October 10, 2004

Retiring to Florida may prove a stormy choice

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Last night, 35,000 Irish fans invaded Paris. The last time 30,000 Paddies travelled en masse to watch the boys in green was to Florida for the final, disastrous Dutch game of USA ’94.
I remember standing on the terraces at a midday kick-off with the Orlando sun beating down and all I had to do was watch the match. We hid our eyes as Marc Overmars skinned Terry Phelan and switched wing in the second half to dole out the same humiliation to Denis Irwin.

Packie Bonner in goal spilled almost everything and even our talisman, Roy Keane, struggled. Apart from Andy Townsend’s fabulous blond perm, the entire episode was eminently forgettable.

Back then, Florida was a place where Paddy workers cut suburban American lawns, waited on American tables and built American houses. Today, Florida is our playground.

Thousands of Irish people have bought second (mainly retirement) homes there. As the October 31 tax deadline approaches, many more will do likewise. There’s nothing like the taxman to focus the mind on the pension.

Foreign property is increasingly becoming the asset of choice for pensions as the returns offered by equities are decimated by a combination of poor markets and the rapacious fees charged by the bloated financial industry.

This property trend will continue, boosted now by the ability to borrow for pension purchases.

Even if property returns remain above those of equities, the big question for ordinary individuals is whether their pensions will cover their retirement.

Most of us dream of jacking it all in, moving to the sun, putting our hooves up and getting out of the rat-race.

But the big imponderable is how can we finance it? And there is another uncertainty: how long will we live? Taken together, the issue concerns how much we have to put away today to ensure that we can keep our hooves up in the years ahead. The outlook is gloomy.

At a conference in Dublin recently, John Coomber, the chief executive of SwissRe, highlighted two natural changes that will occur over the next three decades with enormous negative implications for pensions and the insurance industry: global warming and increased lifespans.

Let’s talk first about the weather. Until the 20th century, the northern hemisphere’s temperature was almost unchanged and any departures from the average tended to be on the cold side.

Not any more. The world is now experiencing a significant increase in its temperature. This has enormous implications for weather patterns in the future, increasing the likelihood of hurricanes, tornadoes and the like.

Data has shown that Florida – and southern Florida in particular – is experiencing a dramatic change in wind patterns and that hurricanes and devastating high winds are becoming ever more frequent.

But data from the US National Oceanic and Atmospheric Administration (NOAA) shows that humanity and nature are on a collision course. As the weather is worsening dramatically, people in their millions are moving into the eye of the storm by relocating to Florida.

It is not just Paddies who are buying in Florida. Information from the NOAA shows that Florida is expected to see the greatest population growth in the entire US between now and 2015 as people flee the cold northern states for the sunny south-east.

This is a disaster for the insurance industry. A senior global player in the industry told me that “the industry can survive anything but natural disasters”.

If the risk of natural disasters is increasing, then the cost of underwriting that will increase.

But if the risk of natural disasters is increasing in areas where populations, possessions and property are also increasing in density, then the expected pay outs could bankrupt the global insurance business.

(The best way to look at this is by understanding the likely cost of a hurricane in the mid-Atlantic, which is close to zero; a hurricane in London would be a different story.)

The implication of global warming for the cost of insurance in the future is pretty scary. It means that all premiums will rise and, as they rise, insurance companies, which are the largest holders of equities worldwide, might sell their holdings of stocks to try to generate profits to pay maturing policies.

This will depress global equity returns, further increasing the amount of cash you have to put aside today to pay for tomorrow.

Quite apart from global warming, the second big change is longevity. In the past 100 years the proportion of us surviving longer has increased almost every decade. So now, for example, a great number of us survive until we are 75.

This figure was 50 in 1900.

However, interestingly, it is rare to live past 90.The big question is whether future ageing patterns will replicate that of the past 20 years.

Data from SwissRe Life &Health reveal that most of us are likely to live to around 90 and then die in great numbers with very few living longer than 105.

This type of pattern would make financial planning relatively simple. Today’s fortysomethings would have to work longer and save a bit more, but they should cover their retirement without dramatic change.

What if we started living much longer in greater numbers? For example, what if a sizeable amount of us lived on to 105 or 110 even? It is a real possibility now with so much of commercial medical inquiry devoted to prolonging the life of rich Westerners.

If the combination of healthier lifestyles, the growth of the “wellness” industry and development in preventive medicine continues apace, we could be looking at the biggest change in human experience in centuries.

While this brave new world throws up huge opportunities, today’s question is who will pay for us when we are all fighting fit, sprightly centenarians? And more to the point, when Cork has the temperature of Crete and Florida is an environmental wasteland, how much will we be forking out for insurance and pensions?

One thing is clear: there is a better chance of Ireland winning the World Cup in 2030 than our present pensions letting us retire at 65 to live happily ever after – even on the fat of the land.