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Sampension CIO: Demographics spell lower returns in future

The baby boomers have retired and the generations following them are much smaller. This will have tangible consequences for future returns on investments, says Henrik Olejasz Larsen, CIO at Denmark's Sampension.

The baby boomers – that large generation born during the post-World War II years – have retired. They are among the first generations in the western world to have been able to save for retirement during most of their working lives.

For decades this has helped drive up prices on equities and bonds. But they now need their pensions and the effects will be felt by everyone in the form of lower returns on investments over the coming years, predicts Chief Investment Officer at Sampension, Henrik Olejasz Larsen.

"There has simply been a fundamental demand and this is a common trait for both Europe, the US, China, and Japan. In a very large part of the developed world – perhaps the entire developed world – the demography has driven up asset prices," Olejasz Larsen says in an interview.

Headwinds for asset prices

For this reason, we have now hit a turning point, he believes.

"It's not something that happens from one year to the next. But it's a strong tailwind that we've had for decades that is now dying down and actually being replaced by headwinds. When it will hit varies a little. But over the next ten years, there are many countries where pension capital will start to be spent," says Olejasz Larsen.

This means there are assets which must be sold. But at the same time, there will be a trend of a smaller number of enthusiastic buyers as the next generations on the labor market will be more sparse.

"Precisely this mixture is what some might fear will go against the trend of still increasing asset prices, so that the returns we get over the next ten years will be much lower compared to what we're used to," says Olejasz Larsen."Of course, the next generations will be richer than those who have saved. That helps a little. But it's not the same level of tailwinds that we have been having," he adds.

Compensation for loss of value during recession

For the pension companies, it could be a big challenge getting savers to understand that it will be hard to maintain the high returns of recent years. Particularly because there have been no warnings of what was coming.

"We had this long period from 2009 where things have just improved since the financial recession. People might think that this is the norm, but I think it has largely been compensation for the large losses of value that we experienced during the financial crisis," says Olejasz Larsen.

In the period since 2009, savers aged 40-55 with annual pension payments of DKK 30-80,000 have achieved annual returns of 9-10 percent in market interest products at several of the country’s pension firms.

"This doesn´t mean we can will generally expect to get 5-10 percent in returns per year. It is highly unlikely that we can achieve that going forward," says Olejasz Larsen.

A few percent

Where do you expect returns to sit?

"At a few percent. And fortunately inflation is low at the moment," he says.

But inflation could rise going forward, says the CIO.

"While the labor markets tighten up, some inflation might be waiting ahead. I don't think it will come the first couple of years. But if unemployment continues to be as low as it is in Denmark and Germany, then it would be strange if salaried workers and unions don't start demanding more," he says.

He notes that the wage increases, which usually play a vital role when it comes to inflation, have been relatively modest in recent collective agreement negotiations, particularly in light of the high employment rate.

"My interpretation is that the spiral from wages into prices is moving very, very slowly. But when it first starts moving, like it did in the late 1960s and the early 1970s, then it's pretty difficult and painful to stop it," says Olejasz Larsen.

"Nobody right now has any intention of stopping inflation. Neither the US nor the European Central Bank nor politicians. No one wants to stop this too soon," he adds.

Longer on the labor market

If these prospects for lower returns on investments hold true, this means that more money needs to be put into savings. There are two ways to save more money. Either by increasing payments or by postponing the age of retirement – something that politicians have already taken on as a result of people generally living longer and the consequent need for larger savings.

"By staying on the labor market longer, there is a type of double effect. First because you make more for more years, and second because there are fewer years where you need money. So it means a lot if you stay an extra year on the labor market," says Olejasz Larsen.

Today, Danes born after 1963 can expect to retire after turning 68, while those who were born before the end of 1953 can exit the labor market at age 65.

English Edit: Gretchen Deverell Pedersen

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