Real Impact Of Global Financial Crisis On Baby Boomers

The Real Impact of the Global
Financial Crisis on Baby Boomers
Baby boomers are retiring a whole lot less wealthy

T
he term “wealth destruction” has become the catchphrase for
the global financial crisis, with more than seven million references
on Google. However, the Oxford English Dictionary’s definition of
destruction—the action or process of causing so much damage to some-
thing that it no longer exists or cannot be repaired—suggests a more
accurate term is required. While it is difficult to quantify, the data indicate
that the majority of losses are sitting on paper and reside with large pools
of institutional money and extremely wealthy individuals rather than
across the general population. To what extent has there been material
individual “wealth destruction” as a direct result of the financial crisis?
Among which individuals and in what ways? What will have a larger
longer-term impact — steep declines in real estate and equity values,
or the knock-on effects of unemployment, low GDP growth, and the elim-
ination of company benefits?

To answer these and other questions, we conducted • Australia’s compulsory pension savings regula-
analysis across a sample of countries that have tion (superannuation) provides a valuable bench-
some similarities and also very distinct differences mark for countries with low savings rates and
in wealth distribution, savings rates, pension aging populations.
regimes, borrowing patterns and use of real estate: • China, as an emerging market with no private
• The Anglo-Saxon countries of the United States pension system and the world’s largest propor-
and the United Kingdom are at the epicenter of tion of citizens over age 60, faces its own set of
the crisis with equity and real estate bubbles, complex challenges.
failed banks, and mature private pension indus- The global financial crisis is primarily an
tries managing large pools of assets. Anglo-Saxon phenomenon that will have a last-
• Italy and Germany, representing the continen- ing impact in the United States and the United
tal European model, have higher savings rates, Kingdom.
lower incidences of borrowing and lower use of The starting point for our analysis is a propri-
equities. Retirees remain highly dependent on etary methodology for segmenting and sizing
the state for funding, as private pension systems populations by their age, liquid wealth and alloca-
are still evolving. tion of assets across cash, securities and pensions.

THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney 1

This methodology, supplemented with Lorenz protection policies
curve analysis of the evenness of distribution of • Employees (current and former) of banks and
wealth across each country’s population, enables multinationals who have lost millions of dollars
us to identify where pools of assets are concen- in anticipated wealth as stock options expired
trated, movement of households among wealth • Thousands on the cusp of retirement who are
bands, funds flows and relative gains and losses in sitting on pension portfolio losses upward of 20
portfolios at a macro level. In this phase, we com- percent in the United States and the United
pleted the segmentation for the United States, the Kingdom
United Kingdom and Australia.
We have focused on the
“baby boomers”—those aged 45
to 64 — who tend to control the The Anglo-Saxon countries of
largest asset pools in many coun-
tries. Tens of millions of baby the United States and the United
boomers (and their money) will
be retiring over the next 20
Kingdom are at the epicentre of
years. That this most important
the crisis with equity and real
demographic trend has collided
with the worst economic down- estate bubbles, failed banks, and
turn since the Great Depression
has led to much speculation on mature private pension industries
the future of mandatory retire-
ment ages, the popularity of managing large pools of assets.
equities as an asset class and
potential alternatives, financial
advice, and the provision of
public and private pensions. • Those whose own businesses have folded or
The epicenter of the global financial crisis whose homes have been repossessed in the wake
has produced distinct “micro-segments” within of the financial crisis
each country that are challenging to identify via These micro-segments have experienced wealth
macro demographic analysis but whose plights destruction in the true sense. While many people
are well known and documented. The following have suffered loss of income through unemploy-
are included in these micro-segments: ment, short-time working or lower demand for
• The 6,000 investors who put a total of $320 their labor, there is little evidence of wide-
million into structured products backed by spread destruction of wealth — so that it no longer
Lehman bonds exists or cannot be repaired — among the general
• Victims of the Bernard Madoff and Allen population.
Stanford schemes Each of these micro-segments poses specific
• Individuals with deposits with now-defunct challenges both for regulators and the financial
Icelandic banks beyond the coverage of investor services sector. However, on a macro level, it is

2 THE REAL IMPACT OF THE GLOBAL FINANCIAL CRISIS ON BABY BOOMERS | A.T. Kearney

Figure 1
Lorenz curve model of global wealth distribution, 20081

Lower Mass Emerging Hyper High Ultra-high
mass Affluent
market affluent affluent net worth net worth
market

100%
AUSTRALIA
Total wealth: $1.4 trillion
Total households: 8.2 million
Gini coefficient*: 35
80%
GERMANY
% of liquid wealth

60% on Gini coefficient*: 36
uti
rib
ist
ld UNITED STATES
ua
Eq Total wealth: $23.2 trillion
Total households: 116 million
40%

UNITED KINGDOM
20%

0%
0% 20% 40% 60% 80% 100%
% of households
1
As of December 31, 2008; all amounts are US$
*A Gini coefficient is defined as the area between the Lorenz curve and the line of equal distribution divided by the area under the line
of equal distribution. In this chart, the Gini coefficient related to the Lorenz curves depicted, Australia has the lowest number, followed
by Germany, the United States and the United Kingdom. (For clarity, they are referenced as income Ginis and not related to the chart) Source: A.T. Kearney analysis

likely that the knock-on effects of the global finan- shocks, while wealth creation from income is a
cial crisis — unemployment, closure of defined longer and slower process due to many exogenous
benefit pension funds, higher taxes and caps on factors, as discussed below.
salaries and bonuses—will have a far more mate- Our Lorenz curve analysis enables us to see
rial and lasting impact on a larger percentage of relative degrees of wealth or capital concentration
the population than the crash itself. among the countries studied (see figure 1). Why is
this important? Understanding how much capital
Stark Differences in Wealth Distribution is in the hands of a few people, together with
There are two sources of wealth: capital, or pre- other factors such as the proportion of savings
existing assets, and disposable income, which is held in equities, enables us to identify how wide
put into savings and becomes capital. The imme- and how deep the impact of the market decline
diate impact of the crisis has been on capital; the has been across age and wealth bands. There are
knock-on effects will be on disposable income. distinct differences among countries:1
Substantive wealth creation is a function of large • Australia has the most even distribution, driven
asset bases (capital) that can withstand market by a combination of compulsory pension sav-
1
Similar analyses for Germany, Italy, China, and other countries will follow in a subsequent phase of work.


ings and a lower cost of living relative to other between a Lorenz Curve and the line of equal dis-
countries. tribution, measures the equality of that distribu-
• The United Kingdom’s curve looks similar to tion; 100 is perfectly equal, zero is perfectly
what we would expect to find in an emerging unequal. The Gini coefficients quoted here,
market, with 1 percent of the population compiled by the United Nations, measure income
owning 70 percent of the assets. Ninety percent distribution. At 28, Italy has the most even distri-
of the U.K. population has an average £7,000 in bution of income here; China, at 47, has the most
liquid assets. They lost very little money in the unequal, followed by the United States at 41.
crisis because they did not have much to begin Australia, Germany and the United Kingdom all
with. The immediate impact has largely been have similar scores (35, 36), which is perhaps sur-
contained to high-net-worth individuals with prising given the significant differences in wealth
very large capital bases who have seen their concentration among the three countries. This
portfolios recover significantly in the recent points to a weak correlation between income and
market rally. wealth creation.
• The United States’ more even distribution Germans and Italians simply save more money
reflects a much larger base of affluent individuals. and keep a higher proportion of it in cash (see
The Gini coefficient, a function of the delta figure 2), a result of the impact of World War II

Figure 2
Sharp increase in savings rates forecast for 2009

14 Italy United States
Germany Australia 12.5
12 United Kingdom
11.3 11.4 11.2
10.6 10.8
10.5 10.3 10.4 10.5
10.2
9.9 9.9
10 9.5 9.4 10.2 9.3
9.2 9.0
8.4
7.9
8
(% of disposable income)
Household savings

6.0
6 5.4
5.2 5.1 5.1
4.7 4.8
4.0 4.2 5.1
4

2.4 2.4 2.6
2.3 2.1 2.1 2.2
2.0 2.0
2 1.4 2.1
1.9 1.8 1.8 1.8
0.4 0.6
0.7
0

–0.8
–2
–2.3 –2.5
–3.1
–4
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
estimated
Note: China estimated 25% to 40% over period
Sources: OECD, ONS, IMF, China Daily; A.T. Kearney analysis


and hyper-inflation. The relatively poor savings mental differences in asset allocation and the
rates in the Anglo-Saxon countries—less than half structure and maturity of the private pension sys-
those of their continental European counter- tems (see figure 4 on page 6). The strong preference
parts — are well documented, although savings of the Chinese for cash, which accounts for an
rates more than doubled in the United Kingdom average 85 percent of their liquid assets, enabled
and the United States from 2007 to
2008. Australia’s recent increase demon-
strates how effective their compulsory
pensions savings scheme has been—the
The immediate impact of the
impact on savings rates and wealth
distribution in a five-year time period has
crisis has been on capital;
been dramatic. U.K. and U.S. take note. the knock-on effects will be
Different Fates on disposable income.
While stock indices lost almost half their
value over the period 2007-2008, declines
in individual liquid assets were a fraction
of market losses (see figure 3). Index gains and losses them to increase their wealth during the financial
are not a suitable proxy for estimating losses by crisis, although this is likely driven by new funds
individual investors, which is why many estimates flows from income rather than returns on existing
of wealth destruction are greatly overstated. assets. They also made money in securities. In
Investors in the countries analysed fared very Germany, where investments in mutual funds and
differently in the market downturn due to funda- direct equities have declined around 25 percent

Figure 3
Decline in liquid assets by country compared to market losses1

United Kingdom United States Australia Germany Italy China
10%

–4%
–9% –11%
–13%
–18%

–43%
–50% –52%
–53%
Wealth reduction Stock market reduction –62% –63%

2007-2008 except Australia, which is 2007-2009; peak to trough (August 2007- February 2009)
1

Source: A.T. Kearney analysis


Figure 4
Overall market losses compared to average portfolio losses

US$ billions 23.25

Cash 3.85
19.11

3.85

Securities1 9.76

7.32 6.07 5.83
5.13
4.71 4.76
2.26 4.50
3.75 2.42 1.35
3.25 1.44
1.51
1.60 3.99
DC pensions2 11.39 2.01 1.60
3.81
9.69 1.36 3.79
1.04 1.20 1.08 3.32
0.27 0.33
1.21 0.29 0.19 1.51 1.54
0.94 0.73 0.65 0.69 0.72
Unsecured –1.75 –1.75 –0.34 –0.34 –0.09 –0.09 –0.28 –0.28
debt
2007 2008 2007 2008 2007 2008 2007 2008 2007 2008 2007 2008
United States United Kingdom Australia Germany China Italy
Stock market
decline (peak –53% –43% –50% –52% –62% –62%
to trough)
1
Defined as cash, securities and DC (defined contribution) pensions minus unsecured personal debt
2
All figures are quoted in US$ at constant exchange rates, defined as the prevailing rate at December 31, 2008 Source: A.T. Kearney analysis

since 2005, the well documented preference for the period of highest capital accumulation, due
cash and more conservative investments also cre- both to capital gains on existing investments and
ated a strong buffer to the downturn. to an increase in disposable income available for
The 18 percent loss in the United States, the investment. They have entered their peak earnings
highest of any country analysed, is driven by years and tend to have lower expenses, having
a high proportion of assets invested in equities. paid off mortgages and seen their children leave
The United States and United Kingdom, which home. Because they have the largest pools of
both have well established defined contribution assets, it isn’t surprising that baby boomers also
(DC) pension sectors, experienced 15 to 20 per- lost the most during the credit crunch. In the
cent drops in pension assets, triggering signifi- United States, 63 percent of the total $4.1 trillion
cant concern about the fate of baby boomers lost from 2007 to 2008 belonged to boomers,
approaching retirement age and their ability to with 38 percent ($1.6 trillion) owned by those 55
recoup their losses in time. to 64 years of age. British boomers account for 54
Baby boomers typically make up 30 to 35 percent of UK losses, the 55- to 64-year-olds 36
percent of the population in these countries, but percent of the total. Figures for Australia are lower,
hold 50 percent or more of the total assets. Older with baby boomers experiencing around 40 per-
boomers, those in the 55 to 64 age bracket, are in cent of the decline.


Detailed segmentation of markets in the There are two primary drivers of this smaller loss:
United States, United Kingdom and Australia the dominance of multi-manager life stage funds,
reveals fundamental differences in asset allocation and a high incidence of pre-retirees taking financial
between cash, securities and pensions by age advice. For retail investors, about 30 percent of the
band, as well as gains and losses by
age and wealth band. Figure 8
shows the portfolio losses for all
three countries. Because baby boomers have the
Australia. An important
feature of the Australian market largest pools of assets, it isn’t
is its compulsory superannuation
scheme (a form of defined contri- surprising that they also lost the
bution pension), which has been
highly effective in recent years most during the credit crunch.
at increasing the savings rate and
indeed at balancing out the dis-
tribution of wealth (see sidebar:
Australia Bets on Superannuation and Wins). market, the products sold through financial adviser
Securities portfolios consistently lost about 35 networks are almost all unitized multi-manager
percent of their value, while superannuation plans managed funds; they have typical asset allocations
lost about 11 percent—less than half of that suf- of 20 percent cash, 25 percent fixed interest,
fered by some American and British investors. 30 percent Australian equities, 15 percent global

Australia Bets on Superannuation and Wins
Concerned about the demographic itants are the beneficiaries of one agement industry has emerged to
impact of an aging population and of the world’s largest pools of desig- provide superannuation fund man-
the inevitable strain on public cof- nated retirement assets: A$1 trillion, agement and advisory services to
fers, in 1986, the Australian govern- equivalent to 119 percent of GDP, employers and employees. Currently
ment and the country’s largest trade which is expected to double by 2015. there are more than 500 different
union agreed that employers would Some Australians are retiring with superannuation funds active in the
invest 3 percent of wages in a retire- more disposable income than they market and a network of approxi-
ment savings account in their name, had during their working lives. mately 13,000 trained, licensed and
a number that eventually rose to The basis of the plan—choice, regulated financial advisers, which
9 percent. By 2005, 90 percent of mobility and the option of self- has become a formidable force in
wage earners were participating in management—have all stimulated the Australian economy.
the country’s Superannuation Plan. competition and fostered industry
Today, Australia’s 22 million inhab- innovations. A sizable wealth man-


Figure 5
Australia: Total liquid wealth by age group and year

AUD$
Age 15 to 44 Age 45 to 54 Age 55 to 64 Age 65+
(billions)
Baby boomers: 36% of households, 54% of total wealth
464 476

358 74 409 86 426
423
314 394
Cash1 77 91 105
87 66
147
94
Equities 63 57 43 179
41
100
309 65
Super- 262 320
annuation 283 274
232
153
135

Trusts 31 15 10 30
20 19 28 18
–33 –32 –4 –4
Unsecured –74 –73 –15 –15
debt

2007 2008 2007 2008 2007 2008 2007 2008
Households 3.6 1.67 1.31 1.65
(millions)
Cash is generated from existing assets including land and buildings, labor and other productive assets.
1

In addition, it can be generated through other contractual obligations, including annuities and defined benefit pension payouts. Source: A.T. Kearney analysis

equities and 10 percent property or infrastructure United Kingdom. The largest net declines in
(there is some debate about whether listed prop- assets, about 15 percent, were among the younger
erty behaves similar to equities or property). Asset or wealthier segments of the market (see figure 6).
allocations are automatically rebalanced toward Compared to Australia and the United States, losses
more secure investments as the investor nears in securities investments were considerably lower,
retirement and needs to protect principal. primarily because 44 percent of these investments
The flight to cash by Australian investors in were in actuarially based, illiquid life-assurance
2007-2008 was dramatic (see figure 5). A large per- products such as investment bonds and with-profits
centage of the 25 percent drop in securities was funds, which have a greater proportion of assets
due to positions being liquidated and parked in invested in corporate and government bonds. Only
deposits. As a result, the majority of Australians 12 percent of assets are held in direct mutual fund
over age 45 and with assets less than $180,000 investments, in stark contrast to the United States.
(A$200,000) actually made money in 2008, with Although funds flows into cash are nominal com-
the highest losses concentrated in the youngest pared with Australia, Germany and Italy, invest-
and wealthiest segments—those who are best able ments into cash ISAs, a form of tax-deferred savings
to take paper losses and ride the markets back up. account, increased 1300 percent 2007-2008.


Figure 6
United Kingdom: Total liquid wealth by age group and year

£ (billions)
918
868
794
122
328 751
232 82

357 240
458
397 311 272
305
DC 265 209
pensions 178
157
152
Securities1 155 131 447
99 409
79 323 334
Cash2
149 137 154 156
Unsecured –60 –44 –43
debt –100 –102 –68 –20 –18

2007 2008 2007 2008 2007 2008 2007 2008
Households 9.9 10.1 4.4 4.5 4.2 4.2 6.5 6.6
(millions)
The net including capital losses, new capital flows and intra-asset capital flows.
1

Cash is generated from existing assets including land and buildings, labor and other productive assets. In addition,
2
it can be generated through other contractual obligations, including annuities and defined benefit pension payouts.

The largest declines in assets, 30 percent or business flows down 25 to 40 percent depending
more, were in defined-contribution pension plans on the type of pension. Few British pension inves-
held by those aged 55 or older—those at or near- tors, except the very wealthy, are offered financial
ing retirement age. Almost 90 percent of all indi- advice in managing their pension. This is a major
viduals with a DC pension choose the default gap — and an opportunity — for the industry.
fund (made up entirely of equities until approxi- Managed funds, similar to those offered in
mately 10 years before retirement, when a propor- Australia, could provide British investors with
tion of assets is shifted into bonds). There is a a valuable alternative to default funds.
perception in the U.K. life and pensions industry United States. There are three striking obser-
that investors don’t know enough or care enough vations in the United States: the high concentra-
to take an interest in actively choosing their pen- tion of money held in securities within all age
sion funds or managing their money; there is groups and consistent losses among baby boomers
a significant amount of market data to support in the affluent and higher wealth bands; a decline
this perception. The financial crisis hasn’t helped. in cash positions; and an increase in unsecured
Contributions to personal pensions are one debt (see figure 7 on page 10). The proportion of
of the casualties of the financial crisis, with new equity ownership is far higher than in any other


Figure 7
United States: Total liquid assets by age group and year

US$
(billions)
8,113
7,455

6,733
5,887 3,143
5,622
3,865
2,816
4,559
2,944 3,033

2,449
2,342
3,825
1,777
DC 2,816
pensions 1,529 2,899
1,393 2,148 2,200
1,625
Securities 1
1,004 721
941 922 1,006 991 1,316 1,298
Cash2 621 576
–410 –437 –316 –337
Unsecured –813 –913 –171 –196
debt
2007 2008 2007 2008 2007 2008 2007 2008
Households 47.8 48.3 24.1 24.4 19.7 19.9 24.4 24.6
(millions)
1
The net including capital losses, new capital flows and intra-asset capital flows.
2
Cash is generated from existing assets including land and buildings, labor and other productive assets. In addition, Source: A.T. Kearney analysis
it can be generated through other contractual obligations, including annuities and defined benefit pension payouts.
3
Assumes annual household growth rate of 0.5%

major economy and is consistent across age bands. Although life-cycle funds are available for 401(k)s,
Strong stock market performance over many years few Americans invest in them. As of year-end
has resulted in more equity exposure than is pru- 2007, the typical 50-year-old had 48 percent of
dent, particularly for retirees, who hold a smaller his 401(k) assets in equity funds and another 11
proportion of their assets in cash than their peers percent in company stock. The typical 60-year-
in other countries. The United States is the only old had 40 percent in equity funds and 9 percent
country we analysed that actually showed a net in company stock. (The impact of high concen-
reduction in cash wealth among those over 65, trations of company stock is explored in the next
compared with an average 9 percent increase in section). Like their British counterparts, few
the United Kingdom. One American we inter- Americans, with the exception of the hyper-affluent
viewed summarized the pro-equities cultural men- and high-net-worth individuals, use a financial
tality well: “My father, who is 85, had a lot of advisor to help them manage their 401(k)s. Few
money in stock. I know this was risky, but the company plans make this service available to their
markets had been so good for so long, that you felt employees. It is a massive gap in a massive market
foolish not keeping money in stocks. You felt if that poses a significant opportunity for advisors
you weren’t you would be missing out.” and for 401(k) plan providers.


Figure 8
Portfolio losses are concentrated in younger and wealthier segments1

United Kingdom United States United Kingdom
Age 18-44 45-54 55-64 65+ Age 18-44 45-54 55-64 65+ Age 18-44 45-54 55-64 65+
0 to 0 to 0 to
49,999 –9% –12% –9% –2% 49,999 9% 61% 8% 2% 49,999 11% 10% 8% 0%

Portfolio value (AUD$)
50,000 to 50,000 to 50,000 to
Portfolio value (GB£)

Portfolio value (US$)

99,999 –12% –11% –8% –4% 99,999 –6% –10% –11% –5% 99,999 –2% 11% 9% 4%

100,000 to 100,000 to 100,000 to
199,999 –16% –13% –9% –6% 199,999 –12% –15% –19% –9% 199,999 –15% 7% 9% 5%

200,000 to 200,000 to 200,000 to
499,999 –15% –14% –11% –8% 499,999 –13% –19% –18% –11% 499,999 –12% –12% –6% –2%

500,000 to 500,000 to 500,000 to
999,999 –16% –15% –13% –9% 999,999 –16% –20% –21% –15% 999,999 –12% –14% –13% 1%

1 million + –15% –13% –12% –8% 1 million + –17% –17% –20% –19% 1 million + –24% –21% –19% –19%

Gains: Losses: <4.99% <5.00 to 9.99% <10.00% to 11.99% >12.00%

Losses December 2007- December 2008 measured in local currency
1


Wealth Concentration=Loss Concentration holds with liquid assets of £500,000-£1 million —
So far, we have talked about some large declines in accounted for 23 percent of losses, with the
asset values, over half of which are held by baby balance of £30 billion or just under 7 percent
boomers on the cusp of retirement and more than evenly distributed among the affluent and mass
one-third by retirees in the United States and the market. In Australia, the affluent and the rela-
United Kingdom. Do we need to prepare our- tively small hyper-affluent segment took the bal-
selves for a massive increase in demand for govern- ance of losses, 15 percent or A$33 billion. In the
ment pensions? Perhaps, but not because of losses United States, which has large middle and affluent
in portfolio values incurred from 2007 to 2008. classes relative to other countries, losses are evi-
Impact outside high-net-worth households. dent in every wealth segment: the mass and mass-
In the United Kingdom, the United States and affluent (6 to 7 percent), the affluent (14 percent)
Australia, high-net-worth and ultra-high-net- and the hyper-affluent, which accounted for 18
worth households—those with the largest capital percent with close to $1 trillion in total losses.
bases and therefore best positioned to ride out These small percentages make for some very sig-
the market turmoil — took 70 to 75 percent of nificant absolute losses. Not surprisingly, because
the losses. However, there were fairly significant they hold the greatest concentration of assets,
differences in how the remaining losses were dis- baby boomers aged 55 to 64 account for the vast
tributed among the other wealth bands in these majority of losses (70 percent or more) in each
countries (see figure 9 on page 12). wealth band.
In the United Kingdom, where 90 percent Overall, these losses have not been sufficient
of the wealth is controlled by the top 2 percent to effect any dramatic proportional shifts in
of households, the hyper-affluent—those house- wealth distribution in the United States or the


Figure 9
Relative losses among wealth bands (2007 versus 2008)

United Kingdom United States Australia
Top 1% hold 70% of liquid wealth Top 1% hold 48% of liquid wealth Top 1% hold 34% of liquid wealth
11 1
£ (billions)

US$ (billions)

AUD$ (billions)
2 4 3
3 4
4
9 16
High- and ultra-
523 high net worth
658
8

9 11,883 21
14,855
1,760 1,530
168 Hyper affluent
187

21
89
411 Affluent
444
66 2,481
190 3,101
270
Emerging
180 37 253 affluent
190 2,766 251
3,293
90
100
70 70 130 Mass market
1,420 1,235 128
170 160 58 Lower
776 753 53
mass market1
Percentage 2007 2008 Percentage 2007 2008 Percentage 2007 2008
of house- liquid liquid of house- liquid liquid of house- liquid liquid
holds wealth wealth holds wealth wealth holds wealth wealth

Liquid wealth 2.5 2.2 Liquid wealth 23.5 19.0 Liquid wealth 2.6 2.2
trillion trillion trillion trillion trillion trillion
Note: All figures are in domestic currency and rounded.
1
Lower mass market, on average, are net debtors. Source: A.T. Kearney analysis

United Kingdom, although our analysis indicates a conservative scenario that references historic
that approximately 220,000 U.K. households stock market performance post corrections.
actually “traded down” in wealth band over the
past twelve months. Australia is a different story: Citigroup: The Impact of Equity
high-net-worth individuals own 4 percent less of Compensation on Wealth Destruction
the total pool of wealth than they did a year ago, The use of company stock as a core element of
most likely because their average liquid assets sit compensation has accelerated rapidly since the
close to the A$1 million lower boundary of the 1980s, coinciding with a sustained bull market
wealth band. and the baby boomer generation entering its peak
It is highly likely, however, that many inves- earnings years. The financial services sector was
tors recouped a significant proportion of their one of the leading proponents of equity compen-
losses in the recent market upswing. Our models sation, a practice far more common in the United
indicate a time horizon of three to four years to States and among large multinationals than in
recoup all losses incurred 2007-2008, based on Europe. Options were the ultimate form of pas-


Figure 10
Findings in Citigroup survey

Composition of losses from Citi Retirees lost an average Average net losses to net worth
stock collapse by wealth band of $843,000 ranged from 10% to 45%+
$620,000 average loss Total losses (US$ thousands) Percentage of respondents
$280,000 $530,000 $930,000 $800,000 $840,000 $843
9% 5% 6% 10%
7% 17%
11%
12% $698
2% 3%
2% 25% $632
2% 2%

1%
$456

87%
82%
78% 78% $297
64%

<$0.50 $0.50 $1.00 $2.50 >$5.00 Retired 0 to 5 6 to 10 11 to 15 >15 <45 45 to 54 55 to64 65 to 75 >75
to $0.99 to $2.49 to $5.00
Years until retirement Age
US$ millions
Capital losses Dividend income >45% 26% to 45%
loss (1 year)
10% to 25% <10%
Estimated loss Loss on expired
on live options options

Notes: Total number of respondents = 78; average losses since June 2007 (assuming negligible trading volume within period); Sources: Citigroup alumni survey;
expired options assumed to have strike price of three years prior value with no discount; dividend income losses annual A.T. Kearney analysis

sive savings, providing baby boomers with a capi- Chuck Prince claimed that Citigroup was “still
tal base that offered the potential for significant dancing,” the stock price was at $51.64. It went
wealth creation with very little effort. Then the into free-fall soon after and is currently trading
market crashed, taking down such prominent at $4.04. While 30 percent of Citigroup alumni
institutions as Lehman Brothers, Bear Sterns, responding to our survey lost nothing (“I sold
Merrill Lynch, RBS and Citigroup. How much everything in 2006. It is the best decision I ever
wealth was destroyed for employees of these made”), the remainder suffered an average
banks who had substantial stock positions, either $620,000 hit to their net worth—roughly 25 to
via outright ownership or options? We tapped 45 percent of their portfolio value—the majority
Citigroup’s alumni network to ask them about of which was via outright share ownership (see
what the impact has been on their net worth.2 figure 10). “I have lost about $400,000,” one told
In July 2007, the month in which CEO us. “The impact is material. I was hoping to take
2
Note: Among study respondents, 85 percent are baby boomers primarily 55 to 65 years of age. More than half are high-net-worth individuals with more than
$1 million in liquid assets. The rest are considered affluent, with assets ranging from $100,000 to $1 million. Most are Americans; 65 percent are vice presidents,
20 percent senior and executive vice presidents. Roughly 25 percent are now unemployed, with several reporting that they are victims of Citigroup’s layoffs after
many years of service and express concern about finding work at their age. The average tenure is close to 20 years. Additionally, 89 percent of respondents over the
age of 45 are members of the Citigroup final salary pension plan, which they anticipate will contribute 20 to 30 percent to their monthly retirement incomes.


my capital base in Citi stock and diversify it so that less, while another one-third have an exercise date
I could grow further. Now I can’t.” Those within for the fourth quarter of this year. “I have lost
five years of retirement have serious decisions to $250,000 to $500,000. If they had given me my
make about when they will stop working. “I would bonus in cash rather than stock, I would have
have been able to retire comfortably in five years. been able to pay off my mortgage.”
Now I may have to work at least another five.” While the majority of these losses are still on
On a percentage basis, the affluent and paper, few are optimistic about the stock returning
the lower end of the high-net-worth group lost to pre-crash levels any time soon. Most are recali-
the largest proportions of their portfolios. Many brating their expectations for their retirement, as
respondents admitted falling foul of
a fundamental tenet of sound invest-
ing: they put too many eggs in one
basket. The Citigroup dividend is “The real crisis for me is the
one rational justification for this.
Retired respondents estimate an dividend, which is a major por-
annual dividend income loss of close
to $15,000, those aged 55 to 65
tion of my retirement income.
losing approximately $10,000. “The
I am going to have to sell part
portfolio loss is bad, but I could
have ridden that out. The real crisis of my portfolio at a loss and
for me is the dividend, which is
a major portion of my retirement switch to other equities that
income. I am going to have to sell
part of my portfolio at a loss and have a steady dividend income
switch to other equities that have
a steady dividend income stream.” stream.”
Citigroup’s policy since 2003 of — Former Citigroup
mandating that 25 percent of all employee
bonuses be put in restricted com-
pany stock—and then strongly dis-
couraging trading when they vested—was also they will be considerably less wealthy than they
one of the drivers of excessive portfolio concentra- expected. “I thought I would be really well off and
tion in Citi stock. The false promise of anticipated not have to worry about anything. Now I think I
wealth from options has had a significant impact. will just be comfortable — I hope.”
“I am at least 10 years behind where I thought I
would be,” said one alumnus. Our small sample The Findings
of respondents had more than 300,000 options Our analysis has enabled us to construct a fact
between them with an average strike price of base for dissecting the real impact of the global
$42—ten times the current stock price. One- financial crisis by age and wealth band. There is
third of these options have already expired worth- minimal evidence of widespread wealth destruc-


tion, with the majority of losses being on paper pulsory superannuation plan has had a dramatic
and concentrated among high-net-worth individ- impact on evening out wealth distribution and
uals and pension funds. The global financial crisis driving up savings rates from a very low base in
is primarily a U.S. and U.K. issue. The following a short period of time. The use of financial
are the major observations from our study: advice and managed funds protected Australian
• True wealth destruction is contained to cer- investors in the downturn. The United States
tain groups. Wealth destruction has been lim- and the United Kingdom have a lot to learn
ited to specific and unfortunate segments of the from this.
population, such as employees of businesses, • The role of company stock in employee com-
including Citigroup, who have seen 40 percent pensation leads to dangerous portfolio over-
or more of their wealth go the route of the share concentration in one equity. To what extent do
price, individuals who have lost their homes, companies need to take on greater fiduciary
and victims of the Madoff Ponzi scheme. responsibility to their employees? Given the
• Most losses are concentrated among the sustained bull market, many, particularly in the
wealthy. About 70 percent of losses — the financial services sector, thought their stock
majority of which are on paper and being would only go up. Unfortunately this hasn’t
recouped—are concentrated among the wealthy, proven to be the case for employees of Citi-
who, with their large capital bases, are the best group, RBS, Lehman Brothers and Bear Sterns,
positioned to ride out market volatility. among others.
• Baby boomers have been hit hardest. Baby • The latest crash is part of a cycle rather than
boomers aged 55 to 64 have the greatest con- an inflection point. The rally that began in
centration of assets in all countries studied, March 2009 has seen assets flow from low-
given that they are in peak earnings years and yielding cash back into equities, evidence of
have more disposable income. Because they are rational behavior on the part of investors. The
the segment with the most money, they are also pattern is comparable to what happened after
the segment that lost the most in the crisis, 1987 and following the dot com crash. This
particularly from their pension funds. makes the latest crash look more like part of
• The wealth of U.S. and U.K. baby boomers was a cycle than an inflection point.
not well diversified. They had too high a per- • The after-effects will be worse than the impact
centage of their pensions invested in equities, of the initial crisis. The knock-on effects of the
violating the basic principle of shifting a greater crisis — unemployment, higher taxes and cut-
proportion of investments into cash and bonds backs in company benefits, for example — will
as the date of retirement approaches. have a far more substantive impact on baby
• The general lack of financial advice taken by boomers and the age group behind them than
Americans and Britons in setting up and man- will the drop in the markets.
aging their defined contribution pensions is • The global financial crisis is most likely the
a significant gap, as is the use of managed or final nail in the coffin of defined benefit
life-stage funds that can guide asset allocation. pensions. For years, defined-benefit pensions
• Australia’s superannuation plan helps bal- have allowed people to avoid taking responsibil-
ance wealth distribution. In Australia, the com- ity for saving for retirement — their employer


did it for them. Well over half of all U.K. and cial services sector, 55 percent of them in the
U.S. boomers will receive retirement income United States and 45 percent in the United
from their employers. These plans have become Kingdom. Search professionals estimate that
far too expensive for companies to sustain, and investment bankers could see an average
are cited as one of the major causes of the bank- $500,000 to $1 million decline in compensa-
ruptcies at Chrysler and General Motors and tion owing to political fallout over bonuses
economic difficulties at Ford, British Airways, (although several senior bankers report that
BT and others. The result has been a flood of there will be minimal disruption to compensa-
tion policies, the majority of
which are structured accord-

About 70 percent of losses are ing to long-term incentives).
High earners will also bear the
concentrated among the wealthy, brunt of proposed tax hikes,
which will further dent dis-
who, with their large capital bases, posable income and hence
wealth creation. Already, the
are the best positioned to ride out United Kingdom is seeing an
outflow of wealthier profes-
market volatility. sionals to countries such as
Switzerland after the govern-
ment announced a 50 percent
tax rate for those with incomes
plan reviews, with many prominent global com- above £150,000. These segments of the popula-
panies either closing their plans to future accru- tion are the “sweet spot” for private banks, bro-
als or capping benefits. U.K. corporations have kers and wealth managers, who may find
saved an estimated £1billion over the past 12 themselves with fewer new clients to target over
months by cutting back final salary benefits. the short-term and lower average asset inflows.
Similar cuts are also being made to defined con-
tribution plans, which already offer far lower Implications for the
benefits to employees. Saving more is the only Financial Services Sector
way to make up for the loss in these benefits. We don’t expect the global financial crisis to drive
The proposed tax increases in the United States seismic, transformative change in investor behav-
and the United Kingdom will certainly not ior; rather, we expect the change to be additive
help. In addition, the United Kingdom’s pro- and incremental. There are substantial growth
posed elimination of pension tax benefits for opportunities for the fleet of foot, however, and
high earners seems ill-advised. threats for those in the industry pursuing business
• The speed of wealth creation in the tradition- models that are at risk of obsolescence:
ally high-income professional services sectors Work out how to make money from lower
is likely to slow over the next few years. Close margin products. It is inevitable that margins will
to 500,000 jobs have been lost from the finan- shrink further. The trend for transparency will only


accelerate, as the crisis has made investors even seems to provide only basic model portfolios. As
more aware of the prices they pay for advice, trades one Citi alumnus said in frustration, “I don’t need
and funds. The industry will need to determine some company I have never heard of to draw me a
how to make money out of index funds, exchange pie chart. I want someone to help me figure out
traded funds and cash. The heightened awareness how to fill the gap between what I have and what
of risk also requires more rigorous reporting of I need to retire.”
underlying investment vehicles, requiring large Develop compelling propositions for baby
systems investments by most wealth managers. boomers. Baby boomers, particularly those 55 to
Get back to the basics of sound investing. 64 years of age, are an important opportunity.
Diversification, asset allocation and mitigation of The considerable drop in many of their portfolios
principal risk within older age groups are all basic creates a catalyst to engage them in advisory rela-
principles of sound investing. Equities become tionships that could span 25 years. The financial
a bad investment when they are an individual’s services industry needs to begin building value
sole or primary asset class, particularly for those propositions based on service, advice and prod-
approaching or in retirement. The crisis has been ucts that span multiple phases — peak income
a reminder that markets go down as well as up. accumulation, quasi-retirement that often involves
Prepare to adapt business models for the part-time work, active retirement, and the later
end of defined benefit pensions. Asset managers phases, where capital release and cash flow become
need to prepare for the fast approaching day when paramount. These value propositions should
the large pools of institutional assets that they include innovative ideas around health insurance
manage for corporate defined-benefit plans go and health care provision.
into run-off. Defined contribution plans have Find ways to engage profitably with the less
lower monthly deposits, higher administration wealthy. The industry needs to be able to provide
costs and less scope for economies of scale. advice to individuals with assets less than $500,000
Bring new advice and distribution proposi- in the United States, and less than £250,000 in
tions to the DC pension sector. Providing finan- the United Kingdom. Provision of financial advice
cial advice to defined-contribution pension is woefully inadequate among these mass-affluent
investors is wide-open territory, as are model port- and affluent segments.
folios and multi-manager products that can
support investors in finding the optimal asset Conclusion
allocations for their risk profile. Targeting corpo- The global financial crisis triggered a barrage
rate benefits and HR departments will be the of news reports over the past 12 months with
most effective route into this group. big numbers: $30 trillion in market value wiped
Deferred DC pension plan members are also out; £200 billion crisis hits company pensions;
a significant and potentially more urgent oppor- 350,000 people may have to delay retirement or
tunity. As ex-employees, they are an expense at risk living on a smaller pension; millions set to suffer
a time when companies are cutting their benefits as financial crisis ravages retirement nest eggs. The
programs. Our research with former Citibankers tone has shifted 180 degrees with the recent
reveals that the company has outsourced deferred market rally: Rallying market recoups $10 trillion
members to a relatively unknown company which in losses; flood of investor dollars flows back into


equities; levels not seen since the dot com boom. recouped a significant proportion of these losses
Our analysis has enabled us to look behind in the rally that began in March 2009. However,
the headlines at the real impact of the global finan- many baby boomers have endured substantive
cial crisis in key countries by age, wealth band and losses to their pension plans and have watched
major asset class. While there have indeed been the promise of a well-off lifestyle in retirement
significant declines in portfolio values, there is evaporate. This perceived gap between actual and
very little evidence of widespread wealth destruc- anticipated wealth warrants closer consideration
tion. Losses tend to be concentrated among afflu- by the financial services industry as boomers retire
ent and wealthy individuals, who have in fact a whole lot less wealthy than they had hoped.

Authors
Penney Frohling is a partner based in the London office and head of the firm’s financial institutions group in the United
Kingdom. She can be reached at penney.frohling@atkearney.com.
Neil Dennington is a principal based in the London office. He can be reached at neil.dennington@atkearney.com.

The authors wish to thank their colleagues for their contributions in developing and analyzing the study findings and insights
in writing the article, including James le Chevalier, Oliver Whittle, Ralf Baldeweg, Fabien Bez, Peter Munro, Gregory Smith,
Brendan Ratter, Stephanie Myers, Marco Bernasconi, Olaf Foschi, Ronnie Ahluwalia and Martin Windle.


Real Impact Of Global Financial Crisis On Baby Boomers

Recomendados

Recomendados

Más contenido relacionado

Destacado

Destacado (20)

Similar a Real Impact Of Global Financial Crisis On Baby Boomers

Similar a Real Impact Of Global Financial Crisis On Baby Boomers (20)

Real Impact Of Global Financial Crisis On Baby Boomers