Low interest rates are here to stay and will require governments around the world to make fundamental reforms if they are to secure retirements for the long term, said Singapore’s top financial regulator on Monday.
“The current over-reliance on monetary policy to solve the problems arising from the global financial crisis is exerting a cost on long-term investors, particularly pension funds and insurance funds,” said Tharman Shanmugaratnam, chairman of the Monetary Authority of Singapore and the country’s deputy prime minister, at the IIS Global Insurance Forum in Singapore. “We have to accept that low long-term real interest rates are very likely here to stay for reasons that are much more structural than cyclical.”
The forces behind this pose a challenge for insurers on both the asset and liability sides of their balance sheets, said Shanmugaratnam in a 40-minute welcome address.
Underlying economic growth, he warned, is likely to be slower globally during the next 10 to 20 years and, at the same time, savings will remain high as societies age and people expect to live significantly longer in retirement, keeping a lid on interest rates even after the normalisation of monetary policy.
“It’s a phenomenon that could have been recognised much earlier,” he said, before praising countries such as Denmark for their foresight in linking retirement age to life expectancy. “We have to accept that it is important to allow people to work for longer than they used to, and it’s important to make it attractive for people to work for longer.”
However, people should also get a better deal from their retirement savings, argued Shanmugaratnam, as fragmentation and active management have both contributed to higher costs without delivering higher returns.
“If we can take one percentage point out of the fees and charges ordinary investors pay, and I think that is possible with structural changes, that makes a rather large difference to retirement savings,” he said. “Taken over a lifetime of work, that will mean at least a 25% improvement in retirement savings.”
Finally, the deputy prime minister complained that healthcare systems around the world are extremely inefficient and that subsidies had been dispensed too liberally, creating an unsustainable situation. Reforms in this area should be aimed at creating a fairer and more progressive system that can be sustained over the long term.
On a more optimistic note, he said there were still opportunities for insurers in Asia, including infrastructure as an asset class and new insurance solutions around natural catastrophes and cyber.