It seems misanthropic to write about the financial burden of our lengthening lifespans. Longer lives should be a cause for celebration. But that’s what I’ve been doing lately.
One of the most important articles I’ve written this year told the story of how once-iconic companies such as General Motors, J.C. Penney and Motorola are transferring the risks of their pension liabilities to insurance companies. Pension risk transfers are complicated deals with pros and cons for all involved — and, I remind you, retirees are still getting their paychecks — but in the end it comes down to the fragile balance between retirement benefits given to past employees with the needs of the next generation.
It doesn’t have to be an either-or situation. Long lives can be wonderful, but somebody has to pay for them. Longevity is a subject Institutional Investor has covered well, from Fran Denmark’s 2014 story on managing longevity risk to my piece a few years earlier on how the “Surge of Baby Boomer Saving Will Transform the Capital Markets” . William Sharpe, winner of the 1990 Nobel Prize in economics, had a walk-on role in my lede. Sharpe, 78 at the time, was hard at work researching the ways people might be able to live off their savings, given lifespans that were once unimaginable.
Financial planning for longevity involves people either extending their careers or saving a whole lot more — or maximizing the pension fund that is backing a retirees’ pay. There’s a limit to how much most people can save. It’s not unlike a grain elevator, which can only store so much for the future.
Meanwhile investors can also try to profit from the impact of longevity on business. The lopsided aging demographics around the globe will dramatically alter our economy, albeit not always in the most upbeat ways. I talked to Taimur Hyat, chief strategy officer of PGIM, the investment management arm of Newark, New Jersey–based Prudential Financial, about it. Hyat argues that chief investment officers need to think hard about trends that will change the investment landscape. Longevity is one. It’s not enough to draw up detailed asset allocation plans without incorporating themes that will affect the nature of investment opportunities within each sector, whether real estate or private equity.
Hyat emphasizes that his work is not just about the sheer numbers of old people. Yes, there are more elderly people in places such as Japan, China, Europe and the U.S. But these elderly people are also living much longer than previous generations. That’s what is interesting. “It’s the twin effect,” he says. Hyat says there has been a lot of research into demographics, but surprisingly little on the investment opportunities.
Although demographic data is public and has been crunched over and over, Hyat was surprised by a few things, including how wrong demographers have consistently been in their life expectancy forecasts. In 1940, demographers thought babies born that year would live to 63. In reality, they’ve lived to at least 75.
PGIM thinks institutional investors can adopt some longevity themes within their traditional asset allocation plans. For example, demand for senior housing, including semi-independent living centers, stands to grow. Companies in this sector can be incorporated into real estate allocations. Hyat stresses that private equity and venture capital teams could co-invest in companies that are developing cures for diseases such as Alzheimer’s and certain cancers that disproportionately strike the elderly. “Investing broadly in public health care through an ETF, for example, is too blunt of an instrument,” says Hyat. PGIM’s real estate team is investing in what it calls “eds and meds,” in which private health care companies are moving near big educational and medical establishments and building facilities to do biotech research.
But the bigger change for institutional investors is seeing a portfolio through mega trends such as longevity. “It’s taking a theme and then seeing how you would invest in each traditional area,” says Hyat. CalPERS has done something like this with its inflation-linked investments. The Canada Pension Plan Investment Board also evaluates ideas along thematic lines to identify securities that could be affected by long-term structural changes. Think climate change for one. The point is that longevity is affecting every area of our lives and our investments need to reflect that. “It’s risky to fight demographics,” says Hyat.
It is risky to fight demographics, but I wonder if the time frame is too long for most investors. After all, many of these trends will unfold over the next 30 to 40 years. Hyat says PGIM doesn’t try to predict beyond 20 or 25 years. He leaves the world beyond that to futurists, above the pay grade of investment strategists. Hyat says there are many near-term opportunities in real estate, drugs and biotech. Still, mega trends like longevity are “only available to long-term patient capital.”
Investors may have to learn a little patience from their elders.
Follow Julie Segal on Twitter at @julie_segal.
