18 June 2017

Ireland, Dublin

Picture: Fergal Phillips

Julio Portalatin: pensions liability ‘not easily solved’

By Ian Guider

As appeared in the Sunday Business Post 18 June 2017

The world of work as we know it is changing. Towards the end of a chat with Julio Portalatin, he reels off a statistic he recently told his daughter who was wondering about college options for her own young child. What would be the best choice to study in college when she grew up?

Portalatin’s response was that for any child under the age of three right now, 75 per cent of the jobs of the future don’t exist today.

At the other end of the spectrum, he rattles off a statistic about the mounting liabilities of pension funds. Across the world, there is a gap of close to $400 trillion between what people have saved for their retirement and what their requirements in retirement will actually be. And it is a figure that is growing, as the rate of savings is not keeping pace with ageing populations.

As chief executive of Mercer, with 21,000 people spread around the world advising thousands of companies on recruitment, managing their staff benefits, advising on pension plans, investments and healthcare packages, Portalatin knows very well about the meaning of those statistics. They present plenty of opportunities to provide solutions to his clients.

He is in Dublin to visit the company’s office in the city and take part in an event Mercer held during the week to promote diversity in the workplace, something which he has spearheaded since he became chief executive.

But to the world of pensions first. We face a looming retirement crisis, one which some believe is a far greater threat than the financial crisis we’ve just come through. Populations in the west are living longer and, thanks to progress in medicines and treatments, we are living much more active lives in retirement. That has created a crisis in pension funds as most workers simply aren’t saving enough to guarantee them a decent quality of life.

“How do you work through the pensions liability risk of companies, and how do you work through a more sustainable model to mend the gap about what is going to be needed at the time of retirement and what is currently projected to being available at time of retirement? It’s not easily solvable because it is a challenge that has been gaining momentum over years of not solving it. There is no magic pill that solves that problem that has been created over decades,” he says. “It is going to be quite a crisis if we don’t deal with it.”

The solutions cannot be imposed by just one side. It will not be done by workers simply contributing more, or employers or for governments stepping in. It will mean hard choices.

One of those is so-called opt-out, or auto-enrolment, schemes, where people are mandatorily making contributions to a savings plan and it is difficult for them to get out of it. They are not popular - after all, you are reducing someone’s income now to make the contributions – but they have been successful in countries where these schemes have been rolled out.

“For those that adopt an opt-out approach, 90 per cent of the employees stay in and 80 per cent of those stay in at highest contribution level. So to discount that as not being part of the solution is quite ill-advisable. But it is only part of the solution.”

And this is the tricky bit. Opt-out, or auto-enrolment, does not take care of all the years people have not been saving and the more fundamental issue about funding income in retirement.

“Pension systems were established decades ago when the assumption was that much of the population would only access that pension system for a given number of years. Many of those pension systems have not changed. And the reality is there is one big impetus of change and that is the average person will access those benefits for the amount of years they originally would. Logically that is not sustainable.

“If the initial programme was designed to fund ten years of after-retirement life and now the average after-retirement life is 20 or 30 years, you have to do a lot of things to make that a sound financial outcome. One of those is logically to add more funds. Or another logical change is to change the initiation year of when you start accessing those funds. But that means you increase the mandatory retirement age.

“By the way,” he adds, jokingly, “most of those solutions are popular!”

What about future generations? In a world where workers move jobs much more frequently, where some people move from full-time employment to the so-called gig economy and back, traditional savings schemes surely cannot cope with that?

“Most of the millennial generation would like to be in defined contribution schemes because they would like to be in control of their funds. What becomes very important for organisations is giving them tools that trigger their investment decisions and they can pair that to their risk.

“For example, we have a financial wellness platform that allows individuals who have high student loans to refinance those loans and take the savings and apply them to their retirement plans. So it’s not about contributing more, it’s about being smarter.”

Do the changes confounding many organisations from technology mean that its own business model is under pressure? That technology and the growth of automation in the investment world means its consultancy services aren’t needed?

So far it hasn’t, he says. The use of algorithms for investment decisions, and of so-called robo-advisers for financial advice, he says, is more a complementary tool when it comes to the needs of the world of fund management.

As one of the world’s biggest human resource advisers, Mercer under Portalatin has placed a huge emphasis on convincing his clients of the need to have a greater diversity among their workforce. About half of this executive team are women and the company is keen to point out that diversity doesn’t just mean hiring based on gender and ethnicity for the sake of it.

“Diversity should never be confused with sacrificing the best person. This is not about fitting people into jobs that they are not in the best position to fulfill. That is a sure way of destroying the benefit of diversity. Just like any other business imperative strategy, in order for it to be sustainable it needs to be seen as being an investment that gives a good return.

“Imagine if I went to many actuaries in my defined benefit [division] and I asked them to determine a growth innovation strategy for the DB business even though it is on the decline in most parts of the world and the way I did that was I comprised a group of ten actuaries who have been working for the DB business for 30 years.

“I would subscribe to you that, as smart as they are and incredibly successful as they have been, they are not as likely to be innovative about the future as if I had comprised that team as three to four of those 30-year actuaries and complemented that with data scientists, some technologists and some people from the talent business, and I asked them the same question. The outcomes from the second group, I would suggest, would be different. That is what diversity is.”

As a company which operates on a global level, exposed to all major economies and their political and economic circumstances, is he worried?

“We are living in a world that is uncertain, for sure. When we did our plans for 2017 we made assumptions like everyone else, and some aspects of those assumptions have changed. Some of it good. The outlook for global growth is better now. The outlook for timing of decisions to be made that relate to our business are a little bit slower. That is related to regulatory uncertainty, policy uncertainty, referendum outcomes and political outcomes that have changed priorities.

“But I will say that the outcomes for the moment at least suggest that the business agenda seems to be one that, if it is accomplished, it will not leave us in a terrible place. Living in a world that is too uncertain for too long is not good.”