A Lifetime Income for $10,000: Pensions in Emerging Markets are Overdue for Innovation
Update: We recently released the pensions calculator — check it out here!
The Pension Problem
In nearly every country in the world, people are living longer lives. This creates opportunities and also poses challenges for governments, financial organizations, and individuals.
One of these challenges is retirement savings. There are too many poorly funded retirees and too few young workers saving. With the number of people aged 60 or over expected to increase from 962m in 2017 to 2.1b in 2050, this is a growing problem. In developed countries, retirees can rely on pension payments which they accumulated during their career, supplemented by government initiatives and pensions. They can also supplement their income with an annuity: a way for retirees to turn one lump sum into annual payments for the rest of the annuitant’s life.
In the developing world, pensions are rarely available to individuals, and political instability means government-run social security schemes are unreliable. AlliedCrowds aims to bring annuities to emerging markets, allowing people around the world to better plan for retirement, and to ensure they do not run out of money at an old age.
In emerging markets, the elderly have few options when it comes to saving for retirement. Many invest their money in real estate or local capital markets, both of which are highly risky and can lose value quickly.
Annuities in the west sometimes have a bad reputation. This is because the companies that offer annuities tend to add hidden fees, unclear payment structures, and complicated add-ons that obfuscate the product. At its core, however, annuities are a sensible and straightforward products that have been praised by Nobel prize-winning economists since the 1980s.
At AlliedCrowds, we are working on a solution in order to promote annuities in emerging markets as a way to strengthen financial ecosystems and allow people to retire securely.
To illustrate in a simplified example, imagine a 60 year old retiree in the UK purchases an annuity with $100,000 saved up over a lifetime; the life expectancy is 87. The annuity pays a fixed rate of 3.6% annually ($3,600), meaning an annuitant will reclaim $97,200 if he dies at the expected age of 87. He will receive a guaranteed payment of $3,600 regardless of what age the annuitant dies; so, if he or he dies at 95, the $100,000 would have returned $126,000. Because the payments are guaranteed, the retiree will not run out of money in the course of his or her lifetime. This security of a guaranteed income until death means retirees are able to plan for their retirement and invest capital productively rather than hoarding money. It also means they do not risk running out of money in old age, when they are least able to generate income.
The amount of money paid out to the annuitant depends on several factors, including: age at purchase of annuity, life expectancy, return on capital, cost of selling and managing the annuity, required expected profit to provider, and annual increases in payment to counteract inflation, if any. The recurring payment amount is agreed at the start of the contract and is paid at predetermined intervals until the annuitant dies.
The example above uses a relatively large lump sum — $100,000. In emerging markets, however, life expectancy tends to be lower; GDP per capita is also low. This makes the price of the annuity much cheaper — the magnitude can be as much as 10x. The example below makes this clear.
Consider, for instance, a 50 year-old man living in Mali. The additional life expectancy of a man in his early 50s is 22; GDP per capita is $829. This means he has an expected ~20 years of life remaining; taking GDP per capita into account, that’s approximately $16,580 to secure a pension. If we consider that the amount of money needed to secure the essentials (food, electricity, housing, etc.) for a retired person is likely to be lower than the average annual GDP per capita, we can estimate that the amount needed is more like 60% of the total sum — $9,948. This means, for under $10,000, a person can be guaranteed a lifetime income, no matter what. Thanks to mobile money, payments can be sent to even the most remote areas of a country.
The example above is simplified. In reality, there are additional factors to be considered, including a person’s health, geography (rural vs. urban), lifestyle needs, and much more. But it does serve to illustrate the sums involved — ten thousand dollars to guarantee a lifetime income. World Bank’s recent projects focusing on pensions and insurance run in the tens and hundreds of millions of dollars for individual countries.
The money to fund retirement exists; is the political will there? Development aid projects don’t tend to be the most efficient, meaning millions are being lost in transaction costs, admin, and (in worst cases) corruption. Our solution would have a clear and transparent structure — an initial payment is made, and regular payments are issued directly to the annuitant. For development organizations, the reputational and marketing benefits of funding an entire generation of pensioners can be enormous.
We are working on developing the idea further and would love to get your feedback on the concept; we are also looking for partners to make this a reality. For a more complete overview of the concept, check out our full proposal here. And if you’d like to get involved, reach out to me at firstname.lastname@example.org.
We will continue to develop this idea and keep our readers updated: make sure to subscribe to our newsletter here.