Who will look after me in my old age? This is an ancient question. My family, my community, my State, my fellow citizens or anonymous strangers? That is a newer question altogether.
A few weeks ago, the Pensions Board issued a major report, "Securing Retirement Income National Pensions Policy Initiative". It is a rich and robust source for anyone interested in pensions as social and financial policy. It leaves open some thornier social and political questions about the framework in which pensions are provided. Socially, there are many models for the provision of retirement security. To hope that one's family will provide seems, in gloomier moments, to reflect a passing age. Yet there are still heroic examples among us of people who support and provide for aged relatives. In the age of fewer children per family and more childless adults, we are led to believe that we cannot expect much family support in the future.
Another means of material support for the elderly can also come from the wider community. Suburbia may not really be the best place to look for this, but in the country, strong community support is still to be found. Some would call these types of support for the elderly mere charity. That is to miss the point.
Family and community support is an implicit social contract between people who know each other, with roots in a strong moral tradition.
The provision by the State of pensions is a 20th century model we are now accustomed to, even while we cannot be entirely at ease with the levels of payments that are made. State pensions funded by the working population through taxes introduce an explicit State-mediated sense of entitlement. The notion of charity is done away with. A different type of social contract is still implicit, albeit one which is mediated by politics. Employer-provided pensions, where the pension is a function of final salary, involve private contractual arrangements between the employer and the employee. They, too, are essentially social the pension scheme treats each employee as part of a group and there is an obligation that the business will pay enough towards the fund to provide the promised pension. The new style of private pension provision through saving up a personal fund which is invested in stocks and bonds has an individualistic feel this is my fund, and I will make sure it is big enough by retirement through my contributions and those of my employer. No one but myself can or will take responsibility for it.
A key fact remains, however, as an international investment manager highlighted recently. The income generated for the pension fund is still the result of someone's work. If a personal pension fund is invested in the stock market, companies in the stock market must produce enough income for the pensioner. We are back to where we started it is still the able-bodied, working population which supports the retired. Whether this is through taxes, company pension schemes or personal pension funds is a secondary question. Within one society this social contract between one generation and the next is set up in a variety of ways, but some familiar, some contractual. But all take place within the one social and political system.
Now, though, we are at the beginnings of a new departure. This is where pension funds assets are invested increasingly in developing country markets. As the investment manager pointed out, in countries like Germany and Italy, the working population will simply not be able to produce enough to fund retirement income for all the upcoming pensioners, whether it is provided through taxes or private investments. The returns generated in emerging market economies are needed and pension managers will seek them out.
Isn't it problematic if there is a much flimsier political and social framework shared between developed and developing countries than within a developed country like ours or Germany? How much value should the developing world extract from the labours of developing economies? It seems easier to reach that political trade-off if one thinks of the value as going predominantly to pensioners within one's own political or social space. But what if this is not the case?
These are political questions well beyond day-to-day investment management. They are not for technocrats in the far reaches of multilateral organisations. We are all becoming part of this trade-off with strangers in the developing world. We cannot sustainedly allow that distance and anonymity to persist. We are becoming connected more than ever to the peoples of faraway, unfamiliar places.
Oliver O'Connor is an investment funds specialist
