The challenge of our times
Investor Insights - Monthly news for investment professionals 8 September 2016

A recurring theme in Investor Insights over the years has been the challenge that Australia and the world faces with aging populations. This is a serious topic, but one that is often presented in a very pessimistic way. At La Trobe Financial, we take the (surprising?) position that it is actually a good thing that the average person is living longer and experiencing more years of health. At the same time, we believe that a realistic discussion of the issues needs to be at the forefront of our political conversation. Economic and pension policy is, after all, much like piloting an oil tanker – small, sensible adjustments made early can avoid dramatic and emergency action later.

So this edition of Investor Insights is devoted to this, the challenge of our times.

Life expectancy

One of the great achievements of the twentieth century was a dramatic rise in life expectancy. Even in the past 50 years, life expectancy has risen in most western economies.

However, increased life expectancy and declining birth rates have caused many to worry about the impact of an ageing population. Frequently, we hear about ‘a demographic time bomb’ and the fear future generations will struggle to meet an ever increasing number of retired workers and pension commitments.

One key measure of an economy’s growth potential is the dependency ratio. That is, the ratio of non-working-age people (who are dependent on society) to working-age people (who individually and collectively care for the dependents). An aging population causes the dependency ratio to rise, meaning that there will be an increased burden on a shrinking working population.

However, some argue that it is a mistake to base calculations solely on a fixed retirement age of 65. If life expectancy increases dramatically, a sensible policy response would be to allow some increase in the retirement age. In Australia, we are currently seeing initial steps down this path, with the retirement age moving to 67 by July 2023, although these steps are tentative and are frequently regarded as politically controversial.

Nevertheless, based on existing policy settings, we can expect to see the following consequences of an aging population:

  1. Increase in the dependency ratio. If the retirement age remains fixed and life expectancy increases, there will be relatively more people claiming pension benefits and less people working and paying income taxes. The fear is that it will require high tax rates on the current, shrinking workforce.

  2. Increased government spending on health care and pensions. Also, those in retirement tend to pay lower income taxes because they are not working. This combination of higher spending commitments and lower tax revenue is a source of concern for western governments – especially those with existing debt issues and unfunded pension schemes.

  3. Those in work may have to pay higher taxes. This could create disincentives to work and disincentives for firms to invest, thereby reducing productivity and growth.

  4. Shortage of workers. An ageing population could lead to a shortage of workers and hence push up wages causing wage inflation. Alternatively, firms may have to respond by encouraging more people to enter the workforce through offering flexible working practices.

  5. Changing sectors within the economy. An increase in the number of retired people will create a bigger market for goods and services linked to older people (e.g. retirement homes).

On the other hand, not all is doom and gloom. For example:

  1. A declining birth rate also means a smaller number of young people. This will save the government money because young people require education and pay little, if any, taxes.

  2. A lot depends on the health and mobility of an ageing population. If medical science helps people live longer, but with poor mobility, there will be less chance to work. If people live longer and can remain physically active for longer, the adverse impact will be less.

  3. Immigration could be a potential way to defuse the impact of an ageing population because immigration is primarily from people of working age.

  4. Increasing the retirement age is one solution to an ageing population. But, the effect of a higher retirement age will not be felt equally. Those with private savings may be able to still retire early, but those with low income paid jobs are more likely to have to keep working. Also, the impact of longer working life will be felt more by manual workers who will find it harder to keep working.

  5. A big issue is whether spending commitments are funded or unfunded. Many western governments fund their pension plans through pay as you go, rather than saving national insurance contributions. This could lead to gaps in spending commitments. Australia is relatively well positioned in this respect, thanks to our long-standing system of compulsory superannuation contributions.

  6. Economic growth. A big factor in determining the impact of an ageing population is future rates of economic growth. There is a concern, as we have discussed previously, that western economies have entered a period of secular stagnation – falling growth rates. This decline in economic growth will increase the pressure on public finances from an ageing population. Strong economic growth increases tax revenues and makes it easier to fund pension commitments.

  7. Inequality. Another problem with an ageing population is that it could exacerbate inequality. With increased reliance on private sector savings, there could be a division between those with a good private sector pension, and those who rely on a diminishing state pension. Also, inequality could be exacerbated by the state of the housing market, with homeowners in a much better position than those who have to continue to rent into their retirement.

The appropriate response to the challenge of ageing populations is certainly not despair and pessimism. Indeed, as we have so often said before, Australia is uniquely positioned to take advantage of this, the Asian twenty first century. But a clear-headed realism and a willingness to adapt to change is critical.

La Trobe Financial update: Re-badging our investment offerings

As our online investor functionality has improved (and watch this space for some big announcements in the near future), we have had increased uptake from investors dealing with our investments team, mainly online. We are also witnessing increased demand for our products from international investors.

In the interests of clarity and transparency, we have therefore decided to rename our investment offerings. A summary of the changes follows:

  1. Our “Cash & Mortgages Option” becomes our “Classic 48 hour Account

  2. Our “Pooled Mortgages Option” becomes our “12 Month Term Account

  3. Our “Select Mortgages Option” becomes our “Select Investment Account

  4. Our “High Yield Credit Option” becomes our “High Yield Investment Account

The underlying strategies and disciplines remain unchanged. Our commitment to the origination and management of quality, property-credit assets is the same as ever.

Best regards,

Chris Andrews
Vice President,
Chief Investment Officer

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The above awards and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Credit Fund and may be viewed

La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Credit Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. The PDS is available on our website or by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.

- The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund and may be lower than expected. Investors risk losing some or all of their principal investment. The investment is not a bank deposit.
- Past performance is no guarantee of future performance.
- Withdrawal rights are subject to liquidity and may be delayed or suspended.
- The award and ratings were given to the Pooled Mortgages Option within the La Trobe Australian Credit Fund.
- Any rating is only one factor to be taken into account in deciding to invest.

1. Zenith's "recommended" rating indicates that it has high confidence in the manager meeting its objectives. The Zenith Investment Partners ("Zenith") ABN 60 332 047 314 rating referred to in this document is limited to "General Advice" (as defined by section 766B of Corporations Act 2001) and based solely on the assessment of the investment merits of the financial product on this basis. It is not a specific recommendation to purchase, sell or hold the relevant product(s), and Zenith advises that individual investors should seek their own independent financial advice before investing in this product. To view the relevant research information, please visit The rating is subject to change without notice and Zenith has no obligation to update this document following publication. Zenith usually receives a fee for rating the fund manager and product against accepted criteria considered comprehensive and objective.
2. SQM Research - 4 stars to 4.25 stars - superior, suitable for inclusion on most Approved Product Lists. To view the relevant research information, please visit This rating will not take into account your, or your clients' objectives, financial situation or needs. It is up to investors to consider whether specific financial products are suitable for your objectives, financial situation or needs. Research houses receive a fee from La Trobe Financial for rating the product.
3. Lipper Leaders Rating Total Return (Score – 5) Lipper Ratings for Total Return reflect funds’ historical return performance relative to peers. The ratings are subject to change every month. The highest 20% of funds in each peer group are named Lipper Leader or a score of 5 for Total Return. Lipper Leader ratings are not intended to predict future results and does not guarantee the accuracy of this information. More information is available at Thomson Reuters Copyright, All Rights Reserved.
4. Australia Ratings (AFSL 346138) makes every effort to ensure the reliability of the views and rankings expressed in its reports and those published on its websites. Australia Ratings research is based upon information known to it or which was obtained from sources it believed to be reliable and accurate at time of publication. However, like the markets, it is not perfect. This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each rating for their own specific circumstances and realise that not all investments will be appropriate for all subscribers. To the extent permitted by law, Australia Ratings and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Australia Ratings hereby limits its liability, to the extent permitted by law, to the resupply of the said information or the cost of the said resupply.
La Trobe Financial is one of Australia's leading independent credit specialist Fund Managers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Credit Funds under AFSL 222213. It employs over 150 staff and has managed over AUD$10 Billion covering over 100,000 investment grade assets since inception in 1952.

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