How interest rates, demographics pose risks to retirement security

Interest rates, demographics and climate change pose pressing risks to pension savings and retirement security.

The 2019 Global Retirement Index (GRI) warned that the three pressing risks must be addressed by countries as they have adverse implications for retirement security.

The Global Retirement Index (GRI) is a multi-dimensional index developed by Natixis Investment Managers and CoreData Research to examine the factors that drive retirement security and to provide a comparison tool for best practices in retirement policy.

The report noted that low interest rates may stimulate borrowing, but also present a significant hurdle for those saving toward retirement and those looking to generate income.

In terms of demographics, rapidly aging populations pose one of the biggest risks to pension planning, but longevity also represents a key risk for retirees.

Also, climate change has been identified as a long-term risk to global sustainability of the current pension savings as it presents an immediate financial risk today.

The risks may be low for Nigeria as it current has high interest rate in double digits, considerably young population demographics and due to poor industrialisation, enjoys relatively low risk to climate change.

However, from the GRI report, Nigeria is one of the worst countries in the world for workers to retire judging from its 18 drivers of retiree welfare.

The four thematic indices cover key aspects for welfare in retirement: the material means to live comfortably in retirement; access to quality financial services to help preserve savings value and maximize income; access to quality health services; and a clean and safe environment.

For retirees to enjoy good financial freedom in retirement there should be low old-age dependency, none or low bank non-performing loans, low inflation rate, high interest rates, low tax pressure, good governance and low government indebtedness. Income equality, income per capital and low unemployment also determine material wellbeing of retirees as part of the overall retiree welfare in the country.

Happiness, air quality, environmental factors, water and sanitation as well as biodiversity and habitat are drivers of the quality of life of the retiree.

Health wise, life expectancy, health expenditure per capita and non-insured health expenditure also affect the health status of the retiree and invariably the overall retiree welfare.

Available data show that Nigeria lags behind in the 18 drivers and this poses huge challenge for retirees and leaves little hope for workers that will join the retirement league soon.

Nigeria’s old-age dependency ratio, being 65 years and above per 15 to 64 years, was at level of 5.1 ratio in 2015, unchanged from 2010, indicating the existence of pressure on the productive population.

This implies that 5.1 per cent of old persons in Nigeria, many of whom are retirees, depend on the younger population for their sustenance.

Another indication of the unpromising financial wellbeing of the country that also affects retiree welfare is the high nonperforming loans in the country which the Central Bank of Nigeria put at N2.084 trillion in December 2016.

The finances of retirees in Nigeria remain in shock as both inflation and interest rates remain high, threatening returns on investments and shrinking purchasing power.

The National Bureau of Statistics (NBS) reported 16.10 per cent inflation rate for June 2017 while the CBN has retained 14 per cent as the interest rate, forcing commercial banks to keep their interest rates above 20 per cent.

Despite the high interest rate, retiree funds remain at risk since the interest rate is below the inflation rate.

In addition, poor governance and high government indebtedness have affected retiree welfare in the country with many states across the country struggling to contend with high pension liabilities.

Globally, pension funding shortfall could reach $400 trillion by 2050, according to the 2017 GRI.

While Nigeria and the rest of the world are grappling with the shortfall, there is a rapid growth of seniors, a development that is forcing many countries to rethink their public pension systems.

In terms of material wellbeing, retiree welfare in Nigeria is poor considering that despite old-age dependency on the active population, the NBS put unemployment at 14.2 per cent while youth unemployment is 47.40 per cent, indicating that many retirees are struggling to survive on the meagre materials of the active population.

Compared to many African countries, Nigeria has low per capita income, a development that also affects retiree wellbeing. While the World Bank estimated Nigeria’s per capita income as $5,740 in 2016, the bank put that of Algeria, South Africa and Egypt at $14, 720, $12, 860 and $11, 110 respectively.

In terms of quality of life and health, Nigeria does not look good for retirement as there is no health insurance for retirees and life expectancy has been on the rise.