FINANCE | 12.05.2021

Fundamental changes in savings going unnoticed

Redacción MAPFRE

Javier Olías
Regional General Manager of MAPFRE Northern Territory

The economic context changed for good in 2020. We saw not only the direct effects of the pandemic, but also the acceleration of very profound changes that were already under way and that, given different circumstances, would have taken place more slowly. Among other issues, for example, the workplace is now more uncertain, families have less confidence and the production structure has become more agile, with companies that are not dynamic enough dropping out of the game. Ultimately, individual and family incomes have become more fragile.

This has led to fundamental changes in how families save. Not only has the propensity to save increased due to greater uncertainty; above all, given the context and the increase in volume, this saving requires more careful planning — and often, this planning exceeds the capacities of families themselves. Ideally, they should focus on defining targets for their savings, in line with their life goals, and transfer planning efforts to a financial advisor.

This need is not just a result of uncertainty. What is known in economics as the “life cycle” has also changed. Traditionally, this concept indicated that households had more outgoings than income to begin with and after retirement, and would generate savings throughout the middle phase of life. This model is now threatened by increased job instability and higher life expectancy. As a result, to maintain a relatively stable spending capacity at all stages, it is necessary to use the detailed planning of a professional, based on objectives that allow families to plan for their future. Moreover, a higher life expectancy also increases the need to supplement public and private pensions.

As such, we at MAPFRE manage the concept of the “EPSV life cycle” (discretionary management of voluntary social welfare entities—Entidades de Previsión Social Voluntaria or EPSVs in Spanish—based on selection factors), which aims to facilitate the management of retirement savings. The partner’s economic rights are distributed based on two factors: the age of the participant and the risk profile. To achieve this objective, eight portfolios have been formed, made up of three EPSVs. In turn, these EPSVs will consist of in-house mutual funds, except for the Mapfre Renta EPSV, which is made up of short-term instruments only, and each portfolio will have pre-set maximum equity investment limits. The partner’s economic rights are distributed throughout the person’s life until their retirement.

Focus on ESG criteria

One of MAPFRE’s main objectives within this professional advisory service is corporate responsibility for the companies it works with. By extension, it also requires the same from companies that form part of its investment products. The impact of companies on their environment is commonly represented by Environmental, Social and Governance (ESG) criteria. While these criteria are of vital importance in all our investments, there are a number of products where we are even more careful when looking for companies that excel in terms of sustainability.

But with all this lies another problem: when it comes to investing those new savings, we find ourselves in an environment with interest rates at zero—a trend that appears set to continue for some time—as well as less visibility in the financial markets and steep increases in bank fees that threaten fixed balances. This further limits options for families to take action on their own. However, it is precisely in this environment that professional active management is a solution.

In conclusion, there is talk of many changes of all kinds taking place after the pandemic and the associated economic crisis. But one of the most overlooked, though more socially important, affects families’ new financial planning needs, which can increasingly only be met by professionals. The economic well-being of many families in the future depends on it.