The 2008 financial crisis wiped billions of dollars off the value of pension schemes, but the long-term outlook for these funds is linked closely to their maturity. This is because a major financial crisis is much less harmful to a young pension system than a minor crisis is to a pension system already in the payout phase.
In the past decade, pension funds have learned to their cost that contributions are no longer a valid control instrument while in the future they will find out that structural net payouts have an extremely destabilising impact on pension dynamics. Even moderate shocks – inevitable over a longer period of time – are capable of transforming enormous pension savings pots into uncontrollable ‘Sinking Giants’.
That is unless vital changes of pension design and risk management are implemented. The impact any change in pension system dynamics will have on western economies is so huge, resolving its impact cannot be done by trial and error. To effectively anticipate the future, however, requires insight into the dynamics of the pension process and their consequences.
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