure work and their expectations of how people work.
So rising longevity requires a fundamental rethink about how we structure our lives and the health benefits of staying more mentally and physically active in later life and are pretty much indisputable. This time, his Grafton's fellow panellist at the World Economic Forum, David B Ecorse, professor of medicine and engineering at the University of Southern California, downloaded it every delay retirement.
You reduce the incidence of Alzheimer's by 3 percent, so you return 85 instead of 65. That's a 60 percent reduction in the onset of Alzheimer's. So you don't use it, you lose it. And when we're talking lifespans 8, 9, 10 decades, you got to use it. You know what's interesting about your point, which I love that categorisation, is that we're all making for retirement and we all going to have a look in her bank account. I've got $20000. I have $30000. But nobody's banking health for retirement. How do you get a 30 year old to change a behaviour today that will make them live better when they're 70 or 80? How do you get someone to start to practise prevention? You get sick no matter what your age or how much you save your retirement fund. And so the challenge is to get people to start early and to do the exercise, taking the baby aspirin, the standard, all the things that we know make you live longer and better. By the way, also help society and government lower costs. You know, if everybody would take a baby aspirin over the age of 40 in 20 years, 900000 more people in the United States would be alive. We would save over 500 billion dollars in health care costs. We're not doing it. We all have a right to do what we want, but at some point we have to do the right thing in the financial services industry.
We tend to obsess over the financial aspects of later life, but pay far less attention to health. Maybe because it's much harder to measure. We can come up with a financial number and conclude with a high degree of confidence that it's sufficient to provide a basic standard of living when we retire. But doing something similar with health is far harder. This is not to downplay the need for savings and the wide funding gaps that loom on the horizons of individuals, companies and ultimately governments will come to that in a minute. It's just that it seems we don't realise or just repeatedly ignore that finances are just one part of life's puzzle. Education is another area being upended by longer lives. It's ludicrous to think that the skills and knowledge you learn at school, college and university will last 40, let alone the more realistic 60 years that they'll be required to. Education and learning will need to become a lifelong process for most of us. Technology is simply moving too fast for it not to be sung. But what's encouraging is at the very same, disruptive technology could help us retrain. All of this has pretty severe implications for financial advisers to effectively cater for their clients ever shifting needs. They will need to evolve into holistic life planners. Here's what Andrew Scott had to say when we interviewed him at his office near Regent's Park.
If we're right there, we're going to have a multi-stage life. And that suggests that the concept of a pension just disappears. Because what I need now is assets throughout life at different times. I might accumulate a lot of money in my financial stage, but then I want to write it down. I need to go back and get educated for a couple of years or I have a job where I don't touch my assets. I'm just bringing enough money into so wash my face financially, which I've seen a lot in people in their 60s, by the way. But there's a whole covariance of assets. You now need to look at health, relationships, education. That's what I see as work. So I think that we now think differently about when we shuffle money from one period to another. And that's also going to be much more individualistic. Know through sage life can be arranged in one way. Know you can have a job that I retire, but a multi-stage life you can arrange in different ways, different people very, very differently.
Shuffling money between different stages of life seems to imply that advisors may need to approach risk profiling of their clients differently, i.e. the practise of placing different clients into risk segments. According to both their tolerance and appetite for risk, here's our business development director, Simon Young.
Even if you've got somebody that's approaching the AP retirement stage now, say at the earliest you can take any retirement benefits is 55. So if you're 50, you know, hopefully you've got a significant time horizon, investment time horizon. If you're 50 years old, hopefully you can live for another 35, potentially 40 years. So that's a long time. That's a long time to be invested. And depending on how you ask those questions and depending on somebodys experience, knowledge around investment, how can one risk number be appropriate for that whole length of time? I'm sure you're speaking anecdotally. I would imagine that people are when they're answering a risk profile questions, they're probably thinking about the immediate future and not necessarily thinking about the Long-Term. It's quite difficult to imagine a 40 year time horizon and what's wants to go on eating and thinking about money that you're going to need in 30, 35 and 40 years time. There's no reason why you can't take in a significant amount of risk because you've got time for it and covers from testing.
One of the quirks of a human mind is its tendency to undertake mental accounting. We bucket things into categories like goals, for example. People do exactly the same with their finances, and yet advisers often crudely allocate just one risk profiling number, which doesn't make any sense. It's not unusual for people to have a longer term savings pot sitting next to a medium term, one that is intended to finance university or school fees. If Scott and Grattan are correct, the proliferation of these mental accounting pots will increase dramatically in coming years. It won't just be educational fees for children that people will be forking out for. He'll be retraining and sabbaticals for partners and themselves, which will mean a far more nuanced approach to risk profiling will be needed. The advisory market is clearly going to face a number of pressures as a result of increased longevity and the shifting lifestyles. One. In particular is legacy, i.e. how and what people leave behind for future generations beyond merely the financial. However, the responsibility is not squarely on the individual and their adviser. If they're lucky enough to have one. Companies will need to react to these trends and accommodate the shifting preferences of their workers. Here's Andrew Scott.
Most companies are now just pulling out a defined benefit. Pensions. Too expensive. The longevity risk is too great. So very few firms are still meeting. Members of the membership is declining dramatically. So whilst the defined benefit scheme in its current form is now no longer viable, there is a version of the defined benefit scheme that is worked very well for the hundreds in life, because if you think of your assets as not just financial, then the company says to its employees. Okay, now I'll give you auto-enrolment or something small scale defined contribution up to a certain level. But I will after five years give you six months sabbatical. After ten years, I'll give you one year sabbatical. I'll pay for you to go and get retrained. After ten years, I will flip you into different part of the team if you want to see a different skill. I think that more holistic approach to thinking about corporate pensions, including something of a financial pillar, but not only a financial, but might be a way of actually overcoming re-instating that advantage.
I can hire someone today for less than I would do otherwise, and I get it as a retention to.
This flies in the face of the received wisdom on pensions, defined benefit is dead. We all know that, don't we? Yet Scott suggests that they could make a comeback just in a very different form. It is certainly food for thought for the pensions industry, even if it sounds somewhat outlandish. What is abundantly clear from all of this is that technology will play a critical role in enabling societies to find and implement the necessary solutions. It is both opportunity and threat. The challenges ahead are clearly manifold. However, the message is inherently positive. If individuals, companies and policymakers embrace this inevitable trend, the potential for more fulfilling and enjoyable lives seems unlimited. After all the extra years gifted by a 100 year, life needn't be a curse.
Well, thank you for listening to the AIQ podcast. You can find the full interview with Andrew Scott in the latest issue of the magazine available for free at a fee for investors dot com.