The CFA Institute's annual conference, held in Singapore for the first time this year, highlighted the near-term challenges and opportunities retirement plans are facing in a volatile, low-yield market environment as demographic pressures build.
In opening remarks on May 20, John D. Rogers, the institute's president and CEO, said regaining the trust of the investing public remains a priority if the broader financial industry is to avoid “being regulated into a state of irrelevance.”
The investment management industry “largely owes its success” to a combined $30 trillion in government- and corporate-sponsored retirement plans around the world that generate $87 billion in fees a year, he noted.
Helping people depending on those systems achieve a secure retirement amid the “demographic train wreck” facing Europe, North America and Northeast Asia is a major challenge facing the industry, Mr. Rogers said.
Tharman Shanmugaratnam, Singapore's deputy prime minister and finance minister, in a conference speech also on May 20, noted that while institutional investors in the developed world remain significantly underweight in emerging markets, they are steadily reducing their home-country biases.
The fly in the ointment is that those aging savers in the U.S. and Europe are becoming less interested in risky assets and more interested in short-term, liquid assets — a mismatch in light of the long-term financing required for Asia's heavy infrastructure spending needs, he said.
Meanwhile, Asia enjoys a much younger demographic profile but the region lacks the strong lineup of institutional investors capable of translating growing household savings into “longer term … higher risk investments,” Mr. Tharman said.
He said financial industry innovation is needed to bridge those gaps, along with changes in governance, accounting and reporting. “We need new forms of financial intermediation that can redirect savings on the part of a large pool of increasingly old savers in the advanced economies into long-term financing, without imposing excessive risk”on those savers, he said.
Mr. Tharman said an unbalanced policy response to the global financial crisis — with monetary policy doing “almost all the heavy lifting” — has bought time but also allowed governments to delay needed fiscal consolidation and structural reforms.
One consequence of that “serious imbalance” has been to degrade the “information value of prices” in financial markets, raising the risks of misallocation of resources at many levels of the economy, the finance minister warned.
At the same time, delays in pursuing structural reforms could eventually lead to a long-term erosion in potential growth in those developed economies, if — for example — a generation of young workers can't find employment, eroding the skills they had gained through education.
Meanwhile, the capital attracted to emerging Asia's relatively strong growth from the slower growing advanced economies is forcing economic policymakers in Asia to move beyond their traditional focus on macro-environmental targets, such as inflation, and prudential oversight of key financial firms.
Amid volatile capital flows, in a “risk-on, risk-off” environment, policy makers in emerging Asia are being forced to add “macro prudential regulation” to their tool kits — moving, sometimes in unconventional ways, to avert asset price bubbles, which in Asia more often than not means property market bubbles, Mr. Tharman said.
“Averting asset market bubbles in advance,” an imprecise art, is now an important part of the tool kit of policymakers in the region, he said.
A better mix of policies, including medium-term fiscal consolidation and structural reforms in areas such as pensions or labor markets, is urgently needed, Mr. Tharman said.
There's a window of opportunity of “no more than a decade to get this right, but I believe we can,” he said.