Liability driven investing?

Liability Driven Investing or LDI is getting lots of attention. Overdue considering the ONLY reason pension plans exist is to pay beneficiaries with absolute returns. But are the absolute liabilities being calculated correctly for the future growth in longevity? The correct way to categorize human age is now: 0-17 minor, 18-79 young person, 80-109 middle-age, 110+ senior citizen.

Invest in lower risk alpha. Your great-great-great grandchildren will thank you...in person. Pension funds were established when people worked to the bone for 40 years at the same company and when they retired, for the 5 years or so they typically had left, the employer would take care of them with a retirement pension. This is outdated with people likely to have many jobs, several careers and live decades past three score and ten. Not so long ago making it to 70 was comparatively rare; nowadays it seems a young age to depart the mortal coil. Here in Japan there are 60 year olds retiring this year who WILL spend half their life as retirees. Not surprisingly Japanese pension funds are piling into hedge funds">hedge funds - the most reliable source of return when bonds yield so little.

I recently visited Yuzurihara, a village near Tokyo, which has a higher percentage of active/healthy 90+ year olds than ANYWHERE else on the planet. Of course Japan is famous for longevity and offers a window into the future for other countries. I have been buying stocks of Japanese companies that market to older age groups yet there are still very few in USA or Europe. The demographic trend is ignored by marketers and pension fund actuaries at their peril. Add a decade or two to those longevity tables and recalculate the asset/liability model. Not pretty.

Pension actuaries are going to be very wrong in their "expectations" for people expiring "on time". Life expectancy can't be looked up in statistical tables like logarithms. Those numbers are invariant, age is not and thus liabilities are not. Pension funds calculate liabilities, in part, by GUESSING how long beneficiaries are going to live. That estimate is made using PAST longevity data. Fast changing lifestyle and work practices combined with vastly increased knowledge of health and the aging process mean historical longevity tables are probably of limited use for estimating FUTURE longevity. Pension liabilities are worse than they appear due to the rapid leap in life expectancy.

Nowadays 70 year olds run marathons, climb Mount Everest and spend their spare time updating their Facebook profiles. Kirk Kerkorian at 88 is trying to sort out General Motors GM, Alan Greenspan at 80 is setting up his new consultancy. In some respects, Hugh Hefner, also now 80, puts it best, "80 is the new 40". He's right. And, of course, some of the better hedge funds">hedge funds are managed by young people, that is anyone under 80 years old.

Anti-ageist laws still have not caught up with sex and race discrimination laws. There is a lot of age discrimination in employment practices. This reflects outmoded compensation structures and age prejudice. Television advertising ratings emphasize 18-49 old viewers, based on the bizaare notion that after 49 you won't change your buying habits; but the over 49 year olds I know spend money like a teenager and they have a LOT more of it. Yet marketers seem to have little interest in them. Societies evolve just like financial markets.

by Veryan Allen. Copyright

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