Longevity risk driven by short term issues

By Mark Eggleton

Australians are living longer but our ability to service our financial needs beyond retirement is in drastic need of an overhaul, especially as most of our super funds move into a net outflow situation.

It was a common refrain on the first day of the Financial Services Council Leaders’ Summit in Sydney and was a major theme of the panel discussion titled, “Is Long term investing old hat or the new black.”

To put it bluntly, longevity risk is shaping up as the major challenge confronting the Federal Government, the investment community and investors for the next few decades. Reason being is a simple matter of numbers – we’re living a lot longer. In fact, the average retiree lives for about 25 years after leaving the workforce.

The good news is we all realise we’re living longer and we need to invest in an income stream of some sort. But the asset allocation in most super funds is rather poor and, more pertinently, the take-up of annuity products in Australia is rather low.

More pertinently still, and rather ironically considering we’re living longer and understand the need to plan for the long-term, investors are becoming more short-term in their thinking.

And interestingly, part of the blame for our current addiction to the short-term is the superannuation system itself, which (in many ways) does encourage a degree of short-termism when it comes to investment.

Causes of short-term focus

Speaking on the panel, Managing Director of Aberdeen Asset Management and FSC Director, Brett Jollie said it’s partly driven by technology as we’re constantly able to logon to our super accounts or into our investment portfolio and we have the ability to look at them in real time.

The upshot is we’ve become so focused on the short-term that we look at returns annually, quarterly and even daily.

“It’s this daily deluge of data that we now get which is impacting listed company boards and their strategies as well as how superannuation trustees and investment communities are structuring their asset allocations and this is cascading down,” Mr Jollie said.

Fellow panellist Mark Burgess, who is the Independent Chairman of Yarra Capital and former Managing Director of the Future Fund, said the key to changing the focus to a more long-term view is better education across the board.

“The industry itself is doing a good work trying to educate the client base but we need to understand the realities of where the country is at. We need to work with the political community and we have to actively work with them and explain how investment cycles work.”

Brian Reid, Brett Jollie, Marian Poirier and Mark Burgess at the FSC Leaders Summit

Looking ahead

Mr Burgess said investment professionals are constantly looking three to five years out but the average person doesn’t look forward.

“A lot of us are good at looking forward when it comes to choosing how many children we are going to have but we don’t look forward when it comes to investment decisions,” Mr Burgess said.

He said while investment professionals understand investment cycles and warned markets are overdue for a correction, the political class and the average investor will struggle with this reality because they can’t look forward.

“People don’t fully understand this and the investment community is out there trying to engage with the community but my fear is we might over-regulate as we do (as a country) like a safety net,” Mr Burgess said.

Solutions in data

Keynote speaker and fellow panellist Brian Reid, who is the Chief economist at the Washington-based Investment Company Institute, suggested we have gone too far with data and we have to learn to use data to find solutions rather than “using it as a weapon.”

“We have to encourage policymakers not to get stuck in the rhetoric. The way the public discourse has become is data is seen as a weapon rather than a spade and a hammer to pound out solutions. We need to encourage the idea that data will help to find solutions and there are a lot of them out there,” Mr Reid said.

Unfortunately, this overreliance on short term data analysis has filtered into how companies are making their investment decisions, said Panel Chair Senior Managing Director and Head of Australia at MFS Investment management Marian Poirier. She cited the US as an example where over the last 40-years there has been a massive change in investor behaviour.

“In 1975, institutional ownership of public company shares was 35 per cent and the average holding period was 57 months, now over 70 per cent of shares is held by institutions yet the average holding period is less than five months and it’s now the same in Australia,” Ms Poirier said.

Mr Burgess said investors need to back boards to make long-term decisions.

What's required?

“We must have brave boards in this country because (if not) we are just going to get them paying dividends for the sake of yield and in effect capping the long-term growth of the corporate sector.

Investment managers need to have mature long-term discussions about investment portfolios. The role of the long-term investor is critical because if we lose that it will be replaced by too much short-termism and the biggest decisions the boards will need to make is what dividend to pay.”

He warns this mindset discourages the making of critical investment decisions over the medium to long-term; decisions which affect the long-term viability of an organisation.

Brett Jollie agreed companies are not running long–term strategies and suggests it all starts with the analysts who are driving board decisions as they’re running quarterly and half-yearly league tables which are effecting board investment decisions.

This is trickling down to investors who place too much stock in analyst reporting and the league tables.

Yet while there’s a need to turn away from short-termism, the panel generally agreed Australia is improving.

Mr Jollie said the “level of financial literacy is increasing in Australia” but the problem is most investors are just looking at the data thrust in front of them and “they’re focussing on the short-term performance because that’s what we’re reporting.”

“There is a real challenge there. We need to get some policy in place and continue to educate the community.”

This conversation was part of the 2017 FSC Leaders Summit, in Sydney on July 25 & 26.