Factors such as population demographics, productivity and geopolitics impact economic growth and, by extension, the retirement outcomes of defined contribution pension plan members over longer-term time horizons, said Jon Knowles, senior investment analyst at Fidelity Canada Institutional, during a session at Benefits Canada‘s 2023 DC Plan Summit.
Ageing populations have traditionally been viewed as a dis-inflationary force due to lowered rates of consumption and production, he added, and the coronavirus pandemic revealed that reduced rates of labour supply and demand are both equally important factors.
“When we think about somebody that’s entering retirement, their output or what they’re able to produce effectively drops to zero. When we think about whether or not an ageing demographic is inflationary or deflationary, I’m a little bit more mixed on that front and perhaps that’s a non-consensus view, relative to the rest of the market.”
Between 2035 and 2040, Canada’s cohort of retirees is expected to plateau, offset by increasing immigration. While it isn’t a new trend, the pandemic accelerated immigration, said Knowles, noting an increasing number of new Canadians are in their prime working years, positively impacting economic growth.
“They’re really coming and changing the labour force demographic profile and, with enough years of this trend happening, we’re expecting to see that broader trend where the share of population above [age] 65 is expected to plateau to a degree. . . . If we extrapolate this trend over the next 20 years, we feel that population growth is going to be predominantly driven by new immigration to Canada, with [birth rates] adding only incrementally.”
Amid geopolitical conflict and civil unrest in both emerging and developed markets, there’s been a shift to a multi-polar world that will be naturally more unstable than the current world order, noted Knowles. And while he cautioned it isn’t the end of global trade, countries are thinking more thematically or strategically about their own interests, rather than just contributing to growth at all costs. He cited the global semiconductor shortage due to supply chain disruptions amid the pandemic, which has resulted in some nations considering the establishment of semiconductor supply chains that are closer to home.
“It’s perhaps a little bit of a stronger headwind to global growth and we’ll have some sort of inflationary repercussions associated with it, as nations think a little bit more strategically about their key trading partners, how much natural resources they’re exporting to which nations [and] where they’re manufacturing some of their core goods.”
Looking ahead to the next 20 years, Knowles projected some moderation in economic growth on a going-forward basis in an environment with declines in economic activity. And while many developed economies face headwinds from demographic challenges, he said their expected growth rates will be higher relative to their developed market peers and the global economy.
“When we talk about the economic complexity of these developed markets, there’s a degree of inertia that’s built into them — and they have the ability to turn out higher degrees of productive growth than some of their emerging market peers.”
Speaking from a target-date fund investing perspective, Knowles noted a longer time horizon and active management are the two key components to generating investment returns for DC plan members.
“[This longer time horizon] is that glide path you hear so many people talking about. It’s the strategic asset allocation decisions that go into a plan member’s portfolio over their entire lifetime. . . . There’s also . . . active management [and] that comes from the underlying security selectors — whether that be equities or fixed income — and then also active asset allocation decisions.”
He also noted investment returns are only one part of a successful retirement outcome. “You need to be able to marry that experience between investor behaviour with the investment return, or experience, over the long term.”
Read more coverage of the 2023 DC Plan Summit.