Increasing Longevity Is Putting Strain On Global Pensions: Yik

Our next guest has been studying the brewing pension crisis, and we're very lucky to have Han Yick, head of Institutional Investors at the World Economic Forum. He has worked in the pension industry on all sides and is intimately aware of this. Han, can you talk about the problem globally? Is it the same everywhere? And our pensions dealing with this by lowering the returns assumptions to increasing the contributions of members. Sure, thanks for having me. I think um

First of all, it is a global crisis. We've looked at this analysis on a very global level. Are are We have a project which are running called retirement Investment Systems reform and we're looking and working with countries from around the world. I will say some countries are in better shape than other countries. But overall, if you look at what it means to have the gap, UM you have liabilities and assets. The liabilities are you have retirement

aages when pension payments start. And the bad news right now from a pension's perspective is because we're all living longer, Uh, it means that the pension benefits have to last us much much longer. And that's the problem that all countries are facing. You know, longevity is increasing gay for us overall, but from a pension perspective, that's putting strain. If nothing else is changing, it's just math that the amount that we need to UH to account for the amount of

money just needs to go up. That money needs come somewhere. Is there is the dependence on defined contribution rather than define benefit plans contributing to this problem. I think the shift from defined benefits to define contribution has caused UM a different a shift in the responsibility of clear tensions. Yeah. So the issue there is that now the individual bears the burden of being their own actuary, being being their own asset manager UM and and the burden of the

savings themselves. So that's actually caused quite a bit of of gap as well. So is that considered to be a positive element or a negative element? Um? Uh, I would maybe have a lot of different people who are personally responsible for their own retirement. It gets very difficult to implement any kind of change if, for example, you and people at the World Economic Form and a variety of government officials sit down and figure out a solution that it doesn't it make it more challenging to actually

affect any kind of change. I think that's I think that's true. One of the issues is it is a global issue, UM, but the solutions will have to be done at a more regional level. UM. If you look at the U S specifically the four one case situation, there is a little different than the fine contributions schemes in other countries. So, for example, the Netherlands has done a very good job in terms of a collectivized DC plan because mandatory, it's mandatory. UM. Also look at Australia,

they have mandatory contributions. Now the word mandatory here in the US not so popular. It's getting exactly so sometimes the solutions are can be difficult politically, but in the US, for example, one of the things that UM that can help is auto enrollment and auto escalation. So the idea still maintain choice, but have people opt out rather than opt in. So I want to talk about the investment

strategies of these pensions. So what they do is they take the contributions they get, they invest them in assets like bonds and stocks in private equity, and hope to earn a return in order to meet the seven or eight percent obligations that they need to pay out each year. UM. First of all, some have ratcheted back those expectations for returns, but widely people do not think they've come down enough.

How much have you looked into potential losses in some riskier strategies that pensions have been going into in order to get those bigger returns that they are still seeking in other words, like the private equity for example, which firms have a record amount of cash and are investing in companies at peak valuations. Potentially. Yeah, so UM, on our end, we're looking a little more. Uh, I guess a high level than that in terms of UM. In terms of this is the problem these are the steps

they are needed to solve it. From the investment strategy perspective, that's something that UM that the individual pension funds will need to tackle. But it's an area that UM that UH will need to be examined because the problem when once you have a gap you have with the liabilities and the assets, it's really the gap sounds like one number, but it's really based on two numbers. I just wrote a blog that the George Georgetown Center for Retirement Initiatives

published where I talk about this tale of two numbers. UM. Once you have a gap where the liabilities are higher than the assets, you need to close that which means the assets needs to be growing faster than than the liabilities. And if the liabilities are growing because we're living longer, if nothing else changes on that front, if we don't increase retirement age, if we don't reduce benefits, UM, then you know then the liability will continue to grow at

a certain rate. Then we need to increase assets in order to close that gap. UM. Now the problem then becomes what you said, do we go into asset classes that can be potentially riskier but have a potentially greater long term return UM I would argue that steps need to be made on both sides in order to close that gap, because just mathematically it cannot work out if

one number is increasing quicker than the other. We're talking about numbers, and I'm wondering whether the benefits that were describing that will not be there if we continue on our current path. Can they in any way be replaced by the actual services that need to be rendered too elderly people, And I mean things like healthcare, shelter, food, and so on. In other words, you put a price on them, but that's really just a mechanism. The actual service itself doesn't have to be priced, does it. Um.

That's a great, great question or a great point. UM. I would say that for our analysis, the way we've looked at it is in terms of um UH as a replacement ratio, In terms of UH the fact that you may need a smaller percentage of your current income in order to mean to maintain a certain lifestyle. Now

that's UM something that is UH usually good approximation. It allows us to compare country different countries because UM that does factor into account healthcare standards, you know, the things, the cost of living, things like that in different countries. UM in general what's needed though in retirement you cannot

separate what's need in retirement with healthcare. UM. That's something we're going to explore in the third phase of the project most likely because UM, the two aren't are definitely linked. If you live longer, what's the quality of life? What's the cost needed for that? And that will play a huge impact on terms of what's needed as a pension. Tell people how they can just learn more about your work. Sure, I would say you can go to the World Economic

Form website. We have a page on the Retirement Investment Systems Reform Project. We have a white paper UM and as I mentioned in the Georgetown Center for Retirement Initiatives have a new blog post outlining hopefully in easy language, in terms of what this means is in terms of the gap the tail of two numbers. Thank you very much for being with us, so much appreciated. Han Yak is head of Institutional Investors at the World Economic Forum.

And coming up, of course, we have Bloomberg Politics, policy, power and law and Amy Morris. What have you got on tap for us? You know, Facebook's reviewing the invitation for Zuckerberg to testify on Capitol Hill, so we'll talk to Congressman Greg Walden, the lawmaker who extended that invitation. We'll be listening. That's coming up Bloomberg Politics, Policy, power and law. Thanks for listening. I'm Pim Fox along with my co host and colleague Lisa Abramwitz. This is Bloomberg.

We are broadcasting from the Quinnipiac Game eight form. Global asset management education is the topic of the day here at the New York Hilton, and coming up there'll be a conversation with Neil Kashkari. He is the Federal Reserve President of the the Federals Bank of Minneapolis, interviewed by our own Kathleen Hayes. Right now we have David Auerlick. He is managing director and special Advisor to the Chairman of GAMCO Assets on the management at Gamco forty billion dollars.

But he also happens to hold the title of a Commissioner and Chair of the Investment Committee of the New York State Insurance Fund. Mr rol Like, thank you very much for being here, much appreciated. Tell people what is the remit of the New York State Insurance funds so we understand what we're talking about. Sure, UM, thank you

for having me. The New York State Insurance Fund is a hundred and seven year old state agency that is a mono line insurance company UM it UH rights workmen comp insurance policies UH covering approximately thirty seven percent of every worker in New York State UM from large policy holders UM million plus two UH. Most of the policy holders are five ten thousand annually. It's a off budget

state agency. It has full time employees. UM seventeen billion dollar fund office is located in fifteen office located in UH in New York throughout New York State. So this is UH. This is an agency that has to have a long term approach and has to meet a certain amount of returns each year to meet potential obligations. You're a few weeks away from changing your investment thesis, your investment strategy. Can you give us a taste of kind of how you're planning to change your allocation? Sure? Just

so you understand. So, UM approximately ten or eleven billion dollars is managed internally to meet our liabilities paying insurance claims. The balance is used to provide a backstop in case our actuaries say we need more money in our liability pool, so we can take it from the surplus. So the asset allocation UM is that we are shortly going to complete will provide us with additional diversification within at portfolio.

So UM we will expect to see UM investments in alternatives UM broadly speaking, private markets which includes it could be optimist credit, it could be bank loans um UM, it could be private lending strategy increasing allocations, that's correct, Private equity UM could include infrastructure, real estate UM. So those are going to be UM new asset classes for us.

So we're going to be one of the We're building out a alternatives portfolio de novo UM and so that's going to be quite an interesting UM undertaking for us. At this event, there are many young people. I'm wondering if you could explain, what is it you would like to communicate to them? What message would you like to leave them with. One of the things that I will be talking about is the perspective of a long term

investor UM and how we are UM UM patient. We don't get caught up in UM UH sort of quarterly monthly daily gyrations that we have to be consistent. We have to be UH patient investors. We have to have a diversified portfolio to spread out our risk across UM different environments, through different markets, and hopefully UH engaged them in a dialogue because they are students and I expect

them to ask us budget questions. You know, one thing that I thought was interesting as we were talking ahead of this is UH that you are reducing your allocation somewhat too active managers, at least in the large cap space, although replacing that with passive instead. UM I find it interesting is it's basically a bifurcation where you're basically going into passive for the broad market exposure and then trying to increase your exposure to more esoteric markets. Is that

basically the broader thesis here UM. I think, UM, what we had experienced over the last ten years is this the market has gone up, and you can capture that in a passive index for a lot less than active management. UM. I don't necessarily believe in that same thesis UM in small and mid cap I think active management UM is adding alpha and adding value. UM. I also think that in a in volatile markets, you need active market, you need active you need active management UM. And UH, so

it's it's strategic. It's hard to um uh argue that large cap active managers have been consistently outperforming the benchmark as opposed to passive managers. UM so hopefully, um we still have active on on large cap, but it made sense to have a portion of it managed passively. David our Like, thank you so much for being with us, Have fun on your panel and the best of luck. David our liked Managing director and special advisor to the

Chairman for GAMCO, overseeing forty billion dollars. Also commissioner and chair of the Investment Committee for the New York State Insurance Fund. Does buy the dip? Still apply with us to discuss? Phil Orlando, chief equity market strategist at Federated friend to this show, Phil, thank you so much for being here, pleasure, Thanks for having me back. So we've seen a little bit of red in the past few days. Um. In the past there is a pavlavi in response to

immediately buy any dip, no matter how small. Today we saw that in pre market trading was down. It is now up largely except for the NASDAC. Were you in there buying No, we we weren't. And um so yeah, you had this two and a half percent correction yesterday. Everyone's scared to death about the impact on tariffs and

trade wars, and that's all reasonable and understands. I think. So, um, now, if if, if you were ready to turn here, today would have been a big move day up and the SMP had a nice you know, green in the futures. But then I guess we're largely flat, maybe fractionally higher. That that tells you that we're not there yet. You know, the kids in the back of the car, are we there yet? We're not there yet. And and from our perspective again, you gotta remember sort of the typical pattern here.

You had this nice move up in the beginning of the year, and then this waterfall collapse. We're down twelve and then you bounce and then what you what you need to do technically is sort of retest that low. And we haven't done that retest. That's where we are now. It's that retest process. And and so you know, our best guess is that you probably are looking at a retest at the two day moving average, probably over the course of the next couple of weeks um ahead of

the earning season. I think the only season is gonna be pretty good. But that's just that you've got I think a little more downside. I think that two hundred day moving averages around twenty's like okay, But I got the advantage I have the actually charting. Yeah yeah, savant with a computer and yeah right exactly in my dreams. Uh you know, okay, So eight four. So I want to know who do you believe are all the smart sellers or the market participants ince January six that have

caused this increase in volatility. It's not like the companies are all different, it's not like the economy is all different. There's got to be something that explains why. When you look at a chart of the S and P five it looks really lovely going up to the twenty sixth of January, and then from then on in it looks like a heart patient who's having a stroke. So understand that the stock market from just before the election back in sixteen through that January aforementioned peak stock market was

up like or some ridiculous number. And the reality is that looking at some of the fundamentals, looking at some of the technicals, the move up in January, and I think we were up like seven and a half or eight percent in that first three or four weeks. Was probably ahead of itself, and we were due for a correction, and we were due, frankly for a a more healthy spate of volatility. The VICS last year was was sitting between like eight and ten. You know, I know, but

but Phil, but who or is it a machine? Because I understand, you know, it was ahead of itself, but I mean, every time we use those pronouns, there's got to be something behind it. And the market doesn't move

all by itself. There's either a human being or there's a decision being taken, or there's a machine that's program that says, you know, when it does X sell or when it does why by so we're we're told, we're hearing that there were some al goes, you know, some of the really smart hedges that were you know, taking some money off the top there back in in late January, and then we dropped twelve percent in a couple of weeks.

We were dramatically oversold in our view. We did buy there, uh and we had a nice so eight to ten percent bounce or so, and then we've been uh, you know, sort of patiently waiting for the retest here. So I think we may get more aggressive in a couple of weeks if we get down to this four level as you talk about him. We are expecting that that corporate earnings in the first quarter are going to be very solid. We think the full year is going to be very solid.

We're in a hundred and fifty five s and P versus one one thirty last year or thereabouts now. When we raised our number to one fifty five, you know, in the fourth quarter of last year, people thought we were star craving lunatics. Well go back and look at your little computer screen there. The consensus has now moved up to one fifty eight for this year. We're now

behind the consensus. So now, well, so what we thought we saw three or four months ago, the rest of the street is starting to catch on, and that is that the fiscal policy initiatives that are playing out I have a positive impact on underlying you know, company and market fundamentals. So we think the market will grind up over the course of the year. But this period right now is ugly. It's uncomfortable. Uh and and this is what we're living through, all right, you know, it's uncomfortable

right now Mark Zuckerberg and his dinner time conversations. Facebook shares have declined since March sixte They've declined eleven per cent. Is this a buy an opportunity? Well, I don't follow the stock closely enough to make that judgment. I did hear that them forward multiple on on. A lot of these sort of fang stocks are are down pretty sharply.

I thought I heard a comment that that Bill Miller, uh, you know, one of the greatest value investors in the game for the last twenty or thirty years now thinks that the stock could be you know, attractive. He maybe you know, dip into toe in the water. So one guy like Bill Miller says this thing is starting to get cheap. You perk up your forty little years and

you start to pay attention. So I don't know definitively that we're ready to buy, but you know, if a guy like Bill Miller says it's cheap, then then maybe it's worth taking a look at. Just quickly, if you take a look at the SMP five hundred, go back to this time last year, we are up thirty Okay, uh that is that? Okay? Can you live with that, Yeah, I could certainly live with that. And from here we think we could do mid teens over the course of

this year and next year. We're still a thirty one hundred this year, thirty five hundred next year, no recession before probably twenty twenty late one, early on the horizon. So we think that that, you know, you can still make some some pretty good money here before we have to worry about the positioning more defensively. Thank you very much for being with us. Expert Savanta phil Orlando, chief equity market strategist at Federated. You're listening to Bloomberg Market

Time pim Fox along with Lisa Bramwitz. This is Bloomberg. We're broadcasting live from the Quinnipiac Game eight form educating future financial professionals here at the New York Hilton in Midtown Manhattan. And one of the things we're gonna have to deal with this political risk, Well, how do you factor in the resignation of a president's attorney or indeed even a replacement as a national security advisor. Well, perhaps

the first thing might be to call Mark Rosenberg. He is the chief executive of geo quant and he can be followed on Twitter at geo underscore Quant. Mark Rosenberg, thank you very much for being with us. Tell us exactly what is geo quant What are you trying to accomplish? We what we do is generate high frequency political risk indicators that measure political risk across the arrangements vectors at the same frequency as financial market. So it's increasingly accepted

that politics pack markets. Um. Political risk is rarely quantified, and if it is, it's really done at the same frequency as as the market that it impacts. So what geo quant does is produced daily as objective as possible political risk indicators across each country we cover. Mark, it's got to be tough to objectively quantify the risk. Before I get into just the specifics of how you do that, please bring us up to date. Where are we now? We have a lot of turmoil. People are talking about

the change in the National Security Advisor in Washington, the tariffs. Uh, how much has your geo political risk indicators skyrocketed in the US? Well, frankly, the indicators haven't moved. All risk indicators are off, of course, but they haven't moved that much simply because um, the political political risk indicators have increased. So much up to this point. I think these events are really a symptom rather than a cause of political

risk in the United States. Political risk is in building up for quite a while, and I think up until now, or up until that's at least the first court of this year, equity markets are they're kind of UM shielded from the impacts UM, and now that's no longer the case. So I think what we're seeing here, the civilian, the Trump administration, the the hawkish ad hoc policy moves, these are symptoms of a significant build up in political risky United States over the past eighteen months that are now

coming to their well mark. To follow up on a Lisa's question, so how do you actually do this and how do you assign some statistical measure to what is in many cases a qualitative issue. Sure, well, political scientists has made significant strides and recent heurs in terms of quantifying quantifying previously qualitative concepts. So we do have models to use UM just as you as you would in economics and finance, in order to systematize and quantify UM

the political factors that drive markets and economies. And in addition, we have new technology to UM scrape in h what would be an example I understand all this, but what would be an example of of of putting a a numerical uh point on a score on on something that is h Let's say the change in the head of the president national Security advisor. How do you turn that into a number? So we we measure a few things

relevant to that. We measure geo political risk, We measure the capacity of the state, We measure the level of support in the society for the government. So if that move impacts any of those indicators aren't adjust accordingly. So, for instance, our risk indicator for the United States increase about zero point nine over the past day given recent events um and and that's a function of all the different elements of politics that are now riskier um as

a result of re an event. As I said, it is not that big because we're already at such a high level of this for the United States. If you look at our indicator on your Bloomberg, you'll see relative to history, the United States is already um uh quite high. So these events don't move they need all that much. So I'm wondering. You know, there's been a big question as to how much markets are factoring in this political risk.

So what's the answer. Well, what we found up till now is that photocals because really has been reflected in in tarrency markets in particular dollar and and and as well asn't rising markets. And I think what you've seen over the past quarter is the increasing reflection of photocalist and equity markets UM. I think initially as a response to UM concerns about inflation, which I think we're alternately driven by, you know, a pro cyclical fiscal policy and

concerned about an overheating economy. And the recontel have also been politically driven a nature around central trade policy policy shifts that are more protectionists, around the Muller investigation. Yeah, I think what you're seeing is that equity markets are not waking up to the political risk that have already been self and currency and bond market. Mark Rosenberg, thank you so much for being with us. Mark Rosenberg, chief

executive officer and co founder of geo quant. Their index seeks to measure political risk from both the perhaps personnel changes, but also from a voter partisan level. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramowits one before the podcast. You can always catch us worldwide on Bloomberg Radio to te