Speaking on Friday at the 24th Pensions and Savings Symposium at Gleneagles, Bailey said that given record low interest rates and rates of GDP growth in many parts of the world, and the expectation that global growth will likely continue to be low for some years still, the macroeconomic dimension to the pensions debate “is growing in significance”.
He said the keys to long-term planning for retirement income are: the long-run course of real interest rates, the assumed duration of retirement, and the target for income in retirement.
Acknowledging that all three of these assumptions are very big judgements, he said currently all three are surrounded by “substantial uncertainty”.
Complicating matters further is the level of debt with which the world is now burdened.
“We now live in a world where we can expect debt ratios to remain high over the medium term, which is more manageable at current real interest rates but would be much more problematic in a world whenever nominal and real rates rise,” he said, adding that in countries like the UK, this is much more of an issue for households than companies based on current debt ratios, which has a bearing particularly on home ownership.
Bailey pointed to these as just two of a number of issues that need to be considered when trying to gauge how best to solve the problem of ensuring people’s lifestyle in retirement.
Other issues, he said, included the balance of who, among the state, employers and individuals should carry the risk of failure, especially as the balance is currently shifting toward individuals; the potential for large intergenerational shifts in both income and wealth; and the impact of heightened macroeconomic uncertainty on the ability to write long-term financial contracts.
All of these are big issues, he said and ones that require a great deal more work if they are to be successfully resolved.