TIME - What is the nature of time and how do we make

Multiplying investment, insurance and retirement knowledge
# 22
TIME
What is the nature of
time and how do we
make the best
of it?
MICRO
MACRO
META
With declining birthrates and high levels
of female education, Iran’s leaders are
creating more incentives to have children
Sustained growth can only be
achieved by boosting productivity –
but it’s a catch-22 situation
Astronaut Samantha Cristoforetti
has set new records after spending
199 days away from Earth
CHART ART
RN
STE E
W EU R O P
E
US
RN
STE S
W EH O O T
S
F
OF
A
RN
STE E
E AU R O P
E
MAKING OF THE COVER
PROJECT M cover art is created using
special software that transforms raw
data, images and figures into
aesthetic clusters using special rules
and parameters. For this issue, the
program was fed gross domestic
product (GDP) per capita data from all
over the world, starting from 1800
and ending at 2010. GDP is one of the
primary indicators used to gauge the
health of a country’s economy. It
represents the total value of all goods
and services produced over a specific
time period. The cover art shows the
GDP of individual countries as well as
groups of countries; the fissures and
channels show gaps in the data. To
visually express this issue’s topic of
time, the cover art was created with
the look of metal, a “timeless”
material that can be endlessly reused
to make new products without losing
strength or durability.
CH
INA
R
ME
F O RU S S R
A
IN
L AT
A
R IC
E
M
IA
IND
ASI
AFR
A
ICA
USA
180 0
1820
1850
1870
190 0
1930
1960
1990
2010
1, 296
1, 361
1,849
2,445
4,091
6, 213
11, 328
23, 201
30,491
W ESTER N OFFSHOOTS*
––
1, 302
1,801
2,419
4,015
6,028
10,961
22, 346
29,564
W EST ER N EU ROPE
––
1,455
1,627
2,0 06
2,959
4,073
6,806
15,9 05
20,889
E A ST ER N EU ROPE
––
683
869
953
1,463
––
3,058
5,427
8,678
CHINA
––
60 0
60 0
530
545
568
662
1,871
8,032
FOR MER USSR
––
––
49
––
1,196
1,448
3,945
6,894
7,733
L ATIN A MER IC A
––
628
––
776
––
––
3,130
5,065
6,767
ASI A
––
591
––
548
––
––
1,026
2,783
6, 307
INDI A
––
––
––
533
584
726
753
1, 309
3, 372
A FR IC A
––
486
––
648
––
––
1,055
1,425
2,034
GDP PER CAPITA 1990 INT. GK$ (GEARY-KHAMIS DOLLARS)
Source: The Maddison-Project, http://bit.ly/1JoYD3B
(Artwork/Generative Design:
Peter Riedel – www.peterriedel.com)
USA
*Australia, NZ, Canada and the US
(values weighted according to populations)
G D P P E R C A P I TA DATA AC RO S S R E G I O N S F RO M 18 0 0 T O 2010
2013 version
W ESTER N
OFFSHOOTS
W ESTER N
EU ROPE
EASTERN
EU ROPE
CHINA
FOR MER
USSR
L ATIN A MER ICA
ASI A
INDI A
A FR ICA
18 0 0
18 5 0
19 0 0
19 5 0
2 010
OPENING BELL
BRIGITTE MIKSA
Head of International Pensions
OF THE ESSENCE
You can seize the moment, win an hour or lose a day,
but time still moves inexorably on. Why this flow is all in
one predetermined direction remains a mystery
JOIN THE
C O N V E R S AT I O N
Want more? PROJECT M is
also available online. Visit
projectm-online.com or
follow @ProjectMOnline
on Twitter for more
updates and news
Scientists refer to the asymmetry between
future and past as the arrow of time. Current
efforts to unscramble the difference involve
quantum physics and multiverse theories
involving more than one dimension of time,
but we need not concern ourselves with that.
While the laws of physics treat the past and
future as fundamentally the same, in our daily
experience they are clearly not. Our industry,
the financial one, is built on the solidity of
time. Products, contracts and reporting
schedules are based, start or expire around
definite dates, and although Henry Ford may
have once claimed history was bunk, our past
also too often intrudes upon the present.
In this edition, we examine how
time impacts upon insurance and asset
management and the individuals that depend
on them. We look at history and how events
from a century ago echo in the handling of
current crises and influence investment
attitudes. We also see how, as noted economist
Barry Eichengreen explains, our remembering
of The Great Depression has set up the
conditions for crises in the future.
We find out how extraordinary our era is in
terms of unprecedented prosperity – and ever
widening inequality. Former regulator Andrew
Sheng also explains how the continuing
response by central banks to the financial
crisis is now breeding unhealthy shorttermism. While Michael Heise, chief economist
at Allianz, explains that Europe risks losing
decades, as failure to invest means there will
be no offset to falling productivity caused by
demographic decline.
And we look at an idea whose time
may be coming. Dag Detter champions
national balance sheets as a way for national
governments to not only better account
for assets, but also as a way to increase
GDP growth and boost productivity. It is
a fascinating collection of insights into a
dimension that underpins our existence.
Yours sincerely,
Brigitte Miksa, February 2016
Allianz • 3
CONTENTS
FOCUS
(I s s ue s in d e pt h)
TIME
06 –11
Waiting for no man
We organize our lives around it –
but what is time, actually?
12 –13
Remember the times to come
What’s finance for? Let’s stop thinking about ourselves
14–16
Time for full accounting
How to lay the foundation for better
governance of national assets
17
Q&A
What is history? We ask Barry Eichengreen
25–27
Economic growth in the
very long run
Today’s huge gap between rich and poor
has its roots in the distant past
28–30
Time is tight
It’s the most valuable resource you have.
Are you using it wisely?
31–33
Birth year trumps data in
personal asset choices
The latest generation of investors is wary of the cult
of equities
34–35
18–19
Mortality tables
How long do you have? It depends who you ask and
what assumptions are made
20–21
Risk strategies questioned in
time of instability
The financial crises have exposed
glaring weaknesses
The great falsifier
Gather ye rosebuds: time flies as we get
older and priorities change
At the end of time
You can’t take it with you – so what are
you doing with your savings?
22–24
Discontent in the second gilded age
We’re approaching 19th-century levels of
inequality, says Sir Anthony Atkinson
36–37
38–39
Where is the evidence?
The problem with risk-based regulation is
deep seated, writes Con Keating
THOUGHT LEADERS IN THIS ISSUE
Barry Eichengreen
discusses the uses
and misuses of history
Page 17
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Laura Carstensen
on how time affects our
goals and motivation
Page 18
Sir Anthony Atkinson
explains why inequality is
an urgent social problem
Page 22
Michael Heise
looks at Europe’s
Catch-22 situation
Page 52
CONTENTS
MICRO
(Lo c a l kno wl e d ge )
40–41
Watch and learn
Investing in vintage timepieces: the thrill of building up a portfolio
can last a lifetime and may bring financial returns
42–44
Iran fears demographic implosion
Offering incentives to have children probably won’t stop the decline as women
opt for further education and the country moves towards democracy
45–48
Deaf Indians find opportunity
Mainstream education is failing those with hearing disabilities, but the
Noida Deaf Society is providing training and key skills for jobs
MACRO
(Gl o ba l o ppo r t unit ie s )
49–51
The surprising cradle of developed nations
Fertility is lower in cities. Or is it? New research shows that children have become
symbols of affluence in wealthy urban neighborhoods around the world
52–53
Europe risks losing decades
The recovery is taking hold, but long-term growth is threatened by a
combination of weak demographics and low investment
54–55
What is the next 7%?
What do you call a country where 28% of the population is 65 and over?
We’re aging so fast we need new terms to describe ourselves
56–57
Time to increase holdings of long-dated sterling credit
Long-dated credit offers an attractive middle ground between gilts and equities
META
(T he o ut s id e r ’ s v ie w )
58
Through the glass ceiling
Space travel can do strange things to mind and body,
says astronaut Samantha Cristoforetti
59
Masthead
Allianz • 5
FOCUS
WAITING FOR
NO MAN
It can be measured but it can’t be
seen. It flies, it crawls; it’s how we
measure our lives. But what is time,
actually – and is it on our side?
Time before
and time after:
always
pointing to the
present
6
•
Allianz
Is sues in depth
Allianz • 7
FOCUS
W
hat is more precious than gold but cannot
be bought, earned or saved? The answer
is, of course, time. While we can seize the
moment, time waits for no man. It can bind us, heal all
wounds, and sometimes is of the essence, but at other
points it just plain crawls.
But mark, kill or race against it, time’s passing is
inexorable. Like sands through the hourglass, time can be
measured: day or night, winter or summer, hours or
minutes. We experience time as an arrow moving from an
irreversible past to an unknown future. It is the one
constant in a transient world where days come and go,
seasons turn and people enter and disappear.
Yet, although it’s so central to our lives, what is time
actually? Some of the finest minds in physics, social
sciences and theology have tried to untangle this question
(see pages 28-30). Yet no one has come up with a universally
accepted theory. Perhaps we are not meant to, as Albert
Einstein once said: “Possibly we shall know a little more
than we do now. But the real nature of things, that we shall
never know, never.”
The insurance and retirement industries are built on
the elusive notion of time. Products, like life insurance or
time accounts, are all intimately entwined with dates.
Contracts start on a specific day and, after decades pass,
premiums or benefits are paid. And all of life’s big moments
– births, deaths, weddings, education, home and even pet
purchases – can now be marked by insurance.
Asset management and insurance companies
themselves are bound by time, subject to a relentless
annual timetable of tax statements, shareholder
requirements and regulation reporting. Underpinning
this, the intricate calculations of mortality tables (see
pages 34-35) chart the hopeful course to long-term
profitability, while short and long-term investment
horizons are defined, if somewhat vaguely, by time. So, too,
is the handling of risk, though Con Keating argues (see
pages 38-39) that moving to a dynamic, time average
approach of risk management would be far superior to
what we have now.
Time also intrudes in more subtle ways. Some
academics believe the era you are raised in may influence
asset choices. Evidence is based on US investors in the 1950s
who, having experienced the Great Depression, shunned
equities in favor of bonds. This behavior is seen elsewhere,
notably in Japan after the 1989-90 crash. This “collective
memory hypothesis” may have implications for millennials
who have experienced the harsh shocks of the recent
financial crisis (see pages 31-33).
However, broader preferences can change over time.
Noted psychologist Laura Carstensen examined our
8
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The still point in
a turning world
– our experience
of time measures
out our lives
perception of time remaining and her findings force us
to reconsider loss aversion in old age. It was known
that an individual’s goals can change systematically with
age, but not why. Carstensen says that with fewer years
remaining, older people focus more on meaningful
relationships and ignore what’s bad. As this includes losses,
she infers that loss aversion ought to decrease with age.
With older people relying on more emotionally meaningful
goals, a rethink on financial planning models may be
required (see pages 18-19).
BOUND BY HISTORY
Let’s step back for a minute and look at the broader picture.
According to scientists, radiometric dating puts Earth at
about 4.54 billion years old. Set against this timescale,
FOCUS
humanity’s time on the planet is but an eye blink. Modern
man is believed to have been around for 200,000 years,
but what is referred to as history amounts to only a few
thousand years of squabbles and clashes, of trade and
migration, and of exploration, exploitation and innovation.
For much of this, life resembled Thomas Hobbes’
description as being “nasty, brutish, and short.” Child
mortality rates were high and death came early even for
those that survived. In Classical Rome, life expectancy at
birth was 10-20 years with evidence partially based on
Ulpian’s Life Table, an ancient Roman annuities table. If an
individual survived to age 10, then life expectancy was
about another 35 years (see bottom of page 11).
What is astounding is that over the millennia, the
income of almost every person that has ever lived amounted
to borderline poverty, what the World Bank now puts
at $1.90 a day. Allianz economist Michela Coppola,
Allianz • 9
FOCUS
10
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Allianz
FOCUS
Trusting that
the dots will
somehow
connect in the
future
WILLIAM KLEIN
Best known for
incorporating
unusual elements
into his photographs
and videos, William
Klein currently lives
and works in Paris
explains (see pages 25-27) how exceptional our era is in
terms of the health and wealth of populations.
Diving into the rich Angus Maddison database, she
notes that if the GDP per-capita growth achieved over the
past 2,000 years was depicted in a 24-hour clock, “80%
would occur in the last 40 minutes before midnight.” She
warns, however, that this prosperity cannot be taken for
granted. The two factors that underlined the economic
success of western countries – productivity and
demography – are now undermining it.
Renowned economist Sir Tony Atkinson also notes how
exceptional our times are – in terms of inequality. While
12.7% of the world’s population, 829 million people, live in
extreme poverty, that’s actually the lowest share in history.
In recent decades, the percentage was 37% in 1990 and 44%
in 1981, but even as tens of millions of people were being
raised out of dire poverty, the disparity between the haves
and have-nots has widened.
In 1820, an average inhabitant in the richest regions had
a GDP per capita three times higher than those in the
poorest. By 2001, the ratio was 18 to 1. Such high levels in
inequality have been building for 25 years, Sir Tony told
PROJECT M (see pages 22-24), but it is only now that people
are realizing. “I think we are facing problems with the
cohesion of society,” he somberly warns.
This is one challenge that must be faced in the future.
The inadequate response to the last global financial crisis
will be another, Barry Eichengreen from the University of
California states. Part of an exclusive interview, he talks in
the Q&A (see page 17) about parallels between the most
recent crisis and that of the Great Depression and how the
past influences the present – sometimes by people
choosing the wrong lessons to learn from.
“We have avoided a depression like the 1930s, but have
ended up doing too little to stimulate recovery and too little
in terms of financial reform to prevent another crisis,”
Eichengreen says. Is time on our side in either of these two
issues? Who knows, but time will flow on regardless of how
humanity handles them.
5, 0 0 0 Y E A R S O F R I S K
Need for certainty in a chaotic world has been a key in the development of
civilization. Insurance has helped provide it. Ancient Babylonian traders first
sought to decrease risks by paying extra sums to cancel loans should shipments
be lost. Later, in ancient Greece and Rome, guild members supported each other
through mutual funds. Throughout history, names such as Benjamin Franklin,
Edmond Halley and mathematicians Blaise Pascal and Pierre de Fermat have been
critical in the development of insurance. And insurance has been there to help
recovery in disasters ranging from the Great Fire of London to Hurricane Katrina.
Find out more at: projectm-online.com
Allianz • 11
12
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Allianz
ANDREW SHENG
is adjunct professor at Tsinghua
University (Beijing) and an
advisor to the United Nations
Environment Programme
Inquiry into the Design of a
Sustainable Financial System
Some seven years after the great financial crisis, our response
to the meltdown is breeding an unhealthy short-termism
REMEMBER THE TIMES
TO COME
FOCUS
FOCUS
By Andrew Sheng
»
PILING
REGULATION UPON
REGULATION
ADDS TO AN
ENVIRONMENT IN
WHICH THE
BEST AND THE
BRIGHTEST MOVE
INTO THE
SHADOWS
«
F
ollowing the 2008 crisis, central banks
were forced to step in, attempting
to pick up the pieces left behind
by policymakers as they abdicated their
responsibilities to make meaningful structural
reforms. But central banks cannot influence
the real world; they have to do it indirectly via
unconventional monetary policy.
What began as a temporary crisis solution
has become a new norm. Quantitative easing,
rock-bottom interest rates and low-bond yields
are no longer the exception. Instead, they form
an ecosystem overly focused on the short term.
This would be fine if it were administered
in moderation, as short-term incentives help
drive efficiency. But overdoing it creates longterm instability, and our judgment on what is
sustainable finance has become clouded. This
leads to increasing pressure on long-term
investors, who will eventually have to pick
up the tab as zero-interest-rate policies eat
into the asset valuation of pension and life
insurance funds. Regulation alone won’t be
enough to refocus the global financial industry
on the longer term – and I’m saying this as a
former central banker and regulator. While
achieving much good, regulation can also
encourage short-termism.
What we need instead is a little humility,
to step back and remember that we all have
collective long-term responsibilities. Besides,
regulators as well as the wider financial
community didn’t do a very good job preventing
the last crisis, so it is questionable how they
can help prevent the next one.
Piling regulation upon regulation adds
to an environment in which the best and
the brightest move into the shadows where
they cannot be regulated. And then accidents
will simply happen where regulators are
not watching.
WHOSE RATES ARE THESE?
The ongoing response to the great crisis results
in significant market distortions: in some
markets, central banks have gone from the
lender of last resort to the buyer of last resort.
Pre–financial crisis, central banks owned 3%
of financial assets; now it is 8%. So, we have to
ask ourselves: if they are determining short-
term interest rates, is this a market-driven rate
or a central bank one?
It might not have been their wish, but
central banks are now major players in the
global financial markets and a crucial element
in the fiscal taxation that has been imposed
on society. Interest rates have a huge impact,
and it would be healthy for the entire financial
community if central bankers engaged in
an open discussion on the hard budget
constraints of their current policies. At
the moment there is none, and it won’t be
easy to draw that line. But without it, they can
do anything they please, regardless of the
long-term consequences.
PEOPLE, PLANET AND PROFITS
To save this short-term ecosystem from
collapsing, we need to stop thinking about
ourselves and remember what finance really is
for. People, planet and profits, the triple bottom
line, need to become more balanced. The
current approach is still focused on profits and
cares too little about the people and the planet.
Yet these things can go hand in hand. A lot
of free market advocates think sovereign
wealth funds are demons, but some of them
have delivered excellent returns. This is largely
because they adopt a more long-term view,
looking at innovations in areas like transport
and communication networks that actually
enable market forces to function.
When it comes to saving for retirement,
radically different approaches are even more
vital. With its lack of government pensions,
Asia, for example, could become a laboratory
for new approaches. The majority of people in
the region manage their own assets, and in
most cases that means their home is their
pension. Now, we have platforms such as
Airbnb that can help generate additional
income from a property. Tie that up with a
reverse mortgage and you have a pension
scheme that’s as good as anything.
Ultimately, the question is, what is finance
for? Finance must serve real life, yet reality is
happening faster than the theories we have to
explain what is going on. Nobody has all the
answers, but if we ignore the long term, we
might be in for a nasty surprise.
Allianz • 13
Do governments really
know the value of
the commercial public
assets they’re supposed
to be managing?
14
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Allianz
FOCUS
TIME FOR FULL
ACCOUNTING OF
PUBLIC WEALTH
Realizing the public wealth of nations could
spur new growth and boost productivity
I
n 1085 William the Conqueror
commissioned one of the most
remarkable statistical exercises in
European medieval history, and one which
may have a compelling parallel for modern
governments. He ordered the valuation and
cataloguing of all assets in England. The result
was published in 1086 in what has come to
be known as “the Domesday [doomsday] Book.”
It was a highly detailed record of all the
country’s assets and their ownership. William
wanted a view of his kingdom’s financial
resources in terms of taxes he could collect
and the revenues he could generate from
Crown lands. Part of the exercise was also to
clearly identify Crown lands.
This may well be one of the earliest
attempts at establishing a national inventory
or balance sheet. Yet, despite all the advances
in economic understanding and statecraft,
few modern governments really know the
value of the assets they’re supposed to manage.
Over the years, a number of economists,
such as Willem Buiter, now the Global Chief
Economist at Citi, have called for the creation
of national balance sheets. Now a new book
called The Public Wealth of Nations says that
not doing so is a huge missed opportunity.
And given the scale of public debts and rising
social obligations across much of the
Allianz • 15
FOCUS
world, there’s probably never been a better
time to address this shortcoming.
The two authors, Dag Detter and Stefan
Fölster, estimate that, globally, governments
could be sitting on $75 trillion of commercial
public assets, the same as annual GDP, versus
debts of $54 trillion. What’s more, those assets
tend to be poorly managed and often not
even accounted for. Recognizing their value
could bolster sovereign credit ratings and
lower the cost of debt.
Actually managing those assets properly
could increase GDP growth and boost
productivity – two top economic priorities
many governments are struggling to achieve.
The authors calculate that lifting the return on
public assets by just 1% could produce an extra
$750 billion in revenues. That might sound like
yet another call for mass privatizations,
but the solution proposed by the authors is
potentially more far-reaching.
transparency, public accountability and a clear mandate. “One of the
problems is that governments don’t have balance sheets as such, but
instead focus on the flow of revenue and expenditure only,” said Dag
Detter, who is also an investment adviser. “The current situation is that
governments see public assets as a drain on cash, which is paid from
taxes. This is why they tend to underinvest in things like infrastructure.”
Treating items such as forests and railways as assets that can
produce a return, rather than liabilities that need to be supported with
cash, would see an important shift in mind-set creating an incentive to
properly maintain and develop them. Governments are often reluctant
to borrow so that national railways or ports can be upgraded, for fear
of piling on more debt and impacting credit ratings. This leads to
the familiar theme of underinvestment and ultimately reduces the
efficiency of these assets. The result is a creaking and inadequate
infrastructure, which is bad for the whole economy.
Even worse is that these assets often end up being subsidized, owing
to their poor performance. By contrast, an independent NWF can raise
funds on the capital markets to invest in these assets when necessary as
part of their remit of maximizing returns. Another important benefit is
that it would reduce the possibility of corruption, which is a corrosive
influence on society and democracy.
LIBERATING NATIONAL WEALTH
Much like King William I over 900 years ago,
governments need to carefully identify and
value national assets. But to really create value
for the nation, they need to go much further.
The authors propose placing potentially
productive assets, such as buildings, usable
land, infrastructure, state-owned enterprises
and so on, into a National Wealth Fund (NWF).
In turn that fund would be ring fenced from
meddling politicians. But, crucially, it would
be run like a private-sector corporation
with the goal of maximizing value for its
shareholder – the nation.
Their train of thought follows on from the
widely accepted notion of giving central banks
independence. It allows them to properly
manage the national currency and monetary
policy for the benefit of the economy. It stops
politicians from manipulating interest rates
to help them win elections, for example. To
ensure that high standards of professional
management are maintained, the NWF
would be buttressed by strong governance,
COULD IT CATCH ON?
According to Detter, some governments in Europe and Asia are
waking up. A potential role model is Singapore’s Temasek. This NWF
publishes reports; it is accountable and over time has produced decent
returns on assets under management. In fact, it’s so successful that it
also invests abroad.
Other governments have followed Temasek with interest. Malaysia,
Vietnam, Abu Dhabi and Finland are among those that are trying to
emulate it in some way. Indeed, if governments can accept independent
central banks, then why not go one step further and place the
management of state assets under an independent entity? The value
this could release over the years would be considerable and help meet
the growing challenges of dealing with aging populations, servicing
national debts and maintaining national infrastructure. Indeed, the
authors argue that it would free governments to concentrate more on
the issues they were elected to tackle. The concept of the NWF could
even become a template for supranationals, such as the World Bank and
the IMF, when rescuing struggling countries.
Instead of routinely prescribing destabilizing austerity programs as
a remedy, the NWF model could represent an alternative “gentler”
approach. Not only is it a way of realizing the value of a country’s assets,
but could lay the foundation for better governance and a more robust
free-market economy. In this case debtor, creditor and society could
come out ahead over the long term.
16
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Allianz
FOCUS
BARRY EICHENGREEN
GEORGE C. PARDEE AND
HELEN N. PARDEE
PROFESSOR OF ECONOMICS
AND POLITICAL SCIENCE,
UNIVERSITY OF CALIFORNIA,
BERKELEY, AND AUTHOR
OF HALL OF MIRRORS
Discusses his latest book on the Great
Depression, the Great Recession and the
uses – and misuses – of history
Q&A
QUESTION Galbraith’s The Great Crash,
1929, is the classic on the Great Depression.
Do you believe you have written the
classic on the Great Recession?
ANSWER I think Galbraith set a very high standard and your question is
not for me to answer. More time will have to pass before we get the
definitive book. Don’t forget that Galbraith was published a quarter of a
century after the Great Crash.
History has a lesson. Is it: bunk, as Ford
said; a farcical repetition, as believed by
Marx; or, as Cervantes claimed, the sum
total of things that should be avoided?
My argument is that history doesn’t teach lessons. People teach
lessons. The way history is written and taught is influenced by the
context in which history is written, talked about and taught. The
agenda of the author affects how the narrative is framed and events
are viewed, portrayed and organized.
If all authors have an agenda, what is
yours?
I’d like to think that I’m concerned to understand better how earlier
experiences inform and shape the perceptions of people today, and
how that in turn influences how they respond to events.
There are parallels between the 1930s
and our own financial crisis. Do you
think modern officials applied the right
understanding of events?
While the parallels are remarkable, it’s also remarkable that we
weren’t more aware of them and the implications while they were
unfolding. Before our crisis, enough people didn’t draw the obvious
conclusions that it could all end badly. I think the big mistakes were
the decisions made before the crisis.
There are important lessons in your book
Hall Of Mirrors. What are they?
Pushing back, as I said earlier, I think history doesn’t have lessons, but
the past can inform our understanding of current dilemmas – like how,
in the present case, success was the mother of failure. We’ve avoided
a depression like that of the 1930s, but we’ve ended up doing too little
to stimulate recovery and too little in terms of financial reform to
prevent another crisis. So that’s not a lesson of history, but it is an
illustration of how the past can be used to better understand the
situation we are in today.
• Allianz
• 17
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FOCUS
THE GREAT FALSIFIER
With less time remaining, we focus more on what is
emotionally meaningful. This challenges both the notion of
chronological age and the notion of loss aversion
T
he author of a prominent theory
in modern-day psychology, Laura
Carstensen is unimpressed with her
own achievements. “A theory is just a theory
until it has been tested. True insights only
emerge where it has been falsified and we
know what is right or wrong.”
Applying such scrutiny to her findings,
Carstensen’s research inched forward over
roughly a decade until it became known as
the socioemotional selectivity theory (SST),
stipulating how time affects our goals
and motivations. “From our early work we
know that goals are changing systematically
with age. We are now examining how this
affects our memory and the way we direct our
attention,” the professor of psychology and
director of the Stanford Center on Longevity
told PROJECT M.
Yet it is not time lapsed that changes
our preferences, but time remaining. “The
subjective sense of remaining time has
profound effects on basic human processes,
including motivation, cognition and emotion,”
Carstensen wrote in a 2006 Science article.
“Socioemotional selectivity theory maintains
that constraints on time horizons shift
motivational priorities in such a way that the
regulation of emotional states becomes more
important than other types of goals.” In more
mundane words: with fewer years remaining,
older people focus more on what they enjoy,
namely meaningful relationships with close
friends and family members.
This questions the concept of chronological
age. A good predictor of cognitive abilities,
language and motor coordination among
the young, it becomes an increasingly
poor predictor at older ages, according to
Carstensen. Theoretical models of human
development that focus almost exclusively on
the passage of time since birth need to be
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overhauled – with a direct impact on the
premises of financial planning, particularly
when it comes to retirement savings and lifecycle products.
“When time horizons are nebulous and
seemingly unending, as they are in early
adulthood, our goals are about preparation,
exploration and learning,” Carstensen says.
This makes sense: with the larger part of life
ahead and little sense of direction, one is best
advised to think broadly and prepare for what
is even remotely likely. Yet with much of our
life lived, we are free to return to what is dear
to our hearts: “Older people focus more on
goals that are emotionally meaningful.”
Yet we hardly rely on facts and figures
when developing motivations and setting
goals. Cognitive processes are based on
a subjective sense of time, which can be
manipulated. Experiments have shown that
when told they will soon move to a distant part
of the country, younger people prefer to meet
close friends and family members rather than
a remote acquaintance who seems to have
much in common with them. Their reaction
resembles that of older adults. Similarly,
Carstensen found that events such as the
9/11 terrorist attacks and the severe acute
respiratory syndrome (SARS) epidemic in
Hong Kong in 2003 completely eliminated age
differences on some measures of motivation.
WHAT THIS MEANS FOR LOSS AVERSION
Carstensen’s findings take the notion of
loss aversion to a new level. Stating that people
are more sensitive to loss than to gain is
considered a truism for all humans. Yet relevant
studies were almost exclusively conducted
with younger participants, and Carstensen
challenges the linear understanding of loss
aversion. “We suspect the concept of loss
aversion may not be true for older adults.”
»
OLDER
PEOPLE FOCUS
MORE ON GOALS
THAT ARE
EMOTIONALLY
MEANINGFUL
«
FOCUS
If older people are joy seekers and this
preference directs their attention, they are
likely to ignore negative events such as
financial losses, in what Carstensen calls
the “positivity effect.” She infers that loss
aversion must then decrease with age. And
tomographic imaging proves her right.
“Brain activity, when anticipating a potential
loss, is significantly lower among older
people than among younger.” Neural activity
is similar in both age groups when
anticipating a potential gain, Carstensen and
her co-authors write in Nature Neuroscience.
This has far-reaching implications for
everything related to finance and old age,
ranging from financial literacy to elder
financial abuse. It has also led the Stanford
Center on Longevity to cooperate with
regulators, such as the Financial Industry
Regulatory Authority (FINRA), as well as with
service providers. While the positivity focus
is a default mindset among older people, it
too can be manipulated. And maybe it should
be, when it comes to financial education and
advice for older workers and retirees. “Even
telling people about these findings is helpful
in eliminating them,” says Carstensen.
While the gift of longer lives that
humanity has received over recent decades
naturally affects us, Carstensen also suggests
that the approaches to both saving for
and spending in retirement need to
change. “We have not focused much on
decumulation,” she says. “With shorter lives
it wasn’t quite as urgent.”
She advocates working longer or going
back to some form of training at later stages
in life. Workers may also consider taking
sabbaticals to spend time away from work
to look after young children. “We have to
get away from the notion that we have a few
extra years tacked on at the end,” explains
Carstensen. “That is a crisis of creativity, not a
crisis of aging.”
More sensitive
to loss than gain:
not necessarily
true for all ages
Allianz • 19
Saving for a rainy
day: what are
you going to do
with it?
AT THE END OF TIME
Once the effort to save is made, Americans retain surprisingly large amounts
of assets until the end of their lives
W
hen it comes to the end of time, rational
economic beings should have little left,
unless they want to bequeath wealth to later
generations. Or so economic theory has it.
Yet the reality is different. Roughly a third of Americans
own $250,000 or more in non-annuitized wealth when they
arrive at the end of their lives, according to a recent paper by
James Poterba (Massachusetts Institute of Technology).
Examining two groups – those aged 51 to 61 and those 70 or
older in 1993, and following them until 2012 – for their paper
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What Determines End-of-Life Assets?, Poterba and colleagues
Steven Venti (Dartmouth College) and David Wise (Harvard
University) found that asset levels are persistent over the
retirement phase. For the fortunate ones with substantial
assets, this means they hardly spend down during their
time in retirement. Asset levels are equally persistent at the
lower end of the wealth distribution. Some 70% of the
younger cohort who ended their life with less than $50,000
of assets also began retirement with similarly low levels.
The same is true for 52% of the older group.
FOCUS
The authors conclude that total non-annuity wealth (real
estate, business and financial assets) often hardly declines
in later life unless the retiree falls seriously ill – that is,
suffers from a stroke or chronic illness. “Our research
shows that low wealth at the end life often is an issue of
low saving, not over-spending,” Poterba, also president
of the National Bureau of Economic Research (NBER), says.
Examining motivation such as the desire to leave a bequest
was outside the scope of this study.
SAVING BECOMES MORE DIFFICULT
The challenge of an adequate retirement income looms
even larger in the current low-interest-rate environment.
“The way defined contribution plans interact with current
financial market conditions is a nontrivial challenge,”
Poterba says as in an interview with PROJECT M.
Assuming inflation-adjusted investment returns of 2%
per year and 1% annual inflation-adjusted wage growth, a
worker would have to save almost 15% of each paycheck for
40 years to receive an annuity stream equal to half of his
earnings at just before retirement. Saving for only 20 years
one would need to set aside more than a third of earnings,
Poterba calculates in Retirement Security in an Aging
Population. In reality, actual household saving rates in the
US are around 7%.
When asked whom he pities more – the pension
reformer set against the twin challenges of sustainability
and adequacy, or the worker struggling to save more –
Poterba is too much of an academic to provide simple
answers. Intent on understanding what drives wealth
accumulation and retirement spending, he carefully
weighs his response. “Both have to work through a
challenging environment.”
On second thought, Poterba becomes controversial
in his own quiet way, hinting that the debate over
sustainability might involve too much hysteria. “There is
not much deep economics in the sustainability discussion.
Given a country’s demographic facts, its retirement age
and wage level, sustainability comes down to ‘what goes in
can come out.’” Poterba expects unsustainable public
pensions to be reformed by a combination of higher
taxes and higher contributions as well as an increased
retirement age.
Working longer can be a particularly powerful tool as
the years between 55 and 64 are often high-saving years –
with the kids out the house and the mortgage largely paid
back. Coincidentally, working longer also reduces the ratio
of accumulated assets to time spent in retirement.
Reducing retirement by three years can increase the
monthly budget available for consumption by 15%,
according to Poterba’s calculations.
UNDERSTANDING POLICY IMPLICATIONS
To advance economists’ understanding of the saving and
spending process, Poterba now seeks to combine the facts
of real life with the insights of behavioral economists as
well as intergenerational motives for saving. “The three
saving motives – consumption over the life cycle,
precautionary savings and bequests – all need to be
put together in a model, which needs to be verified
against behavioral economists’ insights. One thing that
has emerged from research over the past decade is
that precautionary considerations – the idea of saving now
to have money in the case of unemployment or health
shocks later – play a significant role for retirees who
conserve their wealth in later life.”
The question what savers intend to do with their assets
has vexed economists for more than two decades. The
precautionary motive may be stronger for younger
households with next to no rainy-day funds. On the other
hand, much of the saving is done by wealthy households
who are unlikely to need precautionary funds, Martin
Browning and Annamaria Lusardi wrote in their 1996
contribution to the Journal of Economic Literature,
“Household Saving: Micro Theories and Micro Facts.”
“Our reading of the evidence is that while the
precautionary motive is important for some people at some
times, it is unlikely to be so for most people,” they conclude
on the basis of their literature review.
Apart from academic interest, there is also a policy
element in Poterba’s work: “In the US, Social Security
income bulks very large as a fraction of income for elderly
households in the bottom third, maybe even the bottom
half of the income distribution.” Policy changes in this area
affect the key income source for this group, particularly as
the canonical three-legged stool of retirement income –
public and occupational pensions as well as private
savings – is often a one-legged stool for lower income
groups. “Understanding the late-life behavior of households
is crucial for policymakers,” Poterba concludes.
Allianz • 21
FOCUS
DISCONTENT
IN THE SECOND
GILDED AGE
Inequality is one of our most urgent social problems,
explains Sir Anthony Atkinson
C
arved into the wall of the Franklin Delano Roosevelt Memorial
in Washington, DC, is a quote from the president who led the
United States out of the misery of the Great Depression: “The
test of our progress is not whether we add more to the abundance
of those who have much; it is whether we provide enough for those
who have too little.”
That nicely sums up the spirit behind the latest book by Sir Anthony
Atkinson, Inequality: What Can be Done?, and indeed his whole life’s
work. “Very much so,” agrees the 71-year-old London School of
Economics professor. “But it is also very much in the spirit of the new UN
Sustainable Development Goals: no poverty, zero hunger, access to water
and so on – all are issues concerning inequality.”
Living as we are in what some call the Second Gilded Age, a time
when the wealth of the top 1% has grown through winner-takes-all
economics to the point where societies are approaching 19th-century
levels of income disparity, it is no wonder inequality is a hot topic. In
America in particular, 95% of all the economic gains since 2009 have
gone to the top 1%. They now receive a fifth of the US national income – a
level last seen a century ago.
But as the professor politely explains, it is not just America. “In the
last few years, the biggest increase of inequality has been in countries
like Sweden and Germany, places you wouldn’t expect it. Inequality is
becoming a much more widespread problem worldwide.”
ROAD TO DAMASCUS
For half a century, Anthony “Tony” Atkinson has passionately and
rigorously focused on income distribution. As a mathematics student in
the early 1960s, he served a voluntary stint in a deprived hospital in
Hamburg, Germany. It was a defining time for him. Returning to the UK,
he found that poverty had never really been resolved there either, and he
was inspired to take up economics.
His first major book, Distribution of Personal Wealth in Britain,
was published in 1978. It was a groundbreaking study (co-written
with Alan Harrison) that analyzed the extent to which different
economic, social and political forces can influence the distribution of
income. Since then he has produced some 50 books and more than 350
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scholarly articles, including one with Joseph
Stiglitz that laid one of the cornerstones for the
theory of optimal taxation.
Because Atkinson pioneered the field of
modern British inequality and poverty studies,
his name adorns the Atkinson index of
inequality, used by the United Nations in
conjunction with the Human Development
Index, since it better accounts for differing
social values than the Gini coefficient. Not
surprisingly, Atkinson’s name is one that his
colleagues mention as worthy of receiving the
Nobel Memorial Prize in Economic Sciences.
FOCUS
The rich are
getting richer –
but our society is
deeply divided
SIR ANTHONY
AT K I N S O N
For many years though, Atkinson admits his was a lonely interest. Until
recently, as Paul Krugman noted in The New York Review of Books, many
economists and politicians shouted down any mention of inequality.
This was best summed up by Robert Lucas Jr. of the University of Chicago,
an influential macroeconomist, in 2004: “Of the tendencies that are
harmful to sound economics, the most seductive, and in my opinion the
most poisonous, is to focus on questions of distribution.”
But income distribution did become a public theme when Thomas
Piketty published Capital in the Twenty-First Century (2013). That
controversial book, with its central claim that the most powerful force
pushing toward greater wealth inequality since the 1970s is the gap
between the after-tax return on capital and the economic growth rate,
sparked wide debate about the causes of income inequality.
is an academic
economist
particularly
concerned with
the economics
of income
distribution and
the design of
public policy. He is
a Fellow of Nuffield
College, Oxford,
and Centennial
Professor at the
London School of
Economics
Allianz • 23
FOCUS
would boost egalitarianism. These include
returning to a progressive tax-rate structure,
setting a minimum wage, and guaranteeing
employment to those who want it. He also
outlines how to reinvent social security by
providing a “participation income” to those
contributing to society.
The radical government interventionism
required has already seen The Economist
pooh-pooh many of the proposals. Atkinson
does not take umbrage, but patiently explains
that what today may seem like outdated lefty
ideas were actually standard government
policy not too long ago, such as guaranteed
employment in the US in 1978.
Indeed, his book serves to underline how
out of fashion the social policies of the
postwar decades have fallen. He also explains
how such policies could be reinvigorated
to reduce inequality back to where it stood
before the great “inequality turn” of the
1980s, which occurred under Margaret
We’re only now
Thatcher in the UK and Ronald Reagan
truly realizing the
in the US. “Now things have changed, but
effects of extreme
income disparity
there is no reason why they cannot change
back,” he says, “unless prevented by the power
of money and politics.”
The ways that the rich inf luence
government policy for their own benefit is,
Piketty, who studied under Tony Atkinson, paid his dues when he
he says, one of the worrying aspects of the
described his mentor as “the godfather of historical studies on income
and wealth.” For someone who has been working on the matter for so
growth of inequality. It is not just blatant selflong, the public attention must seem bemusing to Atkinson, even as it
interest – such as when one Conservative MP
comes as a relief that the topic is finally gaining the attention it deserves.
gloated in 1988, after the UK Parliament voted
for a reduction of the top marginal income tax
to 40%, that he “didn’t have enough zeros on his
A MORAL, NOT DISMAL SCIENCE
calculator” to measure the size of the tax cut he
High levels in inequality have been building for 25 years, he tells
had just helped approve for himself.
PROJECT M, but it is only now that people are finally realizing it. “I think
we are facing problems with the cohesion of society. When you have long
Rather, as The Economist acknowledges,
lines of people queuing for food banks and others buying tickets to get to
“when governments prioritize low inflation
the moon, such great disparity is bound to cause problems.”
over low unemployment, or low taxes
Throughout his career, Atkinson has held to John Keynes’s argument
over investment in infrastructure or
that “economics is essentially a moral science,” and he emphasizes that
education, they are responding to the
it should, once again, understand itself to be so. It is not surprising,
preferences of the rich.”
therefore, that this belief underpins his latest work. If inequality is one
A final point before the interview ends?
“I don’t think we need to accept
of the most urgent social problems facing the world today –
where we are today as final.
as many argue, from President Barack Obama to Christine
There’s no reason why we can’t
Lagarde of the International Monetary Fund – then it needs
ECONOMICS IS
have both equitable distribution
a practical vision of how it can be addressed.
ESSENTIALLY A
and the benefits of growth. We
MORAL SCIENCE
Atkinson’s latest book is his comprehensive, concrete
and cost-analyzed plan of action for tackling inequality.
SIR ANTHONY
just need to start thinking how we
In this UK-focused work, he outlines 15 proposals that
can deliver enough for all.”
ATKINSON
»
«
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FOCUS
ECONOMIC GROWTH IN
THE VERY LONG RUN
We cannot take the economic good fortune of the modern world for granted
By Michela Coppola
I
n the long run, we are all dead,” John
Maynard Keynes once bluntly stated.
True, but should the notion of “long
term” be defined by the average human
life span? Issues we confront today, such as
demographic aging and the challenge of
sustaining growth, cannot be understood
by examining a few brief decades. Sometimes
the roots of economic and societal change
trace back centuries.
Angus Maddison, who died in 2010,
understood this. He believed that “the
pace and pattern” of economic activity had
deep historical origins. A distinguished
economic historian with a “predilection for
quantification,” Maddison created a database
that is one of the great economic resources of
our times. In it, he strived to recreate the past
by calculating the size and growth rate of the
international economy going back to Year 1.
What emerges is an incredible success
story. Maddison estimated that over the
past millennium, population rose 23-fold
while per capita income increased 14-fold.
In the previous millennium, population rose
only by a sixth and per capita GDP actually fell
slightly from 1 CE.
Allianz • 25
FOCUS
THE GREAT ENRICHMENT
What is astounding is that from 1000 until
about 1820, development was a crawl, and
abject poverty, which the World Bank puts at
$1.25 a day, was the experience for almost
all of humanity. After 1820 came a surge in
living standards and life expectancy. This
period has been dubbed by noted economist
Deidre McCloskey as “the Great Enrichment.”
Exactly how great was this enrichment? If GDP
growth per capita over the last 2010 years was
depicted in a 24-hour clock, 80% would occur
in the last 40 minutes before midnight.
This does not mean the period before
lacked growth. Maddison believed that
economies do not “take off” from nowhere.
In his work, he tried “to explain why some
countries achieved faster growth or higher
income levels than others.” In Europe, the
complex interaction between proximate
(directly measurable economic inputs, such as
labor, physical and human capital, and land)
and ultimate (institutional, political, social
and cultural) sources of growth accumulated
over centuries. Eventually it provided a
productivity burst that allowed Europe to
take economic leadership from China
around 1500 onwards.
Yet, although there were huge differences
in the technological capabilities of countries
before 1820, living standards of the average
person were similar across countries.
This is because the population densities in
technologically advanced countries were
rising. While the size of the cake was
increasing, more people were eating it, so
everyone still received a thin sliver.
Maddison’s data shows that in 1820
an average inhabitant in the richest regions
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From a long-term
perspective, rich
societies are the
exception rather than
the rule
FOCUS
GDP PER C APITA
19 9 0 I nt e r n at i o n a l G e a r y - K h a m i s $
Bubble size represent s GDP per c apit a
8,0 0 0,0 0 0
Wor ld p opulation (,0 0 0)
7,0 0 0,0 0 0
$7,468
6,0 0 0,0 0 0
5,0 0 0,0 0 0
4,0 0 0,0 0 0
3,0 0 0,0 0 0
2,0 0 0,0 0 0
20 0 0
150 0
10 0 0
0
50 0
$467
1,0 0 0,0 0 0
Year A .C .
Source: A llianz, International Pensions c alculations base d on the Maddison Proje c t Dat abase
w w w.ggdc.net /maddison/maddison-proje c t /home.htm
had a GDP per capita three times higher than
someone in the poorest region. Since then the
spread has widened. By 2001, the gap between
the richest and the poorest region was 18 to 1.
Two trends are widening this gap. First,
productivity in industrialized countries
dramatically outpaced the rest of the world –
increasing the size of the cake. Second, in
industrialized countries, population growth
peaked in the 19th century and – with the
exception of the postwar baby boom – has
fallen ever since, allowing the Western world
to reap a demographic dividend.
As the population size stabilized and
productivity rose, the size of the average slice
of cake has increased. Lower birth rates and
increasing life spans also had a positive effect
on the accumulation of human capital: fewer
children meant parents could invest more
resources on the children they had. As a result,
labor productivity increased further, allowing
the cake to become even larger.
DECLINING TIMES
A historic irony is that the two factors –
productivity and demography – that
underlined the economic success of Western
countries in the last two centuries are now
threatening their wealth. With the number of
workers set to decline, the goods and services available per person will
shrink. As the pool of labor shrinks, improving longevity means the
number of consumers will remain constant. The result, a smaller cake
for roughly the same number of people.
This decline could be significant. Assuming all else remains equal
(output per hour, hours worked and labor force participation), Germany
risks losing 15% of its GDP per capita by 2035. The pattern is similar in
other mature economies.
Governments can address this through policies that expand the
labor force to use the underutilized skills of the elderly and women. If
more workers work until the official retirement age, current levels of
GDP per capita could be sustained for some time. Equally, encouraging
more women to join the workforce would soften the effects of aging on
economic potential growth.
Increasing labor productivity is another key. For example, by 2035,
German workers would need to produce 17% more per working
hour in order to hold GDP per capita constant. Achieving this
will be tricky. Between 1870 and 1990, average output increased
by a factor of 17, but the easy targets have already been hit.
Pushing the productivity frontier further will require much more
concerted effort.
In less than two centuries, a bare 40-minute window on the twomillennia clock, living standards have experienced a quantum leap.
However, the wealth of goods and services enjoyed today is an anomaly
when seen from the long term. To retain these gains, businesses,
governments and societies need to deal with the challenges of
demographic aging by fostering productivity increases and adjusting to
an older labor force. Given the speed of demographic change in many
parts of the world today, time is not on our side.
Allianz • 27
FOCUS
Global timekeeping
is increasingly being
influenced by the
Asian focus on
long-term planning
and growth
TIME IS TIGHT
Because it is the most precious resource you have. It flows on, like a mountain
river – and if you want to benefit from its passing, you have to move with it
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FOCUS
S
top the world. I want to get off.” Wanting to slow things down
is not just a cry of frustration. It also raises intriguing question:
why does the world clock never wind down, and what is this
notion of time actually?
Time can be measured in cycles: day or night, winter or summer,
hours or minutes. We experience it as an arrow moving from an
irreversible past to an unknown future. Time also varies depending on
how, where or when we perceive it. Having fun? Time flies. Bored? It
slows down. We know that perception influences how we experience it.
THE NATURE OF TIME
But the clock is always on. It is the one constant in a transient world
where days come and go, seasons turn and people enter and disappear.
Indeed, every living being is carried on that relentless conveyor belt
from birth to death and, if you believe in such a thing, rebirth.
So what, in fact, is time? Is it a physical force – one that could be
manipulated? Is it part of the Great Scheme, a mystical force that drives
development on Earth and, perhaps, in the whole universe? Or is it little
more than a series of cues of nature to guide
our passage: it’s night, so sleep; it’s spring, so
plant seeds; you’re old, slow down.
Some of the finest minds in physics,
social sciences and theology have tried
to untangle time. Yet no one has come up
with a universally accepted theory. Perhaps
we’re not meant to. As Albert Einstein said,
“Possibly we shall know a little more than
we do now. But the real nature of things, that
we shall never know, never.”
Physicists have searched for formulas
to explain time, why it’s irreversible and
what made it all begin. Each major discovery
has turned old theories on their heads. In the
early 1900s, Einstein’s Theory of Relativity
replaced Sir Isaac Newton’s 17th-century
theory that time and space are absolute
and unchanging, independent of physical
events and of each other.
Another Einstein discovery, that light
is made up of particles or “quanta,” became
the foundation of a new branch of physics,
quantum mechanics. This went on to
challenge Einstein’s belief that there is a
divine order in which everything can be
calculated mathematically. The German
physicist Werner Heisenberg showed it was
impossible to precisely know the speed
and position of a particle simultaneously.
This “Heisenberg uncertainty principle” is the
basis of quantum mechanics.
ENTANGLED PARTICLES
Today quantum mechanics has the upper
hand. In 1988, Seth Lloyd, a physics graduate
and philosophy student, was the first to
use “quantum entanglement” to explain a
phenomenon that has puzzled physicists for
generations – why time is irreversible.
Quantum mechanics has shown that
particles become increasingly “entangled”
with other particles, losing their original state
and not able to return to it (a process called
“entropy”). Lloyd posited that the arrow of time
is an arrow of increasing correlations between
particles. Then, he was told that questions
about time’s arrow were for “crackpots and
Nobel laureates gone soft in the head.” Now,
however, quantum physics is one of
Allianz • 29
FOCUS
the most active branches of physics, and
entanglement a key concept in quantum
computing and quantum cryptography.
Quantum physicist Sean Carroll from the
California Institute of Technology has even
challenged the idea that time began with the
Big Bang. The Big Bang assumes that the
universe started in a state of perfect order, but
what if it we are part of a “multiverse” that
doesn’t start with a low-entropy configuration,
he asks? He admits this is “unapologetically
speculative” but points out that we don’t
know enough about the laws of physics to
make statements such as “the universe began
with the Big Bang.”
ARE WE USING TIME WELL?
Ph i losophers,
neu roscient ists
a nd
psychologists have equally struggled to
grasp time. We see shapes and colors using our
eyes, hear sounds through our ears
and feel things through touch. But which
of our five senses helps us grasp time?
Even trying to qualify what we mean by
“perceiving time” is mind-boggling, as this
extract from the Stanford Encyclopedia of
Philosophy in its 2000 article The Experience
and Perception of Time shows: “When we
perceive B as coming after A, we have, surely,
ceased to perceive A. In which case, A is merely
an item in our memory …”
So what does this mean for you and me?
Time to take a step back from our hectic lives
and reflect on what time really means to us? It
is, after all, one of the most valuable resources
on Earth – a chance handed to everyone
equally at birth. But are we using it well?
In today’s time-obsessed world, important
decisions are increasingly based on a narrow,
largely commercial idea of time. A nation’s
economic health is measured in annual GDP, a
firm’s performance in quarterly profits and an
employee’s productivity in terms of hours of
overtime. “Man makes the times” is a wise old
saying, and in our times, the more we try to
control time, the more we become a slave to
time. Technology also plays a role. Wearable
devices will soon allow people complete
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» THE INDIANS SEE
LIFE HOLISTICALLY, AND
TAKING TIME OFF
TO REGENERATE IS PART
OF DAILY LIFE
SUSANNE HERDER
«
control over the timing of their pulse rates, heartbeats, household
appliances and an array of electronic devices.
Some of today’s tempo originates from the United States, says UK
intercultural expert Richard Lewis: “After the second world war,
America helped to put Germany and Japan back on their feet,
revitalize their economies and generally showed the rest of the world
how to succeed commercially following US techniques, tempo and
principles.” In profit-oriented America, time is money. “It flows fast,
like a mountain river in spring, and if you want to benefit from its
passing, you have to move with it. Americans are people of action;
they cannot bear to be idle.”
STOP THE WORLD – JUST A BIT
Zoom to another corner of the world where the over 2,000-year-old
Hindu religion still echoes in Indian timekeeping. Bangladesh’s main
roads are a cacophony of sound and motion as people and creatures
weave their way through unruly traffic. But there are also people doing
nothing. Indeed, a common complaint by foreigners working in India is
that when you need someone, they often say, “Sorry, time out.”
“It sounds as though they’re lazy,” says German intercultural expert
Susanne Herder, who recently returned from India. “But in fact,
the Indians see life holistically, and taking time off to regenerate is
part of daily life.”
In fact, to stop their world just a bit, harried Westerners have
borrowed the idea. Management coaches now offer courses in
“mindfulness” or living more consciously. Lewis believes that global
timekeeping will increasingly be influenced by the East, and in
particular by Asia, as the balance of economic power swings. “Asians are
patient with time,” he says. “Westerners see time as linear and
disappearing, the Asian religions and philosophies see it as circular. An
opportunity is lost today, but it will come round again, like the seasons
and tides, which all reappear with assuring regularity.”
He believes that Western-style competitive urgency and
opportunistic exploitation in business could be replaced by the
Asian focus on long-term planning and incremental growth.
“A growing lack of faith in politics, government institutions, finance
and banking is helping this process,” he says. That might help to
slow the world down a bit.
FOCUS
BIRTH YEAR TRUMPS
DATA IN PERSONAL
ASSET CHOICES
A growing body of research suggests the era you grew up
in is likely to influence your preferences on asset classes
Risk taker? More the
cautious type? It
depends on when you
were born
I
t’s well known that asset allocation
choices wax and wane according
to underlying returns. When the stock
market is on a downer, retail investors tend
to sell. When it is rising, they buy. However,
these are short-term cyclical phenomena.
More recent research is suggesting that
personal risk preferences may have deeper
psychological roots.
Allianz • 31
FOCUS
It has long been assumed in the investment
community that people have relatively stable
risk preferences regardless of their economic
experiences. It’s yet another classical notion
being challenged by behavioral finance. A
paper published in 2009 titled Depression
Babies: Do Macroeconomic Experiences Affect
Risk-Taking? made a connection with those
who experienced the Great Depression and
their investing habits.
The authors, academics Ulrike Malmendier
and Stefan Nagel, studied US consumer
finance records from 1964 to 2004 and found
that the impact of economic conditions and
the performance of asset classes is particularly
pronounced on the young. It can influence
their risk tolerances and choice of assets
during their lives.
“If you look at the long-term historical
records going back decades, this is a
systematic pattern,” said Stefan Nagel,
professor of Finance & Economics at the
University of Michigan. He explained that
when stock markets go through prolonged
periods of poor performance, younger people
tend to get discouraged from investing in
equities. It’s the opposite during bull markets.
DEPRESSION BABIES AVOIDED STOCKS
It’s well documented that US investors in the
1950s, who experienced the 1929 stock market
crash and the Great Depression, shunned
equities in favor of bonds. The US experienced
a 20-year bear market, ending in the 1950s.
A modern manifestation of this behavior
occurred in Japan. The McKinsey Global
Institute noted in 2011 that among developed
nations, Japanese households stood out for
their very low stock market participation.
Attitudes changed after the 1989-1990 crash.
From then onwards stock ownership by
households plummeted from 30% to under
10% and never exceeded 18% – even though
Japan’s two-decade bear market was
punctuated by some strong rallies. By contrast,
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FOCUS
around 42% of US households had some
non-retirement financial assets in stocks.
In other developed nations, Generation X
(those born in the mid- to late 1960s to early
1980s) had a very different experience.
Research by Bank of America Merrill Lynch
says they enjoyed the greatest equity bull
market ever. During the period 1982-1999, US
total returns were 1,654%, compared with
previous great bull markets, which returned
423% (1920-1928) and 332% (1860-1872).
However, fast forward to the present and the
latest generation of investors is wary of the “cult
of equities.” If anything, they behave more like
an investor readying for retirement, seemingly
prioritizing return of capital over return on
capital, which may not be so bad if Rob Arnott is
correct in his arguments (see “An industry built
on false perceptions,” PROJECT M #21).
In April 2014, Gallup found that just 27% of
18- to 29-year-olds claimed to own stocks,
down from 33% in April 2008. Among 30- to
49-year-olds, 67% held stocks – a group that
encompasses most of Generation X and the
oldest millennials. In the same year, a survey
by UBS discovered that affluent millennials –
so-called recession babies – held 52% of their
wealth in cash and 28% in stocks, compared
with 23% and 46% for older people.
“It’s what’s called the collective memory
hypothesis,” said Victor Ricciardi, a finance
professor at Goucher College in Baltimore and
co-editor of the book Investor Behavior: The
Psychology of Financial Planning and Investing
with Kent Baker. He explained that emotional
reactions to recent economic shocks have a
greater weight on decision-making than longterm historical investment performance data
or objective information.
However, there are some important caveats
to be made before concluding that Generation
Y is set to mirror the depression babies. “The
millennials are a recent example of a younger
generation experiencing severe economic
Recession babies: not as
cautious as one might
expect, given the shocks
of our times
shocks making them more cautious toward
risky assets, but their reaction may not be as
severe as the depression babies,” said Ricciardi.
Indeed, the major global equity indices
sold off aggressively in 2007-2009, but they
have since recovered – most having surpassed
their previous all-time highs. By contrast,
Japanese investors and “depression babies”
endured two-decade bear markets.
REGULATION DRIVES ASSET ALLOCATIONS
And there’s a structural reason, which is likely
to ensure that many millennials will own
equities. As Ricciardi pointed out, some
countries have auto-enrollment pension
plans – where money is deducted every month
from salaries and invested into savings
products. Many of those products will have an
equity element to them.
Other types of regulation have a profound
influence on asset allocation decisions.
Thomas Richter, CEO of the German
Investment Funds Association (BVI), noted
in an interview with PROJECT M that in
the US, equities are favored thanks to
government tax breaks.
By contrast, the French regulatory
framework has skewered investment flows
toward money market funds. In Germany,
different rules have instead fueled a huge
market for endowment life insurance
products. Nonetheless, US household
ownership of stocks is declining. According
to the US Federal Reserve, it fell from 53.2% in
2007 to 48.8% in 2013. A survey by publishers
Bankrate put the 2014 figure at 48%. It said
the main reason cited for not investing
was lack of funds – possibly reflecting the
stagnation of US median incomes since 1995.
The second-most-important reason was lack
of investing knowledge.
Other possible reasons for declining stock
ownership could be because many investors
got their fingers burned during the 2007-2008
sell-off. Others are retiring and could be
selling shares to invest in retirement products.
However, the implications of Malmendier
and Nagel’s research is that millennials
may come to favor equities provided that
equities continue their performance since
the 1980s.
Allianz • 33
MORTALITY TABLES
Differences in mortality tables, also known as life tables, can create problems
for insurers and pension funds
By Michael Heim, head of Pensions Actuary Services, and Greg Langley
A
sk actuaries how long you are
on average likely to live and you
could receive significantly different
answers. For example, if today you are a
German male born in 1988, it could be either
82.1, 88.9 or 97.1 years if you reach the age of 65.
Similarly, for a woman born in 1988 it could be
85.8, 92.7 or 100.5 years.
The difference depends on which of three
German mortality tables the actuary refers to.
Less morbidly referred to as “life tables,” these
figures show, for each age, the probability that
a person will die before her next birthday.
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A tool used for social security planning, and by insurance companies
and pension funds to estimate the amounts needed for future payouts,
mortality tables are based on historic developments in the population.
They can also represent educated predictions about future
improvements in life expectancy.
It’s not unusual, as in the case of Germany, to find different standard
tables. The low figure comes from the German Statistics Office;
published annually, it covers a three-year period to provide a snapshot
of the current population and its mortality.
The high figure is used by insurers and comes from the German
Actuarial Society (DAV). As longevity predictions over the past
century have been continually contradicted by actual increases, the
generational mortality tables used by insurance companies need
FOCUS
The Norns:
twisting the
threads of fate
in Norse
mythology
buffers to ensure that companies have adequate reserves for future
obligations. The middle figure comes from Heubeck, a consultancy that
develops and publishes periodically updated German mortality tables
that serve as the reference for pension obligations in balance sheets of
German corporates.
FAR FROM ACADEMIC
Differences in mortality tables can be far from academic. Rapid
improvements in longevity in new European Union member states have
played havoc with mortality tables in the region. As healthcare and
health consciousness still lag in these countries, it could be assumed
that developments may continue along the same pattern of
improvement that occurred in Western Europe from the 1970s onward.
But such assumptions or misleading data can also lead to problems
with mortality tables. The Economist has noted that the financial woes of
America’s automobile manufacturers in the mid-2000s stemmed in
part from underestimating pension liabilities.
Like many American firms, they had been using mortality tables
from 1983, which did not reflect the rise in life expectancy experienced
in intervening decades. As employees entered retirement and lived
longer than expected, the costs of pension promises made in earlier
years helped lead to the bankruptcy of General Motors and Chrysler.
For annuity providers and defined benefit pension funds, expected
improvements in mortality are crucial. If customers live longer than
expected, more payments will need to be made than may have been
allowed for, which could leave them short of funds.
A recent report by the OECD says, “Failure to account for future
improvements in mortality can expose pension funds and annuity
providers to an expected shortfall of provisions of well over 10% of their
liabilities.” In Mortality Assumptions and Longevity Risk (2014), the OECD
estimated that each additional year of life expectancy not allowed for
can add around 3-5% to current liabilities.
NOT ACCOUNTED FOR
Given the importance of improvements in longevity, it’s surprising
that it is not included in all standard tables. The reason is that
regulations vary widely. Of the 16 countries examined by the OECD,
most do not require both pension funds and annuity providers to allow
for future improvements in life expectancy.
Brazil and South Korea have no minimum mortality table required
by regulation for either industry. Other countries require specific tables,
while specifying minimum assumptions that may not take into account
future improvements in mortality and life expectancy.
If no regulation exists, pension funds and annuity providers
often use their own tables or an industry standard, but in some
countries mortality assumptions are not
consistent either amongst annuity providers
or pension funds. Indeed, some countries do
not even collect mortality data.
Of the countries examined, half (including
France, Germany and the UK) require both
annuity providers and pension funds to
account for future mortality improvements,
but the majority do not. The US, for example,
requires it for pension funds but not
annuity providers.
In practice, providers in most countries
allow for improvements in life expectancy,
although the OECD notes annuity providers do
so more often than pension funds. In Japan,
where no improvements are required for either
industry, pension funds can include up to a
10% margin for men and 15% for women for
funding purposes, but many do not do this.
The failure to account for future
improvements in life expectancy can have
significant consequences, as the plight of
the US automotive industry illustrates. It
would make sense then to establish standards
both internationally and nationally relating
to mortality tables.
The OECD report recommends that
regulations addressing the longevity risk
faced by pension funds and insurers should
require the use of up-to-date mortality
tables that reflect future expectations in life
expectancy. Governments could assist by
providing reliable longevity indexes and
mortality projections. Regulations should
also prompt insurers and pension funds to
recognize and assess the longevity risk to
which they are exposed through capital
and funding rules.
To assist insurers and pension funds in
handling this risk, the OECD believes that
government should encourage the market for
alternative instruments such as standardized
index-based longevity hedges, as well as
longevity index bonds issued by governments.
With individuals expected to live longer,
insurers, as well as pension funds, need
to be able to ensure future payments. If
they cannot, the risk will undoubtedly land
back in the lap of governments, who will need
to address the needs of a large, aging
and angry, population.
Allianz • 35
FOCUS
RISK STRATEGIES
QUESTIONED IN TIME
OF INSTABILITY
Recent financial shocks have called into question
many beliefs about risk management
By Thomas Zimmerer and Patrick Bastian
A
s investigators continue to sieve
through the wreckage of the 20072008 global financial crisis, one
factor drawing attention is risk. The period
before the crisis – known as “the Great
Moderation” because it seemed that
macroeconomic instability had been tamed –
was a time of exuberance, wild hope and
animal spirits when great profits were made.
The collapse of Lehman Brothers in
September 2008, and the financial shock
waves it caused, put paid to the notion of
stability. It also called into question many
beliefs about risk management – for example,
the idea of diversification. Based on Portfolio
Selection by Harry M. Markowitz, recipient of
a Nobel Memorial Prize in Economic Sciences,
many investors believed that reduced portfolio
risk could be achieved simply by holding
uncorrelated instruments.
As shown in “Rethinking the herd,”
as markets increasingly move in lockstep,
it seems the attendant increase in
correlations could unhinge this cornerstone of
portfolio theory. As a result, many investors
started taking a more active approach to
managing downside risk. Strategies that
address equity tail-risk – “tail-risk hedging
strategies” – in particular gained attention
after 2008, although many sponsors find
them ill suited to long-term allocations.
They can be expensive and may come with a
high opportunity cost: buying drawdown
protection through put options can easily cost
a few percentage points in implicit hedging
costs year after year.
Some investors are turning to an approach
known as tactical asset allocation (TAA),
seeking to improve the risk-return profile
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Dynamic risk
mitigation: finding a
way through
financial crises
FOCUS
of portfolios. Unlike diversification, TAA
strategies have an objective to deliver alpha
rather than meet a return target with minimal
risk. But such strategies base rebalancing
decisions on short-term return estimates that
can be difficult to forecast. This means that
regardless of returns, they may not be effective
tools for risk mitigation.
Another approach is dynamic risk
mitigation, a plan-level approach based
on diversification and dynamic asset
allocation. Similar to TAA in that it
relies on rules to shift the portfolio’s asset
allocation, a dynamic asset allocation (DAA)
strategy integrates risk management with
alpha generation. It synthesizes the benefits
of diversification to potentially enhance
the alpha potential of a portfolio. While
dynamic risk mitigation does not provide
the same downside protection that other
strategies such as option-based tail-risk
hedging may provide, it comes without the
high price tag. Advocates argue that when
successfully implemented, such a strategy can
provide similar loss profiles with high
confidence at a lower cost.
Typical institutional investors face
the twin tasks of trying to avoid the dramatic
loss of assets that occurred during recent
financial crises, while delivering returns that
meet or exceed the return of the strategic asset
allocation in the long run. This is no easy task.
To achieve both goals of a typical institutional
investor – drawdown protection and
upside participation – an efficient
DAA strategy targets two dimensions: the
return relative to the strategic asset allocation
(SAA) benchmark, and the risk budget.
ENSURING RISK BUDGET
A dynamic risk-mitigation approach should be
aligned with plan-level objectives and
eliminate the need to place bets on asset-class
return forecasts. The key is a pre-defined risk
budget measured by capital loss (or fundingratio loss), not tracking error or standard
deviation. This can guide a rules-based
allocation shift between return-seeking
growth assets and defensive assets using
simple inputs that can be measured: portfolio
return versus the overall benchmark (static
SAA) for the previous trading day; and portfolio
value vs the remaining risk budget for the
previous trading day. For dynamic riskmitigation strategies to be effective, they
should not interfere with a plan’s existing
portfolio structure or managers. When
implemented with an overlay, they can be costeffective, as futures can be used to achieve the
desired exposures.
Dynamic risk mitigation at its simplest
should reduce risk-asset exposure when
markets are declining and add it when risk
assets are rising. This is pro-cyclical but
does not fully exploit the cyclicality of asset
class returns. Most asset classes exhibit
both “trending” and “mean reverting” return
patterns. That is, they cause medium-term
cyclicality around longer-term risk premiums.
Cyclicality is best captured by a version of risk
mitigation through a combination of pro- and
anti-cyclical allocation responses to the
return dynamics of asset classes.
Pro-cyclicality is captured in the notion
that “the trend is your friend.” That is, it
increases the risk exposure of a portfolio in
good markets and decreases risk exposure in
declining markets. Anti-cyclicality is about
mean reversion. This decreases risk, although
markets have performed well, and increases
risk after or during market declines. The idea is
that performance will ultimately catch up, and
that rebalancing a portfolio back to its initial
allocation is the best way to achieve the
desired risk-return profile.
By combining pro-cyclicality with anticyclicality, the allocation seeks to balance
“as many return-seeking assets as possible”
with “as many safe assets as necessary” to
meet the SAA return target within the risk
constraint. At the core is a set of rules that
drive the decisions when to take profits and
when to re-enter markets. If the rules are
effective, and a dynamic risk-mitigation
strategy is successfully implemented, a
portfolio could dynamically deploy riskseeking and capital-preservation strategies.
How effective will dynamic risk mitigation
be? Only time will tell, but it looks to enhance
traditional notions of risk management while
seeking to eliminate the weaknesses glaringly
exposed during the financial crisis.
Allianz • 37
WHERE IS
THE EVIDENCE?
Moving to a dynamic, time-average
approach to return would be better than
what we have now, argues Con Keating
By Con Keating
T
he time dimension of investment has received
great prominence in the wake of the financial
crisis, from both regulatory authorities and the
political classes. Calls for increased long-term investment
have come thick and fast, but analysis justifying such
demands is often absent or weak.
Consider the idea that volatility does not harm longterm investors who can afford to ride it out. While it is true
that an investor with long-term liabilities, such as future
pensions payable, is not forced to liquidate holdings at poor
prices in times of market distress, this does not mean that
high market volatility is not harmful to them.
Volatility lowers the long-term compound rate of return
even though the asset has not been sold – and the volatility
penalty is quadratic. With 10% volatility, a 5% arithmetic
annual return will be realized as 4.5% compound. With 30%
volatility, the annual compound return will be just 0.5%
(these are time-average returns).
Given this, long-term investors should be cautious,
especially as “long term” is such a nebulous concept.
However, consideration of the time dimension of returns
does provide the important practical definition of
threshold: this is the point in time beyond which the mean
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rather than the volatility term begins to dominate. That is,
when the signal is equal to the noise. As we move to the long
term, to avoid bias, it becomes necessary to also consider
the mean term in measures of risk, such as tracking error
and volatility.
LITTLE TO SUBSTANTIATE
There is remarkably little academic work undertaken on the
question of long-term relative to short-term returns. In part,
this is due to the attractions of simplified modeling based
on Bellman’s principle of optimality, which reduces the long
term to a series of short-term decisions. This amounts to
choosing the available and analytically tractable, even
though it may be wrong, over the complexity of reality. There
is some academic discussion of the role of liquidity in longterm investment. Liquidity has a cost in several senses: a
cost incurred by the security originator, and a cost, in the
form of higher market prices and lower income yields, to
investors. Reflecting this, untraded private placements
should return more to an investor than listed securities.
However, with sale and reallocation of assets now difficult,
the long-term illiquid portfolio could easily become a
graveyard of declining industries and stranded assets.
© 20 08-2015 Choi + Shine Architec t s
FOCUS
Short-term changes
need to be
accomodated in a
time-average
approach to risk
that the average holding period has changed little over
decades, lying in the 40-45 month range.
The real non sequitur in these arguments is that
this trading activity in some way influences corporate
investment decisions. A company’s capital resources are
(long-term) committed, and the subsequent gyrations of
market prices do not change that. If there is a mechanism,
then it is psychological rather than legal. It appears
that engagement has failed to encourage long-term
behavior and descended into a morass of short-termism
and self-interest.
Many have observed that long-term savings institutions
are now all highly regulated, and that this regulation
comes with unintended consequences. Even the Bank of
England has recognized this. The problem with risk-based
regulation, as we know it, is deep seated. This approach
is measure-theoretic in origin. Possible outcomes are
assigned probabilities and a weighted average of these
taken (expectations), as if all are simultaneously occurring.
A modern approach would use the temporal behavior of the
process and the dynamics, and lead to time averages rather
than to the familiar expectation values.
FROM THE ABSTRUSE TO THE PRAGMATIC
Moving to the dynamic, time-average approach where
fluctuations matter, the irreversibility of time and the path
dependencies of the real world may all be accommodated.
Our long-term future really is largely the product of our
own past and current actions. Beyond the pleasing
Self-evidently, in the absence of trading, markets cannot
characteristic that the time-average approach sits well
perform their economic reallocation role. This flexibility is
descriptively with our intuition and experience is the
particularly important in an intergenerational context.
Pensions promised are claims on the output of future
attraction that it leads to many further insights.
producers rather than current producers. Today’s
These range from the abstruse to the deeply
investible universe is likely to be radically different
pragmatic. From a natural resolution of the St. Petersburg
from the future, as many future producers do not
paradox, to explicit clarification of the rationale for the
yet exist. This is a weakness of the funded
existence of insurance and the motivation
private pension model when compared with
for mutual co-operation, the collective risk
state provision.
sharing and risk pooling of many institutional
arrangements. Under the time-average
approach, it is evident that there is mutual
TIME IS OF THE ESSENCE
What is missing in current discussions is
gain to both co-operation and insurance.
the extent to which maturity transformation
The dynamic approach of the precautionary
by markets is desirable, with long-term
principle for risk management fits naturally
securities being held by a succession of
with a time-average perspective. Precaution
shorter-term investors and speculators.
is a temporary action when the risk or
C O N K E AT I N G
The regulatory emphasis so far has all been
uncertainty is imperfectly known. It is strongly
is head of research at
the BrightonRock Group
based on matching the term of securities to
related to the arrival of new information over
and a member of the
liability horizons.
time – it is dynamic and flexible.
steering committee of
the
financial
In the discussion, market short-termism
For investment management then, time
econometrics research
has been demonized, using inappropriate
really
is of the essence, but in ways far broader
center at the University
of Warwick
statistics. UK stamp-duty data in fact reveals
than that expression’s narrow legalistic sense.
Allianz • 39
MICRO
Loc al k nowle dge
WATCH AND LEARN
Vintage timepieces can provide a lifetime of
enjoyment. Those also looking for a financial return
on investment must be wary of the many pitfalls
The Reverso
Gyrotourbillon 2
is made of 373
pieces – watches
like this can
reach high
prices at auction
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MICRO
K
ristian Haagen says he doesn’t own many
watches, but the ones he does are “amazing.” The
Danish watch journalist and collector keeps his
prized possessions in a bank vault. “Every time I go there to
get one, I still feel this childlike enthusiasm. I get an
‘oomph’ feeling in my stomach whenever I see them.”
For people like Haagen, watches are about much more
than just telling the time or setting an alarm. We all have
phones that do that. But a well-made watch has style and
craftsmanship. It can be a status symbol and a conversation
starter. And it can also be a sound financial investment.
Premium vintage watches, which tends to mean around 25
years or older, can appreciate considerably in value. Earlier
this year, auction house Bonhams sold an Omega 1968
Seamaster 300 for £25,000 ($38,000), having sold the same
watch for just £1,140 in 2007. And they’re far from alone,
with the majority of auction firms reporting substantial
profits for sellers at most major recent sales. “There’s
growing demand. Vintage taste tends to come with a more
mature market, and we’re slowly starting to see more
interest from Asia and the Middle East, which have always
been focused on more modern watches in the past,”
explains Frederic Watrelot, head of watches at Christie’s
auction house in Hong Kong.
Investing is far from straightforward, though, he
cautions. “If you do your research and buy from somewhere
with integrity, then there’s a good chance you won’t lose
money. As for making a profit – that’s much harder to
predict. Watches are like art or classic cars: value is
controlled by desirability and exclusivity. But if you’re
talking investment, you’re talking vintage. Buy new at retail
price and it’s almost impossible to make money.”
BEWARE THE FRANKENWATCH
Entry into the world of vintage watches won’t come cheap,
but it needn’t cost the earth. There are plenty of ways for
buyers to find what they’re looking for, from auction houses
and established vintage dealers, to a growing number of
reputable online marketplaces, such as Chrono24. Those
with an eye on resale value should stick to certain wellknown brands. Swiss-made watches have become the
byword for quality, and brands such as Omega, Rolex or the
more expensive Patek Philippe are always in demand. “I
think Rolex or Omega represent the best quality you can get
for the money,” says Haagen. “From a thousand dollars
upwards you’ll have a rock-solid watch that should hold its
value.” Just don’t forget to factor in the cost of servicing,
which can double the expense of a watch.
There are numerous potential stumbling blocks,
however. In more extreme cases, watches could be fake or
stolen, but a more common issue is the prevalence of socalled “Frankenwatches,” which have had some original
parts replaced. “With the exception of the strap, genuine
vintage means as original as possible,” Watrelot says. “Don’t
be afraid of a little wear and tear, which can add to the value
in many collectors’ eyes.” Indeed, part of the allure of these
watches is their history, and a celebrity link can be
particularly attractive: in 2012, a Heuer Monaco worn by
Steve McQueen in the 1971 film Le Mans fetched almost
$800,000 at auction.
But even that seems like small change against the Patek
Philippe Supercomplication, which sold for the equivalent
of $24 million in Geneva at the end of 2014, making it the
most expensive timepiece ever. In addition to rarity and
condition, complications are one of the biggest factors to
inf luence a mechanical watch’s value. The more
complications it has, such as chronographs or time zones,
the harder it is to design and make. Handmade for
American banker Henry Graves in the 1920s, the
Supercomplication has 900 different parts and 24
complications, including sunrise and sunset times and
even a celestial chart for the New York City night sky.
FALLING IN LOVE
While Patek Philippe may be one of the most consistent
performers when it comes to making money, investors
should seek out a brand that appeals to them emotionally,
one which they really want to own. After all, only the superrich can afford to buy valuable timepieces they don’t wear.
“I don’t want my watches stuck in a display cabinet,” Haagen
says. “That’s like having a beautiful girlfriend at home, who
you can’t have sex with.” Like many forms of investment,
one of the thrills of watch collecting is building up a
portfolio, learning when to buy and sell, discovering new
brands, and developing different tastes. “My first watches
were Rolexes. In my late 20s, I started looking at Panerai.
Then, I realized if I traded in two Panerais, I could get a
Patek Philippe Nautilus, something I’d wanted for some
time,” recalls Haagen. “And then I discovered A. Lange &
Söhne, who I think make the finest watches in the world.
I’ve fallen in love with them.”
Despite the buoyant market, it’s this passion, rather
than the thought of profit, that motivates the vast majority
of investors. Many of the watches bought will never be sold,
but rather cherished for decades before being passed down
to children or grandchildren. “Of course, you should buy
what you can afford, but buy what pleases your eyes and
your heart,” says Haagen. “And above all, buy the watch
that makes you forget what time it is whenever you look
at it.”
Allianz • 41
MICRO
IRAN FEARS
DEMOGRAPHIC
IMPLOSION
E
arly in 2015, Iran launched an official
matchmaking website, but it was not,
insisted Deputy Minister of Youth
Affairs and Sports Mahmoud Golzari, a dating
service. Instead, the website allows singles to
post profiles and specify qualities they seek
in a potential spouse. Mediators then match
applicants after reviewing age, education,
wealth and family background.
The launch of Hamsan.Tebyan.net is part of
an effort by authorities to reverse a dramatic
decline in fertility by encouraging the nation’s
11 million singles to marry and have children.
Other measures include subsidizing fertility
treatment and extending maternity leave to
nine months. The government is also
considering restricting employment in the
public service for women to only those with at
least one child.
The emphasis on offspring has a simple
reason: fertility in Iran has dropped from an
average of 7.0 births per woman in 1979 to 1.8
today. Below the replacement rate of 2.1, this is
the largest and fastest fall in fertility ever
recorded. “If we move forward like this,” Iran’s
supreme leader Ayatollah Ali Khamenei said in
2013, “we will be a country of elderly people in
the not-too-distant future.”
That Iran is experiencing this precipitous
drop has surprised international experts.
After all, it is a religiously conservative country
where, after the founding of the Islamic
Republic of Iran in 1979, women’s rights were
curtailed: female government workers are
required to observe Islamic dress code; in
courts, women’s testimony is worth only half
that of men; schoolrooms, beaches and ski
fields are segregated; and the legal age for
marriage was reduced to 13 years.
“I think that surprise shows how the West
has been unable to understand Iran either
culturally or socially,” says Mohammad Jalal
Abbasi-Shavazi, director of the National
Institute of Population Research and professor
42
•
Allianz
MICRO
Iran has plans to
boost its dramatically
falling birthrate
Strong voices in
Iran: women’s
aspirations have
risen considerably
since the end
of the Iran-Iraq War
of demography at the University of Tehran.
“Politicians and international observers
have been ignorant of the changes. Even in
the early days, when Iran was portrayed as
a country going backwards, there were
institutional changes being made that
improved the lives of women.”
Abbasi-Shavazi explains that what
happened in the public sphere contrasted
starkly to changes within the private.
While Iran was seen as publicly restricting
women’s rights, it was also making
striking improvements in terms of
health and education, particularly in
the countryside.
BABY SHORTFALL
One reason for the fertility drop is a policy
reversal in 1989 that went unnoticed by
the West. After the Islamic Revolution, the
country’s modest family-planning program
was disbanded. But a decade later, faced with
massive youth unemployment after the end of
the Iran-Iraq War (1980-1988), the religious
leadership became convinced that lower
fertility would be best.
It was predicted that the population, which
had doubled from 27 million in 1968 to
55 million in 1988, would reach 108 million by
2006. Iran’s supreme leader at the time,
Ayatollah Khomeini, fearing this could
overwhelm ambitious social programs,
endorsed birth control, and inexpensive,
mass-produced condoms reached Iranians.
Slogans created to influence public opinion
included “Fewer Children, Better Lives” and
“Two Children Are Enough.”
Today Iran has 79 million people, and
experts believe population growth could
reach zero within the next 20 years. Although
nearly 70% of the population is under 35
years of age, the government is worried
about aging and desperately trying to reverse
the fertility trend.
Allianz • 43
MICRO
The Supreme Leader Ayatollah Ali Khamenei
now says Iran should reverse its stance and
enact pronatalist policies. In May 2014, he
issued a statement that advocated a moderate
approach to sustaining fertility at around the
replacement level.
However, increasing fertility is not an easy
task. Abbasi-Shavazi says, “Gold coins won’t
change couples’ calculations,” referring to
part of a baby bonus considered by the
previous government. He makes the point
that such incentives are unlikely to overcome
changes within family culture. In particular,
both the marriage age and childbearing age
have been rising since the mid-1980s – before
the policies of population control were
even introduced.
Abbasi-Shavazi says that the rapid increase
in education and in particular the fact that
many women continue on to tertiary education
(in 2007, 65% of students admitted to
government-run universities were women)
have contributed to the speed of fertility
decline. The desire to defer marriage until
graduation or after finding a secure job has
pushed the average age of marriage up from
18 years in 1980 to 24 in 2011. This has limited
the time frame of childbearing, while at the
same time, there has been a reduction of
the desired family size.
“The aspirations of women in Iran have
risen considerably post-revolution,” says
Abbasi-Shavazi. “Women have strong voices in
social and political areas, although all
expectations have not been met, they now
have more options and increased confidence.
Their status has also improved considerably
in family decision-making.”
SEEKING A BABY BOUNCE
Many, mostly developed countries, are
concerned about falling fertility, but efforts to
spike the fertility rate have had negligible
results. This is not stopping the Iranian
government. One bill to increase fertility has
passed. It aimed to slash funding for birth
control and ban surgeries intended for
permanent contraception.
The Guardian Council, a supreme body
overseeing the constitution, later rejected the
bill and recommended it be part of the
44
•
Allianz
“Comprehensive Population and Exaltation of Family Bill.”
This bill “prioritizes, in sequence, men with children, married
men without children, and married women with children when
hiring for certain jobs.”
Iran should be concerned with falling fertility and take action, as
governments from Denmark to South Korea have done. Yet AbbasiShavazi doubts that the current proposals are appropriate. “To increase
fertility you need to look at women’s demands. There are many concerns
in the new bill. On the one hand, there is support for marriage – that’s
a social, family and government expectation – but it also says you
cannot be employed until you are married. But we know one condition
for marriage is to have a secure job, so it’s a contradiction and leads to
insecurity.”
Abbasi-Shavazi says there is much controversy around the bill and it
is unlikely to pass, but the Supreme Leader recently issued a statement
that talks about both quality and quantity of the population. Among
the 14 points, he emphasized “increasing the fertility rate to above
replacement level” and called for the elimination of obstacles to
marriage, family formation and having more children, and for a
reduction of the marriage age.
Another factor is economic. Suffering under decades of trade
embargoes, the battered economy has inflation hovering at 17%, and
youth unemployment (15- to 24-year-olds) nudging 25%. Young people
without a permanent job relying on one-month contracts cannot
afford the cost of a wedding, nor do they dare to have children.
Yet although the future is uncertain for Iran, even if economic
sanctions are lifted, one direction is almost assured. Internationally,
rapid improvement in female education together with falling fertility
has generated powerful forces toward democratic rights. Unless
Iran is different from these patterns, then chances are good that the
country may move in the direction of a democracy.
Improved female
education and
falling fertility
rates mean
countries move
faster toward
democracy
MICRO
DEAF INDIANS FIND
OPPORTUNITY
India’s deaf are finally finding training and employment –
and they are reliable employees
By Tarquin Hall
H
Joining the labor
market: because the
deaf can do
everything except
hear
aider Ali is deaf to the words
addressed to him by the customer
stepping up to the juice bar where
he works. Yet his disability does not prove
a hindrance to a sale, nor to efficient and
courteous service. With a combination of a
few simple gestures, a winning smile and
a certain amount of pointing at the menu,
Ali takes the order and then sets about
blending the ingredients of a medium-size
“Tropical Crush.”
“I’ve never had anyone throw up their
hands in frustration because I’m deaf,” says
Ali through a signing interpreter after the
customer has thanked him with a thumbs-up.
“People are very accommodating.”
Increasingly, so are Indian employers. Step
into any coffee bar or home-delivery pizza joint
in Delhi, the capital of India, these days and
there is a good chance you will find yourself
having to use rudimentary sign language to
indicate the size of your cappuccino or whether
or not you want a cheese-filled crust. With
chains like Costa Coffee, Domino’s and Joost
Juice Bars eager to take on more hearingimpaired employees, the likelihood of such
interactions looks set to increase.
The main reason: “The attrition rate for
deaf employees is much lower,” says Ruma
Roka, founder and general secretary of the
Noida Deaf Society (NDS). “Having a job for
most deaf people in India is nothing short
of a miracle.”
Such miracles are not achieved overnight,
however. Of the 887 deaf men and women
whom NDS has so far helped to place in fulltime employment, most, according to Roka
and her staff, have endured unhappy and often
harrowing childhoods in a society that still
perceives deafness as a curse.
Allianz • 45
MICRO
The Noida Deaf
Society focuses
on the ability,
not the
disability, of the
students
“Growing up, they’re told that it’s karma – that they
sinned in their past life and so they’re paying the price in
this one,” Roka explains from behind her desk in her
cramped office in one of Delhi’s eastern suburbs. “Parents
will often hide away a deaf child in the home and not let
them out during family functions. They usually make the
excuse that they’re shy.”
Haider Ali: able
to support his family
on his salary
at the juice bar
46
•
Allianz
INADEQUATE PUBLIC EDUCATION
Central and state governments have consistently failed
India’s 1.2 million deaf citizens as well. The National
Association of the Deaf (NAD) describes public education
for the hearing-impaired in India as “wholly inadequate”
and says access to public specialist schools is “extremely
limited.” Half of the country’s 540 districts lack a single
teacher with specialist training, resulting in the vast
majority of deaf children in rural areas being shoehorned
into overcrowded, mainstream classrooms. Sign language,
which has been mandated worldwide as the natural option
MICRO
for the hearing impaired since 1994, is taught in just eight
state-run schools across the entire country.
“Teachers just force deaf students to parrot words they
don’t understand from a blackboard,” says Roka. “I’ve heard
of many instances when they’ve also advised parents to tie
their kids’ hands so they can’t sign. It’s thought that
otherwise they won’t learn to speak.”
Haider Ali, like thousands of other deaf Indians,
reached adulthood with a vocabulary of 40 to 50 words.
Communicating anything beyond his most basic needs
was beyond him. “I was very angry and frustrated all the
time,” he says. “I couldn’t express any of my thoughts or
feelings. My parents were like strangers to me.”
Learning to sign changed all that. His parents mastered
the language, too. At the age of 28, he was finally able to
have a conversation with them. “Many times right here in
my office I’ve seen parents breaking down when they
suddenly hear their child’s voice and understand what
they’ve been going through,” says Roka.
The centre, now one of five, offers 18 months of free
intensive sign language education followed by employment
training. For a first-time visitor, the charity’s building is
remarkable for the lack of noise in spite of the considerable
amount of activity throughout. In one classroom, a group of
students in their early 20s are being taught simple
arithmetic. A computer room is packed with mature
students learning to use spreadsheets and basic digital
animation software. In the basement, classes are also
under way in “ethics” and “life skills.”
A WIN-WIN SITUATION
“We also have to do a lot of confidence-building,” says one
teacher, herself deaf. “We don’t always succeed. Some
students have gone through too much trauma. But usually
we can find a way to get through to them.”
Roka has devoted a considerable amount of time and
energy to educating employers as well. Initially, the
companies she approached were only inclined to offer deaf
people menial tasks. But she insisted that her graduates
were capable of carrying out clerical, “non-voice” jobs in
banks, retail and the IT industry.
The low attrition rate argument proved a persuasive
incentive for Delhi-based FIS Global Business Solutions,
which processes financial data for banking customers in
the United States. Some 95% of deaf employees in the Indian
IT industry stick to their jobs long term, compared to as few
as 40% of hearing ones.
According to the head of the company’s employee
relations, Manpreet Singh, the two deaf data processors the
company took on eight months ago have surpassed
expectations. Concentration is vital in an industry where
one wrong keystroke can send money to the wrong bank
account, he points out, and Vipin Kumar, 28, and Alok Sagar,
25, are not distracted by office chit-chat.
“In organizations like ours, you are evaluated every day.
And one single day, if it goes wrong, you would tend to lose
your job,” he says. “[Vipin and Alok] are extremely hardworking. From a longevity perspective, from a retention
perspective, it’s a win-win situation for us.”
Signs of a confident
future: classes
are held in ethics
and life skills as
well as vocational
training
Allianz • 47
MICRO
Key skills such as
computer sciences
help students find
jobs in the
professional world
The miracle of
having a job:
education is
transforming lives
across India
EQUAL OPPORTUNITIES IN THE MARKETPLACE
The International Labour Organization could not agree
more. A recent study conducted by its Conditions
of Work and Equality Department using data from
10 countries in Asia and Africa concluded that the
economic cost of not employing persons with disabilities
was as much as 7%.
That figure is an estimate, stresses Barbara Murray,
senior disability specialist at the ILO. But it illustrates how
developing education and employment opportunities
for the world’s disabled, in particular deaf people
whose disability may be less restrictive than others,
is economically advantageous, not to mention morally just.
48
•
Allianz
“The people with hearing impairment are generally at
a disadvantage because they’re not put through the
mainstream education system, so all too often employers
assume that their working capacity is low due to their
impairment, whereas it’s really due to their lack of
education,” says Murray. “If they can attend top-notch
training that’s relevant to the opportunities that are
available, there’s no reason why they can’t compete in
the labor market.”
Worldwide, companies are recognizing this to be the
case, she adds. Yet the labor force participation rate of
persons with disabilities in OECD countries stands at just
48%, and state benefits systems are often an incentive not
to work, according to the ILO. Deaf people in India face no
such dilemma. Individual subsidies amount to no more
than $9 per month. Haider Ali, by contrast, earns $150
working at the juice bar – enough to support a wife, who is
also deaf, and his hearing two-year-old son.
Still, for the 27,000 deaf children born every year in
India and the hundreds of others without access to
education, the curse has yet to be lifted. Ruma Roka says
that hardly a day goes by without one or two young deaf
people turning up at her door, desperate for a future.
“Many come from remote areas and often travel on their
own, without being able to ask for simple directions,” she
says. “They show incredible initiative and determination,
often a lot more than the hearing people I know. But it’s
a terrible failing on the part of society, that they’re put
in such a position.”
Global oppor tunities
MACRO
By Richard Wolf and Greg Langley
A
s the population of developing
count r ies changes f rom a
predominantly rural life to a city
one, fertility rates fall, so urbanization and
fertility are clearly linked. But does this
mean cities are also responsible for the
stubbornly low fertility rates found in
developed countries?
General opinion holds this to be true –a
belief so ingrained that The Economist recently
reported that the Japanese government was
considering preventing young people from
moving to cities in a desperate effort to halt
the country’s demographic decline. Yet little
research has been conducted on fertility
differences between cities and rural areas in
developed nations.
Surprisingly, when you compare fertility in
European cities and New York to the adjusted
crude birthrate (CBR) of their countries, it
turns out that urban living does not
necessarily mean childless living. On average,
the birth rate of 35 major European cities and
NYC was 10% higher than that of the country in
which the city is located.
In our recent study, crude birthrates were
calculated using population and live-birth
data from the Eurostats regional database and
New York City data. This was checked against
the national birthrate to see if urbanites have
an excess or lack of fertility compared with
their country folk. Given that the age profile of
cities differs to the countryside (cities attract
the young), the CBR was calculated only on the
basis of people in fecundity age (15-44).
The list includes European capitals and
cities with more than 1 million inhabitants.
These range from megacities such as London
and Paris, with over 10 million inhabitants
each, to small capitals such as Malta’s Valletta.
However, the pattern persists across borders.
Lisbon (50%), Bratislava (31%) and Birmingham
(17%) lead the table in terms of excess
THE
SURPRISING
CRADLE OF
DEVELOPED
NATIONS
Are cities unfairly blamed
for declining fertility?
Allianz • 49
Baby-booming
cities: children
have become
status symbols
in wealthy
neighborhoods
crude birthrate. Nevertheless, there were also cities with a considerably
lower adjusted birth rate than the countries they are located in. In
Dublin (-21%), Paris (-17%) and Helsinki (-17%), people tend to have a
lower fertility than those in the countryside.
HOW CAN YOU AFFORD A CHILD THERE?
Surprisingly, cities with some of the highest living and housing
expenses show an excess crude birthrate. New York’s fertility is 4%
higher than the US rate, while Munich, one of Germany’s most
expensive cities, has a 5% higher fertility. In London – where,
according to CNBC, property prices are said to be rising $7.50 (£5)
every hour – people in their fecundity age bear 8% more babies than
fellow citizens. Nordic cities also stand out, with Stockholm (+13%),
Copenhagen (+14%) and Oslo (16%) all appearing to be great places for
young parents.
So, it seems urban agglomerations and infertility do not necessarily
go hand in hand, but what actually explains this phenomenon? Factors
that drive fertility change across time and space, so fertility shifts
present a challenge for demographers and economists alike to research.
For example, the causes of the Western fertility phenomenon known
as the baby boom are still poorly understood. Experts such as Richard
Easterlin see the renewed optimism and prosperity of the period
following the second world war as leading to an uptick in child bearing,
but this loses plausibility when closely examined.
50
•
Allianz
While this may match the experience in the
United States, it doesn’t explain the baby
boom in non-combatant countries such as
Switzerland, or countries where the boom
started during the war, such as Denmark. Nor
does the theory explain differences in timing.
For example, Sweden experienced its highest
fertility in 1946, while neighboring Norway
saw its peak in 1964 (see PROJECT M online
12/2014, “Age invaders: The last baby boomer
turns 50”).
THE BABY-BOOMING CITY
As with the baby boom, the new Western
phenomenon of baby-booming cities appears
to have several interweaving causes. First,
cities represent a great habitat for work-life
balance, particularly if both partners want
to pursue a career. Short distances and
comprehensive infrastructure allow young
Onsedissum
senempore
parents to easily access
childcare.
qu autem nissimus
People in cities are
more
highly
educated,
idunto
optam
veria
dicte
nihicie
ndellenietur
so the resulting higher
wages
can offset the
additional costs of pricey rents. Part of the
Country
National
Adjusted
Crude
Birthrate
City
Adjusted
Crude
Birthrate
City
Ireland
38.7
34.0
30.5
28.3
Dublin
Paris
-21.2%
-16.7%
29.6
24.7
Helsinki
-16.6%
30.6
27.1
Liverpool
-11.6%
23.4
21.4
Bucharest
-8.9%
23.2
22.1
Barcelona
-4.7%
26.6
25.6
Ljubljana
-3.9%
30.6
29.5
Manchester
-3.6%
22.5
21.8
Valletta
-3.3%
23.7
23.1
Sofia
-2.4%
21.9
21.5
Budapest
-1.7%
22.8
22.4
Hamburg
-1.7%
25.8
26.1
Zurich
1.3%
22.8
23.1
Berlin
1.6%
22.8
23.5
Cologne
3.0%
30.9
32.2
New York
4.2%
22.8
23.9
Munich
4.9%
23.2
24.4
Madrid
5.2%
24.3
25.5
Riga
5.3%
23.9
25.2
Napoli
5.8%
22.1
23.4
Vienna
6.2%
24.5
26.1
Prague
6.4%
26.8
28.6
Amsterdam
6.7%
26.3
28.3
Tallinn
7.6%
30.6
33.0
London
23.9
26.3
Turin
10.4%
23.9
26.8
Milan
12.3%
22.8
25.7
Frankfurt
12.6%
30.2
34.2
Stockholm
13.2%
26.2
29.8
Copenhagen
France
Finland
UK
Romania
Spain
Slovenia
UK
Malta
Bulgaria
Hungary
Germany
Switzerland
Germany
Germany
USA
Germany
Spain
Latvia
Italy
Austria
Czech R.
Netherlands
Estonia
UK
Italy
Italy
Germany
Sweden
Denmark
Poland
Norway
Belgium
UK
Slovakia
Portugal
economic strength
22.6
28.6
of cities is that they
29.8
also host large
30.6
companies, which
22.9
are more likely to
20.3
offer parental leave
and other childsupport schemes – luxuries that may
not be present in rural areas. Another
explanation might be attitudes. Based on
historical experience, economists tend
to see children as “inferior” goods. Just as
the demand for potatoes falls as incomes
rise, so does the demand for children.
But this seems to be changing among
affluent city dwellers.
As BCA’s research report The Coming Baby
Boom in Developed Economies points out, what
better way to signal that one has made it to the
top than to be able to afford to raise five kids in
Manhattan or Beverly Hills? This phenomenon,
known as the “Brangelina effect” (after actors
Angelina Jolie and Brad Pitt, who have six
children), is evident in the data.
Difference
Source: Allianz International Pensions (w w w.projectm-online.com)
based on Eurostat regional data (2011-2013) and NYC database
FERTILIT Y IN CITIES
7.9%
13.6%
In the data, a city’s prosperity
33.2
Oslo
16.0%
is highly linked with fertility.
34.6
Brussels
16.1%
Bratislava, which is among the top
35.9
Birmingham
17.4%
three cities in the analysis on
30.1
Bratislava
31.3%
fertility, has a GDP per capita more
30.6
Lisbon
50.5%
than 130% higher than Slovakia.
Other cities that perform well on
wealth, such as Frankfurt, Warsaw and Tallinn, also have a high excess
fertility. Conversely, poorer neighborhoods such as Liverpool (GDP per
capita 30% lower than the UK average), Manchester (-18%) and Berlin
(-17%) perform below average in terms of fertility.
Melinda Mills, Nuffield Professor of Sociology at the University of
Oxford, commented that the results reflect a trend in industrialized
nations. “We see a U-shape when looking at the socio-economic
gradient,” explains the expert, whose research focuses on human
fertility and partnerships. “You see a lot of children for lower socioeconomic groups. There is a group – often called ‘the working poor’ –
that is struggling and has fewer children. Then there are highereducated and higher socio-economic groups, and in some countries
they are having more children because they can simply afford it.”
Cities, it seems, have been unfairly maligned as fertility traps. As
crowded primary schools and jams of iCandy and Bugaboo prams from
Lambeth in inner London to Prenzlauer Berg in Berlin attest, cities can
actually be quite fertile grounds.
26.0
Warsaw
14.9%
Allianz • 51
MACRO
EUROPE RISKS
LOSING DECADES
Weakening demographics are preventing investment, although investment
is needed to improve productivity to counter demographic decline
T
he financial and economic crisis and its
aftermath have subdued the European
economy since 2009. Now that recovery
is taking hold, it is time to look ahead. During the
crisis, governments reacted with higher public
spending and ever looser monetary policy. But
such demand-side policies will do little to address
the issues that really matter for Europe’s future
growth and prosperity.
The biggest threat to long-term growth stems
from the combination of weak demographics and
low investment. The combined workforces of the 28
EU countries will shrink by between 12 million and
16 million people in the next 15 years, according to
the EU and the OECD. These forecasts already assume
a steady inflow of migrants. Further inflows of
foreign workers could ameliorate the situation,
but they are no solution.
Europe’s only hope for sustained growth is to
boost productivity. Here is where it gets worrying:
Europe has not seen significant productivity growth
for a long time. In the EU-15, the growth rates of labor
productivity (output per hour worked) have been
declining for decades. Productivity growth stood
at a robust 4% in the 1960s, declined to 2% in the
1980s and dropped below 1% around the turn of the
century. Today it crawls forward at about 0.5% a year.
Meanwhile, total factor productivity, which takes into
account technological innovation, has been stagnant.
WHERE’S THE PRODUCTIVITY GAIN?
The decline in productivity growth in the EU is
surprising given the rapid onset of digitalization –
often described as the industrial revolution
of the 21st century. In Europe, as well as the
United States, the technological changes being
wrought by smartphones and the Internet are simply
not showing up in the productivity data.
Statisticians struggle, for example, to account for
how consumers are benefiting from the increased
quality and speed of delivery that often results from
digitalization. Furthermore, in the digital age, many
services are being provided free of charge, which means
they are not being counted as consumption at all.
Another factor is that many corporations run the
old physical business models parallel to the new
digital ones. Adding new IT systems and operating or
sales processes to traditional ones can temporarily
increase costs and depress productivity, especially if
new and old value-added chains are not well
connected. As these problems will diminish over
time, part of the productivity lull should disappear.
EUROPE’S CATCH-22
A more permanent aspect of low productivity
growth may be the depressed level of investment
that we have seen in recent years. For Europe as
a whole, the ratio of investment to GDP is still
52
•
Allianz
MACRO
below what it was in 2008. Long-term
workforce would encourage and allow
MICHAEL HEISE
is chief economist of
economic health will depend, in large
companies to scale up.
Allianz SE and the
part, on whether investment recovers
Official forecasts assume that
author of Emerging
and by how much.
productivity growth will recover to make
from the Euro Debt
Crisis: Making the Single
There are reasons to be pessimistic.
up for the demographic decline. The
Currency Work
OECD and the EU Commission, for
Weak investment activity partly reflects
a gloomy view of the European market. If
example, predict that Europe’s mediumworkforces are stagnating or shrinking and growth
term potential growth rate exceeds 1%. But such
is subdued, why spend on boosting output? So here is
meager growth will only materialize if investment and
Europe’s Catch-22: the demographic outlook would
productivity growth recovers to well above the levels
require much higher, productivity-boosting
we have recently seen. Otherwise the reduction of the
investments. But the demographic weakness is
workforce will lead to stagnation or even decline.
Productivity improvements are possible, but they
causing companies to hold back.
require policies that support investment, innovation
Fortunately, there is much that can be done. A
renewed push to integrate European markets for
and skills. In a world where workers and companies
services, digital goods, capital markets, and energy
grapple with ever faster change and powerful global
would remove barriers to business and bring new
competitors in winner-takes-all markets, this is
incentives to invest.
becoming all the more urgent.
Monetary and fiscal policies will do nothing to fix
The Transatlantic Trade and Investment
demographic problems and low productivity growth,
Partnership that the EU is currently negotiating with
and they will hardly stimulate investment in the long
the US would also create a larger market, with less
burdensome regulation and more competition. On a
run. But stronger growth is needed in economies
being held back by the legacies of the financial
national level, reform drives like those carried out in
crisis. The time to act is now. Otherwise we in
Ireland, Portugal and Spain could improve business
conditions and competitiveness across Europe.
Europe risk losing decades.
Finally, all European countries should redouble their
efforts to educate and train their citizens to excel in
the digital age.
An improved business environment could also
help companies reap productivity benefits from
digitalization. While some companies excel at the
technological frontier, there are too many laggards.
More open and larger markets and a well-trained
Vicious circle:
productivity needs
to increase but
the workforce is
shrinking
Allianz • 53
MACRO
ult
WHAT IS THE
NEXT 7%?
The world is aging so quickly that we
haven’t yet defined terms for it
I
t is a misconception, oft repeated, that the United
Nations has officially defined “aging” or “aged”
societies. For example, last year, Moody’s, the rating
agency, claimed that the number of “super-aged”
countries – where one in five members of the population is
65 or older – would rise from three today (Germany, Italy
and Japan) to 13 in 2020 and 34 in 2030.
While factually correct based on projections, the report
repeated the error concerning definitions, and it echoed
throughout the media. While the UN has an official
definition of the age group “older” (those aged 60 or over),
endorsed during the first World Assembly on Ageing, in
1982, there is actually no definition of “aging,” “aged” or
“super-aged” societies.
Mary Beth Weinberger, a former chief of the Population
and Development Section of the Population Division of the
UN, has often fielded questions concerning the definitions.
The idea that there is a UN-endorsed definition of “aging
society” traces back to a study in the 1950s, she responded
in an e-mail to PROJECT M.
“It appears that an arbitrarily
defined classification of countries
as ‘young,’ ‘mature’ and ‘aged’
(exceeding 7%) was employed in
MACRO
tra
a UN publication and picked up by later authors. In the
course of repeated citation, the classification arbitrarily
used for that particular study (The Aging of Populations
and its Economic and Social Implications, 1956) evolved
into something that sounded more like an official
UN classification.”
As time passed and the percentages in older ages have
grown, researchers have used the 7% and 14% aged
65+ points as arbitrary divides to indicate the pace of
population aging, although other markers could just as
well be used. Yet, given that the thresholds are convenient
signposts indicating the aging of society, the question is,
what will come next?
AFTER SUPER-AGING
As Moody’s highlighted, once 21% of a country’s population
is 65 years and over, it is considered by some researchers to
be “super-aged.” But given the speed with which the world
is aging, it will not be long before a new term is needed –
when 28% of a country’s population is 65 years and over.
Based on the UN World Population Prospects (2015
Revision), Japan will reach this by 2020, and Italy and
Germany by 2030. Within a decade, Austria, Korea, Greece,
Portugal and Spain will follow.
Martina Miskolczi and Kornélia Cséfalvaiová, from
the department of demographics at the University of
Economics in Prague, were among the first to have a turn at
naming the new category when they used the phrase
“ultra-aged” society in the conference paper Process of
Population Ageing and its Dynamic (2013). Whether this
term sticks can be doubted as this will not be the final
name needed to define a category.
By 2050, when China will have crossed the threshold to
becoming an ultra-aged society, researchers will have
already faced the challenge of turning a phrase for another
demographic bracket. By then, Japan could already have
had 35% of its population aged 65 or more since 2045,
indicating just how fast our world is aging.
MACRO
TIME TO INCREASE HOLDINGS OF
LONG-DATED STERLING CREDIT
The search for yield turns towards gilt and sterling-denominated
investment-grade bond yields
By Ketish Pothalingam and Jeroen van Bezooiien
I
n a world of low yields, low returns and
low inflation, pension funds looking to
de-risk portfolios may feel the room for
manoeuvre is limited. If pension funds are
thought of as a stream of liabilities stretching
out into the future, then matching an
increasing percentage of those liabilities with
fixed income assets may make sense. Longdated fixed income could serve as a natural
candidate for matching pension funds’ longdated liabilities.
RISING FROM THE FLOOR
Today, gilt- and sterling-denominated
investment-grade bond yields in the UK are off
the lows experienced at the start of 2015
(see Figure 1), and investment-grade bond
spreads to government bonds remain elevated
from pre-2008 global financial crisis levels
(Figure 2). Along the risk spectrum, long-dated
investment-grade credit could offer pension
funds an attractive middle ground between
gilts and equities. The long-dated investmentgrade credit looks attractively priced versus
the broad UK credit market, supply and
demand technicals are supportive and
corporate fundamentals appear in good shape.
As such, this asset class may offer good
value to pension funds either looking to match
more of their liabilities or seeking to de-risk
some equity holdings. At current yield levels,
long-dated credit may serve as an attractive
hedge for UK pension liabilities when
compared with index-linked bonds.
In general, index-linked bonds are a
natural liability hedge for pension funds
because pension benefits in the UK are indexed
to inflation; indexation is typically capped and
the level of the cap depends on the type of
liability – for example, 2.5%, 3% or 5%. If high
56
•
Allianz
quality fixed-interest bonds yield 4.5% to 5% more than
index-linked gilts, then these may represent a less costly
liability hedge. If inflation stays below 5%, the fixedinterest bonds will pay a higher yield over time. If
inflation rises above 5%, all liability increases
are capped at 5% or lower so that the fixed
bonds still offer a good hedge.
Prov ided an investment
manager has the credit research
capabilities to steer clear of credit
defaults and react appropriately
to credit downgrades, PIMCO’s
analysis indicates that there
are only a few scenarios where
UK linkers represent a less
expensive hedge option than
long-dated UK corporates.
WHAT ABOUT DURATION RISK?
Against the prospect of rising
rates, investors may be concerned
about the higher duration of longdated credit. However, rate hikes are
likely to be less profound than seen in
the past. For UK pension funds looking
to match liabilities, rising rates are less
of a concern as higher yields reduce both
asset and liability valuations.
As economic growth has returned to the UK
and the US, the debate in the UK has surrounded
the exact timing of the Bank of England’s (BoE) next
rate hiking cycle. BoE Governor Mark Carney spoke in July
2015 of his expectations for the peak in the UK policy rate to be
“about half as high” as the long-term average of 4.5%.
This is consistent with PIMCO’s view that the new neutral policy rate
for the UK will be around 2% to 2.5% and that there is not a significant
near-term threat from inflation in the UK. A combination of lower
import prices, the peaking of utility bills and low wage growth has
helped keep both the UK Consumer Price Index and the Retail Price
Index below the BoE’s target inflation levels.
MACRO
OPPORTUNITIES IN THE STERLING MARKET
The relative performance of long-dated
credit versus all-maturity credit, both its
spread over government bonds and the yieldto-maturity over the past decade, suggests
that a move into long-dated credit has merit.
When the technicals of supply and
demand are considered, after the
changes made to UK pension
regulations in the 2014 UK
Budget, new issuance
has declined in 10year and longerterm sterlingdenominated
credit. From a long-term average of 53% of all issuance, longer-dated
issuance has fallen to 42%. PIMCO believes the supply and demand
dynamic is supportive for the sterling-denominated investment-grade
credit market as the sharp increase seen in US-based issuers issuing in
euro has not been replicated in the sterling market. Turning to corporate
fundamentals, such as leverage, mergers and acquisitions activity, and
balance sheet strength, corporations in this current economic cycle have
in general remained conscious of the need to maintain solid credit
metrics. Leverage remains at long-term averages. In the financial sector,
new post-financial crisis regulatory pressures continue to exert a strong
influence on issuers to decrease leverage and increase capital. This in
turn continues to make financials an attractive sector for credit investors.
These developments suggest that it may be an optimal time
for UK pension funds to add to their current long-dated sterling
credit holdings.
KETISH
POTHALINGAM
J E RO E N VA N
B E ZO O I I E N
is an Executive Vice President
at PIMCO, in charge
of UK credit portfolios
is head of EMEA
Client Solutions Group,
PIMCO
FIGURE 1: 10+ YE AR S STERLING - DOMINATED INVE STMENT- GR ADE
CREDIT AND 10+ YE AR S UK GILT INDICE S (YIELD -TO - MATURIT Y)
S t e r l i n g n o n - g i l t s 10 + y e a r
U K g i l t s 10 + y e a r
4.0
3.5
3.0
2.5
2.0
15
5
Ju
l’
’1
ay
M
M
N
Ja
ar
n
’1
5
5
’1
4
’1
ov
p
Se
Ju
l’
’1
4
14
1.5
Source: Bloomberg, 6 August 2015
Y ield-to -matur it y (%)
4.5
FIGURE 2: 10+ YE AR S STERLING - DOMINATED INVE STMENT GR ADE
CREDIT SPRE AD TO UK TRE A SURY GOVERNMENT BONDS
150
10 0
50
5
n
Ju
’1
ec
D
’1
3
2
’1
n
ec
D
Ju
’1
0
9
’0
n
ec
D
Ju
’0
6
Ju
n
’0
4
’0
7
0
Allianz • 57
Source: Bloomberg, 6 August 2015
250
20 0
ec
Thinking in the
long term:
financials remains
attractive for
credit investors
350
30 0
D
OA S (basis p oint s)
40 0
META
The out sider’s v iew
THROUGH THE GLASS CEILING
This year, ast ronaut Samantha Cr istoforet t i set ne w records af ter
spending 199 days away f rom Ear th
S
NAME
Samantha Cristoforetti
AG E
38
P RO F E S S I O N
Astronaut
T I M E I N S PAC E
199 days
58
•
Allianz
pace travel has changed a little since
the days of Yuri Gagarin. In 1957, the
world’s first ever astronaut spent just
89 minutes in space; scientists feared any
prolonged exposure to weightlessness could
be dangerous, potentially even fatal.
On 11 June 2015, Samantha Cristoforetti
returned from the International Space
Station (ISS), having set new records for the
longest uninterrupted space flight by a
European astronaut and the longest single
stay in space by a woman. She’d spent 199 days
away from Earth.
Being confined to 820 cubic meters of
metal 400 kilometers up and witnessing
16 sunrises and sunsets a day can do strange
things to mind and body, she says. “The first
couple of months flew past, it was absolutely
exhilarating. But there were times when it felt
as though a year had passed because so much
had happened and Earth was so far away.
Sometimes, it felt as if I’d been floating all my
life, as though I’d never had to walk.”
Life on board the ISS isn’t just about
pretending to be Superman: astronauts
have a busy 40-hour week full of scientific
experiments, maintenance tasks and 90
minutes of exercise a day to counter the effects
of weightlessness. Cristoforetti spent some
of her downtime documenting life in space
on social media.
Photos and videos went viral as she showed
how weightlessness affects everything from
eating and sleeping to nail trimming and
going to the toilet. She also made the first ever
zero-gravity espresso, posing for the occasion
in her own homemade Star Trek uniform.
“Space is something that should belong to
humanity as a whole,” she says, explaining her
drive to share. “Going into space should be a
collective journey for us all. We’re at the
beginning of that journey, so only a few of us
are lucky enough to experience it, which is why
it’s important that we share it.”
That journey may take us to Mars some
day. The ISS is acting as a springboard for
more adventurous missions, with space
agencies testing a range of technologies as
well as the physiological and psychological
effects of long-term stays in space. In 2016,
some answers should be forthcoming:
Cristoforetti spent the last three months of
her stay with two new crewmates: they’ll be
on the ISS for a whole year.
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