GameChanger

Baby boom(ers) and bust

2006-05-18T17:25:00.000+05:30

Baby boom and bust

The bull in me wants to believe Milken. The bear in me believes in Siegel.

There are many things to consider here:

1. The social impact of older people working late into their lives: If the old keep working, will they make place for the young. The only way out of that is if the employment pie is big enough for all. The French had a massive problem on their hands when they came up with the policy of hiring and firing youngsters.

2. The biological impact: People generally marry by late 20s, have kids by mid 30s and educate and marry the kids off by late 50s and settle down to enjoy their retirement after 60s. If they have to go through another phase of working life, then where will they fit in in the social fabric, remains to be seen. They will have to define a new role and identity for themselves (esp if they have to live for another 60 more years - till 120 as Milken says)

3. Motive to save: There is some motive to save in the 30s to 50s as you would want to support your kids. However, if you know that there will be continuing cash flows till after 60, then retirement planners will need a very strong reason to convince people in their 30s to start saving. If people stop saving in 30s and 40s as they expect to earn in their twilight years, we can see a massive sell off just based on that!

I think more will definitely be said and heard as we go forward. This will become an important topic of discussion as people start realising that the boomers are not dying! I dont expect this to catch market fancy till 2010-2015! But when this does, I think the effects will be fairly savage.

It is interesting that while the younger generation has always fought with the older generation over ideas, this will potentially be the first inter-generational fight over economic resources!

The Economist

Will share prices crash as baby-boomers sell their assets to pay for retirement?

MICHAEL MILKEN will celebrate his 60th birthday on July 4th. The former “junk-bond king” is still going strong, having seen off prostate cancer, and remains as controversial as ever. The debate over whether Mr Milken deserved his jail term for manipulating the high-yield bond market he largely created rumbles on nearly 20 years later, most recently during the Enron trial, where Mr Milken's genius was championed by none other than Kenneth Lay (as the saying goes, with friends like that...).

Jeremy Siegel turned 60 last November. The Wharton business school economist, whose book “Stocks for the Long Run” was the bulls' bible during the last bubble, is going strong too, trim and fit, with his mind as lively as ever—despite being called “demented” at last weekend's Berkshire Hathaway annual meeting by one of the firm's bosses, Charlie Munger. (“He's a very nice guy,” retorted the other boss, Warren Buffett.)

Mr Siegel and Mr Milken are among the first members of the post-war “baby boom” generation to enter the decade of life in which most people retire. (Mr Siegel puts the dates of America's baby-boomers at 1946-64, which he says technically makes him a pre-boomer.) Lately, both men have been giving considerable thought to what impact the impending retirement of the baby-boomers will have on the prices of financial assets. They have reached sharply different conclusions, which they aired in a conference last month at the Milken Institute.

Having built his career on arguing that buying shares and holding them is the best long-term investment strategy in almost any circumstances, Mr Siegel is now surprisingly worried about the impact on asset prices of the demographic time-bomb in the rich world represented by the baby-boomers' mass retirement. Many boomers have bought assets such as bonds and shares to fund their old age. Arguably, these purchases have helped to drive up prices over the past couple of decades. Now, he says, all else being equal, the sale of these assets will lead to a sharp fall in prices, because there are too few people in the smaller generations that followed the boomers to buy all of those assets at today's prices. For instance, in the developed world share prices could fall by as much as 40-50% over the coming decades because of boomer selling, calculates Mr Siegel. Unless they retire later, baby-boomers could see their standard of living in retirement halved, relative to their final year of work.

Mr Siegel's one great hope is that the shortfall of buyers of assets in the rich world will be made up for by a surge in demand from the developing world, as it gets richer fast thanks to the information revolution and globalisation. The demographic time-bomb of a lot of rich-country boomers having to be supported in their retirement by a smaller group of younger workers disappears when the huge, far younger population of the developing world is added to the mix. Indeed, Mr Siegel calculates that shares will continue to perform as well as they have in the past—generating real returns of above six percentage points a year since 1802, according to the research that made his name—provided that the developing world continues to grow strongly, and that buyers there are able to snap up all the shares they want.

That would need to be a lot of shares, says Mr Siegel, who is writing a new book on the subject, “The Global Solution”. By the middle of this century, he reckons, most multinational companies would need to be owned by investors outside today's developed countries, he says, especially investors in Asia. The challenge is to integrate global capital markets so that selling assets from the old in the rich world to the young in developing countries is no harder, nor more unusual, than today's sales of assets by elderly folk in Florida to younger people in other American states. From this perspective, America's external deficits, particularly with some developing countries, may be both long-lasting and nothing to worry about.

The biggest danger is that growing protectionism in the rich world will both slow the rate of growth in the developing world and prevent its demand for shares being met. Mr Siegel views the recent opposition to purchases of American firms by companies from China and Dubai as decidedly ominous.

Milken honey
Mr Milken, by contrast, is hugely optimistic, mainly because he thinks that many boomers will live far longer than is expected today, thanks to existing medical practice and spectacular advances, such as a cure for cancer, that he expects in the near future. He thinks that average life expectancy could eventually reach 120 years. With good health at a far greater age, people will want to keep working, not retire, he says—just as he and Mr Siegel do. (This prediction, Mr Siegel notes, goes against the trend for rising average life expectancy to coincide with falling retirement ages in the rich world.)

Undaunted, Mr Milken insists that working for longer will become easier thanks to technological innovation, such as using the internet from home. That will increase wealth, fuelling demand for assets. Hence the real issue for the world over the coming decades, predicts Mr Milken, will be not whether there are enough people to buy the assets of the baby-boomers, but whether there are enough assets to buy, given all the extra demand in the world.

Most economists will tend to agree with Mr Siegel that Mr Milken's forecast is “more hope than reality”. But Mr Milken's greatest achievements, from creating the high-yield debt market to beating cancer, have been the result of his refusal to accept conventional wisdom. Perhaps he will be proved right again. And if not, there may be an ounce of good news among the bad. If politicians realise that foreign buyers are needed to prop up the value of America's retirement savings, they may be less inclined to flirt with protectionism.

Actuaries and the pensions crunch

2006-01-30T19:22:00.000+05:30

The Economist

Can actuaries help to sort out the mess in corporate pensions?

AMONG the many jokes about actuaries, one cruelly hits the mark. An actuary and a farmer are looking at two fields of sheep. The farmer asks the actuary how many sheep he thinks there are: “1,007”, is the quick and confident reply. The astounded farmer asks how the actuary reached that number. “Easy, there are seven sheep in that field and about 1,000 in the other.”

False precision and reckless approximation have defined the actuarial profession's role in the crisis that has enveloped corporate pensions on both sides of the Atlantic. Although actuaries have not been the only cause—companies, trustee boards, governments and accounting rules have all played their part—they have been surprisingly hapless at their main task: forecasting funds' future liabilities and assessing how many assets will be required to meet them.

Their failure has hastened the collapse of final-salary (defined-benefit) pension schemes, many of which have ballooning financial deficits. In Britain 70% of such funds have been closed to new entrants in the past few years. Recently, led by IBM in America and Rentokil in Britain, companies have gone further and begun to close schemes to further accruals. As a profession, actuaries stand accused of negligence on a grand scale.

This is truest in Britain, which is where the pensions mess is most acute—and is also where actuaries are laying a path for their colleagues in America and continental Europe on how to put their mistakes right. Since the mid-1990s, the profession has completely recast its ideas and practices, such that Britain is arguably now the world's most sophisticated forum on how to price long-term financial promises and guarantees. This is doubly ironic. First, British actuaries failed disastrously in their reckoning of these issues during the 1980s and 1990s. Second, many of these ideas came from academic work in America, where the application of modern finance theory to companies and their balance sheets flourished from around 1970.

America has fallen behind mainly because its corporate pensions crisis, though grave, is less severe than Britain's. Fewer retirement benefits there rise in line with inflation, meaning that they are much less expensive in the long run. Only in a few extreme cases (such as General Motors) is the solvency of a big company at risk because of pension liabilities. Further, the pensions industry in America is a shared endeavour, shaped by rules and accounting regulations as well as actuarial practice.

Most members of retirement schemes have little idea of what actuaries do. In essence, they make forecasts across the many variables that affect pension funds. These include not only big factors such as inflation, interest rates, rates of return on assets and how long people will live, but also a host of other more technical things, too. Every three years or so, its actuary calculates whether a fund is in surplus and how its balance has changed since the previous exercise. Pension-fund trustees and sponsoring companies then try to agree on the appropriate level of ongoing funding.

Such “multivariate” forecasting is notoriously difficult—far more so than, for example, guessing the future growth of an economy's GDP. In actuarial exercises, the right question to ask is not whether the overall forecast will be wrong, but by how much it will be wrong. But until the mid-1990s, few people asked this of their actuaries, who tended to act as if they were infallible even while their forecasts were going spectacularly awry. A set of orthodoxies suited the cosy corporate culture of that earlier period, when actuaries endorsed the idea that funds were in healthy surplus, and trustee boards were toothless and saw no need to argue with companies. Most pension schemes held 80% or 90% of their assets in equities, which rose strongly in an inflationary era. Accounting conventions allowed companies to post “profits” derived from the future expected returns on these equities. Although they were not directly responsible, most actuaries were happy to endorse this.

Many companies also used surpluses to justify lengthy “contribution holidays”, meaning the scheme's actuaries agreed that there was no need to put fresh money into their funds. Before the arrival of a robust mark-to-market culture during the 1990s, actuaries were happy to smooth equity values by not writing them down during tough markets and understating them during bull markets (a habit that goes back at least as far as the 1974 stockmarket wobble in Britain, when a collapse in pension assets was overcome by actuarial fiat). They also endorsed the bizarre practice of assuming that holding equities magically reduced a fund's net liabilities, which meant that the sponsoring company could justify lower contributions.

In hindsight—and not just actuaries were slow to spot the role of inflation in allowing it—this was a perverse way to run a pension industry. First, pension funds held assets that, despite outperformance during a period of robust inflation, proved a poor and risky long-term match for liabilities that are bond-like in that they span many years and require reasonably predictable cashflows. Second, by embracing the idea that high returns from equities would lead to lower net liabilities, actuaries set the scene for an overall level of funding that left many schemes vulnerable when equity markets crashed, as they did in 2000-03. In Britain some actuaries went so far as to allow sponsoring companies to assume unusually high returns on their assets, making funds appear healthy when they were in fact in poor shape.

Some of these orthodoxies have been overturned in recent years. Martin Taylor, chairman of the trustee board of WH Smith, a British retailer, has described the actuarial convention that the composition of the assets should determine the size of the liabilities as “one of the weirdest emanations of the human mind. It's a metaphor—like saying that the advent of jet planes made the Atlantic narrower—and metaphor has limited place in finance.” Plenty of actuaries now agree.

Indeed, the most radical attack on actuaries came from within the profession itself. A defining moment was the presentation to Britain's Institute of Actuaries in 1997 of a paper by Jon Exley, Shyam Mehta and Andrew Smith. In “The financial theory of defined benefit schemes”, they systematically analysed pension funds as part of overall corporate finance theory. Their arguments, which drew on earlier work by academics such as Zvi Bodie of the Boston University School of Management in America, laid the foundations for a completely new actuarial school.

New wares to peddle
According to the new thinking:

•A pension fund should be seen as part of the sponsoring company's balance sheet and risk profile.

•Because funds have tax privileges, shareholders have an interest in wanting them to be fully funded, indeed in modest surplus, so as to maximise that benefit.

•When a company has a pension scheme and accrues liabilities to it, it is in effect issuing long-dated index-linked bonds.

•Assets are worth what the market will pay for them, so £100 worth of equities is worth no more than £100 of bonds.

•The natural assets for a pension scheme are deferred annuities.

One of the strongest arguments made by the new actuaries was to debunk the idea that holding equities somehow reduced a fund's liabilities. They used a simple analogy to show how nonsensical the original thinking had been. Imagine you borrow £1,000 from the bank (ie, a liability) and invest it in equities (ie, assets). Do you owe any less to the bank as a result? Further, do you think you could persuade the bank manager to allow you to make smaller or slower repayments on the grounds that your equities will produce returns in future that will make up the difference? Of course not, said the new actuaries. What a fund does with its assets has obvious consequences, they pointed out, but these do not include altering the value of its liabilities.

To the layman or to observers versed in finance, these ideas might seem obvious. But for actuaries they represented an entirely new way of thinking about pensions. Initial resistance to the new school crumbled amid tumbling equity markets after 2000. Supposedly healthy pension schemes suddenly had huge deficits, not just as a result of lower share prices, but also because falling real interest rates pushed up the net present value (but not the long-term costs) of their liabilities. Something had clearly been wrong with the actuarial status quo, and that opened the way for advice from a new generation of actuaries.

Lane Clark & Peacock (LCP), a firm of British actuaries, conducts an annual survey of the pension schemes of the biggest British companies. Ninety-two of the top 100 companies that make up the FTSE-100 share index have defined-benefit schemes, and these have mostly lurched into deficit in recent years (see chart one). New pension-fund accounting and valuation rules, known in Britain as FRS17, mean that these deficits are more comparable than they were. The headline deficit of £37 billion in July 2005 represents five months' worth of the companies' pre-tax 2004 profits, a year's worth of dividends, or 3% of the FTSE-100's market value. But LCP argues that the figure is not equivalent to the full extent of the challenge facing companies—add other factors and the total deficit might be as much as one-quarter bigger.

The reason why the reported FRS17 numbers could be much too small may, though, be another case of false precision. If a company tried to walk away from its pension liabilities then it must top up the assets so that the accrued benefits can be fully met by purchasing the appropriate annuities from an insurance company. Just now, this is an expensive option: if all the FTSE-100 companies with deficits went down this route, the shortfall would be nearer £150 billion. A recent estimate by Mercer, another firm of actuaries, put the buy-out costs at twice that—though the new school of actuaries would be the first to point out that this is just a snapshot. If real interest rates were to rise, then annuities would become cheaper and the cost of winding up a scheme would fall.

Actuaries, along with the rest of the pensions industry, have also been surprised by an unprecedented increase in the longevity of pension schemes' members, particularly of a cohort that is now in its 60s and 70s. Obviously the longer people live, the longer they will draw pensions, so this is a critical variable for schemes (as well as for governments trying to finance social-security systems). Greater longevity has also had another, more subtle, effect on pension schemes, because it has led insurers to model more carefully how long people might live and hence to charge a more accurate (ie, higher) price on the long-dated life policies and annuities they offer.

With such an array of pension problems, no wonder many companies developed an aversion to defined benefits. According to Britain's National Association of Pension Funds (NAPF), by mid-2005 about 70% of defined-benefit schemes had been closed to new members; some 9% had been closed to further accruals by members (a trend that has accelerated). Christine Farnish, the NAPF's chief executive, has said that she expects defined benefits to disappear from the private sector within five years.

The deterioration of a once flourishing sector led to political intervention and the introduction of a regulatory framework designed to shepherd pension schemes to safety. This includes a new Pension Protection Fund modelled loosely on America's Pension Benefit Guaranty Corporation. In its first full year it will levy £575m from Britain's pension schemes, as it begins to phase in risk-adjusted premiums that call on healthier funds to pay less than creaking ones. A Pensions Regulator has also given more powers to trustee boards to claw back deficits from scheme sponsors over shorter periods, or to ask for security over other assets such as properties.

That is one of several trends embraced by actuaries that have gradually encouraged pension schemes to become more conservative in the assumptions they make and the assets they hold. One landmark was the decision in 2000-01 by Boots, a retailer, to switch all of its £2.3 billion of assets into a portfolio of long-dated cashflow-matching bonds and to make a linked share buyback that benefited shareholders. The deal, which proved well-timed and has since had some imitators, was deemed so radical at the time that many actuaries balked at suggesting anything similar to other clients. Coming near the peak in share prices, it was dismissed by many companies as merely a trading strategy. In fact, the deal came after years of internal debate, between Boots' managers and their financial advisers, pension-fund trustees and, yes, actuaries, about how to apply new actuarial ideas.

Many schemes have since been lowering their exposure to equities, investing more in property, private equity, hedge funds and commodities, as well as buying more bonds. At the heart of this trend is a concept known in the pensions business as “de-risking”. At present this is being touted as effectively by investment banks eager for fees as it is by actuaries. The banks see an opportunity to use their financial-engineering expertise to create structured portfolios of assets that are suited to pension schemes' future cashflows. They point out that even though equities have performed well since the end of 2002, funds' health has worsened. The reason is that liabilities have grown even faster than assets. (The accusation that actuaries failed to warn of the growth in liabilities is implicit.)

The solution, argue the banks, is to look more closely at the risks embedded in liabilities and then to reduce funds' riskiness with “Liability Driven Investing” (LDI). The big financial risks relate to inflation and interest rates, while the biggest non-financial risk is changes in longevity. Using derivatives and swaps, the financial risks can be largely stripped out (for a fee, of course) so that funds can be much more certain about their ability to meet future cashflow requirements.

Two LDI pioneers have shown what is possible. Friends Provident, a life insurer, implemented a hedging programme with Merrill Lynch in late 2003. In September 2005 the pension-fund trustees of WH Smith sold all of the £870m ($1.6 billion) fund's assets and invested 94% of the proceeds in a portfolio of interest-rate and inflation swaps, with the balance invested in equity options designed to capture returns from shares over the next decade or so. The company was persuaded to embrace the plan when its advisers explained that the level of risk in the pension fund was so high that the group's solvency could be at stake if things deteriorated.

It is too expensive to reduce long-term risks entirely, so the idea behind LDI is to focus on the big risks and narrow the range of possible future outcomes, limiting the bad ones. LDI is a bit like a hedging programme that zaps the negative effects of interest-rate and inflation risk. There is a range of LDI strategies and structures. In a sense, Boots implemented an LDI programme, but one using bonds rather than snazzier derivatives.

A long squeeze
One problem with LDI is the constraints on the supply of the instruments it uses, particularly when a pension scheme needs to stretch at least 50 years into the future (which is the limit of long-term swaps and bonds). Last year Merrill Lynch pointed out, for example, that Britain has some £700 billion of defined-benefit liabilities, but a mere £7 billion of 35-year index-linked (ie, inflation-proofed) government bonds. As more funds switch their attention to reducing risks, these supply constraints are likely to worsen. In a recent technical squeeze in the market for 50-year gilts, prices have risen so high that real yields have collapsed to historically low levels. This week, for example, the latest auction of 50-year bonds was oversubscribed and offered a real yield of just 0.46%. Demand is coming from pension funds (and insurance companies) looking for very long-dated investments, but also from investment banks seeking to hedge their own LDI-related trading books.

LDI springs from the new actuarial thinking in that it puts the risks in a pension scheme in the context of the sponsoring company's overall risk profile. But actuaries have begun to point out that LDI is not the answer for every fund. Those with financially strong sponsors, or with sponsors prepared to give pledges or guarantees to their funds, might have no need for a transaction that can be expensive. Moreover, a fund that locks in security at today's high bond prices might come to regret it a decade hence if real interest rates revert to their long-run historical levels.

Even so, the insight that pension schemes need more security is becoming well established in Britain and in America. Ultimately, the old actuaries failed because they did not properly anticipate, calculate and communicate the rising costs of retirement provisions, especially once inflation slowed and real interest rates fell from the mid-1990s onwards. The promise of the new actuaries is that, as their ideas spread, such mispricing will never happen again. If that has come too late for many defined-benefit schemes, at least it might offer a bit more certainty when planning for the next generation's old age.

How Europe Can Age Gracefully

2006-01-23T18:15:00.000+05:30

Business Week article

NEWS ANALYSIS
Natascha Gewaltig

How Europe Can Age Gracefully
Its graying population will put economic pressure on the euro zone soon. What's needed: the political will to implement reforms now

Will the graying of Europe be its economic undoing? In coming decades, a key challenge for countries in the euro zone -- those European nations that use the euro as their common currency -- is posed by an aging population. Even if labor participation rates rise and more women take jobs, economies will depend on immigration to sustain economic growth and fund pension-system liabilities. The next four years provide a window of opportunity for government to implement crucial changes before the demographic shift moves into high gear.

Low fertility rates and an increase in life expectancy will lead to a change in the structure of the euro zone population over the coming decades. Demographic estimates from the European Commission (EC) show that much of the increase in life expectancy will be due to a lower mortality rate in the older age brackets. That means that the average age of the population will increase, as the number of citizens older than 65 rises in relation to the working-age population.

CRIMPED LABOR SUPPLY. The share of the working-age population (15 to 64) will fall from around 66.9% in 2004 to just 56% in 2050. At the same time, the share of the population older than 65 will increase to 30% from 17%.

This development will have several effects. Foremost, the labor supply will decrease over the next few decades. The labor shortage will lead to an increase in wages and a likely attempt to substitute capital for labor.

Companies will need to find less labor-intensive production mechanisms as the availability of labor, especially in narrow fields of expertise, diminishes. As a result, the capital/labor ratio may rise, as will labor productivity and gross domestic product per capita.

WOMEN TO THE RESCUE? However, as the EC points out, some simulations suggest that the positive effect on economic growth of expanding the capital stock around each worker will be marginal compared with the projected drop in labor supply. Even if the euro zone economies are able to post a 14% rise in the capital-labor ratio, productivity would only increase by 3.3% per year until 2050, assuming a constant population structure.

So a greater increase in productivity will be needed to compensate for the loss in output resulting from a fall in the working-age population. Still, the EC estimates that potential growth of the euro zone economy, as gauged by GDP, will decrease to only around 1% in the long term as a result of the aging population.

One key issue for these projections: whether female labor participation rates increase, which would at least partially offset the effect of a decline in labor supply. Germany, for example, had a female participation rate of just under 60% in 2004, according to data from the Organization for Economic Cooperation & Development (OECD).

This compares to rates of 65.4% in the U.S. and 66.6% in Britain. Participation rates in France and Italy are even lower than in Germany. For the euro zone as a whole, the female employment rate was 56.5% in 2003, and the EU commission suggests that this could rise to 64.6% by 2050.

TAX PRESSURES. At the same time, the employment rates of older workers in the age bracket of 55 to 64 will have to be lifted from the 37.4% in 2003. High unemployment in major euro zone countries has meant that early retirement has become almost the norm. The demographic changes will mean that this is no longer a feasible option for the overall economy.

Nevertheless, a rising female participation rate will not be sufficient to compensate for the expected decline in the workforce over the period, so immigration will also have to play an increasingly important role. As the commission has pointed out, it's very important to ensure that the skill structure of migrants matches labor market needs. At the moment, unemployment rates among immigrants tend to be higher than those of natives in many EU countries, and better integration remains a key challenge.

The impact of these demographic changes on the budgetary situation will be important for financial markets. For one, the demographic changes will lead to a sharp increase in pension spending and other age-related expenditure. Without structural reforms, this would lead to a marked increase in taxes and social security contributions, which will also have an impact on GDP growth.

VICIOUS CYCLE. A rise in labor taxes to finance the additional cost could cause unemployment, and the decline in net wages could also have a further negative impact on labor supply.

The OECD stresses that raising taxes and levies to finance pensions reduces the total amount of physical capital that can be accumulated via the impact on aftertax income and associated availability of funds for private investment. The necessary tax increases will have a negative impact on productivity and wage levels.

A privatization of pension schemes, on the other hand, could more than double the long-run ratio of physical capital to labor, raising long-run wages by around 25%. Indeed, some studies even suggest that the current pay-as-you-go (PAYG) pension schemes have a negative impact on family formation, and thus have contributed to the problem of the aging population.

NO TIME TO WASTE. Still, relatively favorable demographic developments over the next 4 to 5 years mean the period until 2011 is a window of opportunity for governments to prepare their pension systems and labor markets for the upcoming challenges. Radical changes and reforms of the PAYG pension schemes in key countries will be necessary. Despite the life-expectancy increase, the entry level for pension schemes has remained widely unchanged -- but this will have to be increased for the plans to remain sustainable.

Nevertheless, the time spent in retirement is likely to increase in the long run, all else being equal, and the change in dependency ratios will make the current PAYG system unsustainable. Pension levels will have to be lowered, and private-pension provisions will need to become more important. If policymakers exert the political will to implement these changes now, the euro zone may weather the coming demographic shifts more easily.

India China to gain from ransfer of assets

2006-01-07T23:37:00.000+05:30

Wharton, Business Standard

BS Regional Bureau January 07, 2006 04:35 IST

By the year 2050, there will be a situation where two-thirds of the world's capital will be owned by Asian countries like India and China, said Jeremy Siegel, the Russell E Palmer professor of Finance, on the first day of the Wharton Alumni Forum, held in Mumbai.

The demographic changes in developing countries such as India and the developed ones like the US and European countries will alter the capital ownership patterns across continents, he added.

Siegel said, "The US will see rising life expectancy. There will be fewer workers to produce goods, coupled with a lot more ageing population who will want to consume those goods."

Which, according to Siegel, raises two questions: Who will produce the goods that are required by a vast section of the older population? And, who will buy the assets owned by the older population?

This is because younger people provide goods and the older people transfer their assets -- be it in terms of physical assets or even intangibles such as knowledge and experience.

That's where the developing countries like India will have a key role to play, Siegel said. India can see more young people in the working age group and fewer outside the working age.

Siegel summarised: "Developed countries will have to buy these goods from India and, in turn, transfer their assets to the people from this nation."

This is in sync with the mindset prevalent in the developed economy whereby the older populace in certain developed locations in the states like Florida, for instance, which have sold assets to the young in exchange for imported goods from the other 49 states.

A large worker population will also mean larger production of goods and this will result in 'India and China cornering twice the GDP of the developed world.'

France trying to assimilate its population

2005-12-15T19:43:00.000+05:30

As I said a some time ago, a big challenge for Europe will be to integrate the immigrants who will possibly come in there to ease the burden of the aging population. If one looks at how France is integrating with its history, it aint a very rosy pointer to its future.

France Struggling (Economist)

The politicians manoeuvre, but they come no closer to solving the problems of integrating the country's ethnic minorities

“FRANCE is a great nation. Its past was glorious.” “France is a great country, because it has a great history.” They sound like the incantations of a long-forgotten emperor, but in fact they are declarations by those who govern France today: the first by President Jacques Chirac, the second by Nicolas Sarkozy, his interior minister. That France's politicians feel the need for such rousing rhetoric is testimony to how far the country has, after the riots, plunged into a collective depression.

The latest round of self-criticism was set off by a failed attempt last month by the opposition Socialists to repeal a law requiring school textbooks to “recognise in particular the positive role of the French presence overseas, notably in North Africa”. The law was pushed by members of the ruling UMP party from the south of France, home to many pieds noirs (former French settlers in Algeria) and harkis (Algerians who fought for France). Although the law passed without a murmur in February, the Socialists have belatedly cried foul, denouncing this attempt to impose the state's preferred version of history.

Such was the fury that Mr Chirac made a rare televised address to calm tempers. He promised a commission to study parliament's role in the construction of memory and history. This week he added his support for a day to remember slavery. Both he and his prime minister, Dominique de Villepin, have distanced themselves from the February law, insisting that history is a matter for historians, not lawmakers. This has cast Mr Sarkozy, who cancelled a trip to the French West Indies last week after protests against the new law, as its chief defender. He has railed against the “excessive repentance” of the French intelligentsia, arguing that “when one walks around Algiers, one realises that one cannot reduce the French presence to torture.”

Behind this unexpected debate over the virtues of France's colonial past lie two struggles. The first is a fratricidal war on the political right, which has intensified since the riots in the banlieues. The second is the country's difficulty integrating the children of ex-French colonies, so vividly exposed by the riots.

On the first count, the commotion is in some ways yet another row that pits Mr Sarkozy, who heads the UMP, against those from whom he wrested control of that party: Mr Chirac and his protégé, Mr de Villepin. Electorally, the right may gain from the riots, since security fears play to its strengths. But Mr Chirac himself, already enfeebled by the French rejection of the European Union constitution last May, has been further marginalised. A devastating poll in the Journal du Dimanche has suggested that only 1% of French voters want him to seek re-election in 2007.

The contest between his two would-be successors on the right, though, has only just begun. Mr Sarkozy remains the favourite. In the same poll, 36% backed him, against 19% for Mr de Villepin. With his tough-talking ways and his action-man style, Mr Sarkozy has earned a reputation for zero tolerance. With his promises to expel foreign criminals, he has broadened his appeal to far-right voters. Last week, he sealed his grip on the party machine by ensuring that the UMP would back a single candidate for 2007: the party, as one observer puts it, has been déchiraquisé.

Yet Mr Sarkozy's success is not guaranteed. A separate poll by Ifop ranked him as only the fourth most popular politician on the right. Mr de Villepin came top, with a seven-point lead. UMP deputies know that the prime minister has wider appeal to the centre and the left, making him a better second-round candidate. In some ways, the row over colonial history suits the chiraquiens: the more Mr Sarkozy leans to the right, the more space there is in the centre for Mr de Villepin.

A second underlying conflict helps to explain why the textbook row has touched such a raw nerve: the post-riots debate over integration. The left, which admits it was dozing in February, now argues that the textbook law is provocative and wounding for France's ex-colonies and their descendants, at a time when France cannot afford to stigmatise its minorities. Aimé Césaire, a 92-year-old writer from Martinique who has long advocated “negritude” as a response to colonial humiliation, was one of those who refused to see Mr Sarkozy. François Hollande, the Socialist leader, said the law was a “disaster” and would further ostracise those of immigrant origin.

A month after the riots died down, France is still taking stock. In three weeks of violence across the country, some 10,000 vehicles were burned, 255 schools, 233 public buildings and 51 post offices were attacked, 140 public-transport vehicles were stoned, and 4,770 people were arrested, according to figures obtained by Le Monde. A report by the Renseignements Généraux, the police intelligence service, leaked to Le Parisien, concluded that the violence was neither orchestrated nor religious, but was rather a “popular revolt” linked to a “crying lack of integration”. It gave warning of possible fresh explosions on New Year's Eve, when hundreds of cars are torched even in normal years.

In response, a raft of policies is being drawn up. These include tougher controls on unemployment benefits, a crack-down on drug mafias, tighter checks on forced marriages, tax breaks for businesses relocating to the banlieues, apprenticeship schemes for teenagers and extra money for local associations.

Among the most interesting ideas is a new effort to promote ethnic minorities. After the riots, Mr Chirac spelled out for the first time that he wanted France's institutions to reflect its population—but to do it while remaining officially colour-blind. As Mr de Villepin put it on CNN, “we don't want to take into account the colour of the skin, or the religion.” This directly counters Mr Sarkozy's preferred idea of affirmative action for minorities. The French have been tying themselves in knots to work out how to promote diversity (good) without legitimising racial categories (bad), which to republican French ears smack of apartheid and infringe civil liberties.

There are some signs that France is reaching for a compromise. Azouz Begag, the minister for equality (who is of Algerian origin), is one of the few who argues that “we must measure the presence of the children of immigration in the police, magistrature, administration and the private sector.” He suggests using the birthplace of parents and grandparents as a proxy. Social scientists sense a first chance to study a subject that has hitherto been taboo. Nobody is fooled that such ethnic monitoring would solve the difficulties of integration. But it would at least unveil their extent, and offer a way to measure progress.

Senior People studying!

2005-12-13T11:02:00.000+05:30

As of now what they are sharpening are their passions: photography, astrology, etc. But soon they may have to plan for second working life! (Would love to do some quick number work one of these days about the amount of wealth these people have and how much income they will need to sustain themselves)

Business Week Article

Meet the Senior Class
Increasing numbers of retirees are ditching the rocking chair and heading back to school. Here are some of the options
Bob Cash, 72, of Cape Elizabeth, Me., retired in 1995 as president of insurance company First Unum of New York. Now he's teaching classes on Dante's Divine Comedy to other retirees. Before becoming a volunteer teacher in one of Maine's "Senior Colleges," he took classes on literature, poetry, and classical music. "I have always been a lover of poetry, and I enjoy learning, period," he says.

Carol Walker, 63, of St. Petersburg Beach, Fla., retired 17 years ago as a lieutenant in the New York Police Dept. harbor unit. Her interest in learning line dancing led her to Eckerd College in St. Petersburg, where she has since studied a variety of subjects, including digital photography and astronomy. Walker has also taught photography and she contributes many of the pictures in the course catalog for Eckerd's Osher Lifelong Learning Institute.

Experts in education and gerontology say that as baby boomers age and approach retirement, the number of retired Americans who are spending time -- or planning to -- on educational pursuits is growing fast. The trend is driven by such factors as increased longevity, people enjoying more years of good health, and a growing realization by many that a retirement into passivity is not only boring but can lead to atrophy of both mind and body. The federal government estimated in 2001 that additional life expectancy for a 65-year-old was 16.4 years for men and 19.4.years for women. That's a lot of time to fill if you're not working and in good health.

GROWING VARIETY. Margery Silver, a neuropsychologist on the Harvard Medical School faculty and an expert on the aging process, points out that scientific research shows that "keeping your mind active has a physiological [benefit]. When you learn new things, you build new connections in your brain." This can even help stave off symptoms of diseases such as Alzheimer's, she says. Silver, who is 73, still works part-time. In 2001, and her husband moved into Lasell Village, a retirement community affiliated with Lasell College in Newton, Mass., where residents can take courses and use the facilities, including the campus Internet system.

Certainly, educational opportunities aimed at the 65-and-older set aren't new. Elderhostel was created 30 years ago to offer educational travel to people 55 and older. The first "lifelong learning institute" targeted specifically at retirees opened in 1962 at the New School for Social Research in New York, according to Elderhostel, and there are many others that have been around for two decades or more.

What's new is the tremendous variety of learning opportunities and venues available to baby boomers as they approach retirement. The options range from one-shot lectures, seminars, or day trips organized by a local college or retirement home to retirement communities that market their educational opportunities as aggressively as they do their golf courses.

ON THE ROAD. So whether you're already retired and looking for something interesting to fill your time, or just starting to think about a retirement lifestyle, you may want to check into some of these options. Here are a few suggestions for identifying programs that coincide with your interests.

Educational travel is appealing because it combines the exploration of a new place with deepening your understanding of its history, geology, or literature. Elderhostel (www.elderhostel.org) offers 10,000 programs a year in 90 countries. The average age of Elderhostel participants is 73, but last year the organization created a new "Road Scholars" program, which is attracting people with an average age of 64.

Road Scholars programs tend to offer more free time and more participatory experiences. Another educational travel option is Senior Summer School (www.seniorsummerschool.com), which started out to offer retired Floridians an educational and northerly escape from the summer heat in Madison, Wisc. Now it offers campus-related summer programs in eight locations in the U.S. and Canada.

BACK TO THE DORM. If you prefer to stay close to home, ask local community colleges, four-year colleges, and universities about their programs. Many campus-based programs participate in the Elderhostel Institute Network, which serves as a resource and coordinator for "lifelong learning institutes," programs that offer a college-level curriculum but don't have grades or tests. You can search for an institute in your area by clicking here.

Maine has a network of 15 "senior colleges" (www.maineseniorcollege.org) where anyone 50 or older can register. Each school in the network has its own schedule. Among the subjects being offered in the spring session at Penobscot Valley Senior College in Orono are growing orchids for fun, women of Africa, Maine wildlife ecology, and management philosophy. There's an annual membership fee of $25, and each course is $25. Dallas' Richland College Emeritus program offers both credit and non-credit classes on campus and special programs, such as day trips -- all open to anyone 55 and older. It also provides free lectures on topics such as music and literature at local retirement homes.

Perhaps the ultimate commitment to lifelong learning is moving into a retirement community affiliated with an educational institution. For folks who like the idea of living in a campus environment, the Kendal Corp., a developer based in Kennett Square, Pa., has built six retirement villages near campuses in Ohio, New York, Virginia, Pennsylvania, and New Hampshire. The programs give residents' access to campus activities, allow them to attend or teach classes, as well as work on joint-research projects with undergrads, grads, or faculty. One group studied how people's choices about living arrangements affect their quality of life as they age.

NO TESTS REQUIRED. Another such community, not built by Kendal, has sprung up in Academy Village, outside of Tucson. There, the impetus for 5- and 10-week courses on topics such as "advances in medical research" came from a resident who is a former president of the University of Arizona.

In our shorter-lived-parents' generation, people were often satisfied to define retirement in terms of what they weren't doing -- namely, working. But with the possibility of 20 or more years ahead after leaving your primary job or profession, you owe it to yourself to envision a positive, enjoyable way to spend your time. Continuing education might be the answer. Not only do you not have to take tests or pull an all-nighter to struggle for a good grade, you can study any topic you want, almost anywhere in the world -- and on your own schedule.

Legal protection?

2005-12-11T22:28:00.000+05:30

What stops me from transferring all my wealth to a company (in which i hold all the shares) at a nomial price.

That way:
1. I can book losses on my holdings when I transfer the assets to the company.
2. When I die, I can nominate my leagal heirs to the shares and they will not have to pay any inheritance tax, if any
3. If my creditors sue me, my money is safely in the legal confines of my company

Thoughts / comments?

Innovative Idea for pension funding?

2005-12-11T22:25:00.000+05:30

Innovative Idea for pension funding?

That there is a serious under-funding for the pensions should come as no surprise to anyone. NY Times reports that the unfunded costs of medical benefits promised to retired government (city) employees could be as high as a trillion dollars! Already battles are being fought as politicians try to grapple with the issue of siding with either current workers or with the retiree workers. Whether it will be the economic might (via political donations that they can afford - point nited below also) or the sheer number of them (in at least the coming years), the baby boomers who are retiring now will have to fight an inter-generational battle with the current workers.

One potential way for the governemnts to solve this problem is to raise debt to finance these outflows. However, that is a simply passing on the responsibility of repaying debt to the younger generation. The other is to raise current taxes: this again burdens the current working generation.

However, one way the government can raise money without impinging on the earnings of the current working populace is to increase the inheritance tax. When a person dies and his estate passes on to his / her legal heirs, the government should claim a larger percentage share in the property that passes. While this will lower the amount that the younger generation will inherit, it will essentially be the wealth of the old generation that will be used to pay off the retirement benefits for their generation.

What remains to be done is the feasibility analysis of this solution. I dont know if I should hazard a guess, but here go some dirty number work. The GDP of the States is ~$12tn a year. Assuming the wealth to flow ratio of 10, the total wealth of the country's inhabitants is ~$120 tn. Of this wealth, ~10% would be in private hands and we come back to the number of ~$12tn as the wealth that pvt individuals have. (Now, Bill Gates has ~40bn and the top 100 odd people have ~$1 tn with them and hence this number does not sound completely out-of-whack). [I do note that I need to actively reconsider the mathematics and economics here.]

Now one notes that just as wealth is not distributed evenly amongst the people, even amongst the people, it is not distributed evenly during their lifetime. I would hazard a guess saying that the cohort of the age of 55-75 (which would account for ~25% of the population: 20 years divided by 80 years), they would have ~40% of the wealth. Hence, this cohort, which is would die over the next 25 years (80 - 55) would have ~$5tn with them. If this wealth is taxed at ~20-25% rate as inheritance tax, the governemtn could use the wealth of these people to finance the costs that the government would incur on there people.

I know the numbers might be all over the place, but I think the idea that I have in mind is clear. In any case, almost everyone is moving away from the pay-as-you-go DB plans to DC plans. Younger workers can look forward to a couple of risks: unknown costs of health case 20 to 30 years down the line (when they retire) and the risk of their investments performing (sustaining!) as they build their retirement nest. However, they are protected from the ignomy of having to borrow from their future generations!

How the governments deal with this issue will be something to closely look out for! Major social and political battles have to be fought now!

NY Times article

December 11, 2005
The Next Retirement Time Bomb
By MILT FREUDENHEIM
and MARY WILLIAMS WALSH
SINCE 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out.

It took an actuary about three months to identify all the past and current city workers who qualified for the benefits. She tallied their data by age, sex, previous insurance claims and other factors. Then she estimated how much it would cost to provide free lifetime care to such a group.

The total came to about $178 million, or more than double the city's operating budget. And the bill was growing.

"Then we knew we were looking down the barrel of a pretty high-caliber weapon," said Gary Meier, Duluth's human resources manager, who attended the meeting where the actuary presented her findings.

Mayor Herb Bergson was more direct. "We can't pay for it," he said in a recent interview. "The city isn't going to function because it's just going to be in the health care business."

Duluth's doleful discovery is about to be repeated across the country. Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag. The usual practice is to budget for health care a year at a time, and to leave the rest for the future.

Off the government balance sheets - out of sight and out of mind - those obligations have been ballooning as health care costs have spiraled and as the baby-boom generation has approached retirement. And now the accounting rulemaker for the public sector, the Governmental Accounting Standards Board, says it is time for every government to do what Duluth has done: to come to grips with the total value of its promises, and to report it to their taxpayers and bondholders.

The board has issued a new accounting rule that will take effect in less than two years. It has not yet drawn much attention outside specialists' circles, but it threatens to propel radical cutbacks for government retirees and to open the way for powerful economic and social repercussions. Some experts are warning of tax increases, or of an eventual decline in the quality of public services. States, cities and agencies that do not move quickly enough may see their credit ratings fall. In the worst instances, a city might even be forced into bankruptcy if it could not deliver on its promises to retirees.

"It's not going to be pretty, and it's not the fault of the workers," said Mayor Bergson, himself a former police officer from Duluth's sister city of Superior, Wis. "The people here who've retired did earn their benefits."

The new accounting rule is to be phased in over three years, with all 50 states and hundreds of large cities and counties required to comply first. Those governments are beginning to do the necessary research to determine the current costs and the future obligations of their longstanding promises to help pay for retirees' health care. Local health plans vary widely and have to be analyzed one by one. No one is sure what the total will be, only that it will be big.

Stephen T. McElhaney, an actuary and principal at Mercer Human Resources, a benefits consulting firm that advises states and local governments, estimated that the national total could be $1 trillion. "This is a huge liability," said Jan Lazar, an independent benefits consultant in Lansing, Mich. "If anybody understands it, they'll freak out."

Last spring, the state of Alaska was the scene of a showdown over retirement benefits that those involved said was a precursor of fights to come. Conservative lawmakers who supported scaling back traditional retiree health care and pension benefits squared off against union lobbyists, advocates for the elderly and the schools superintendent of Juneau, the state capital, who defended the current benefits.

After saying that Alaska's future combined obligations for pensions and retiree health care were underfunded by $5.7 billion, Gov. Frank H. Murkowski called a special session of the Legislature and pushed through changes in pension and retirement health care benefits for new state employees. (The state Constitution forbids changing the benefits of current employees.)

Instead of having comprehensive, subsidized medical coverage, new public workers will have a high-deductible plan and health savings accounts. The changes cleared the State Senate and passed by a one-vote margin in the House.

Even the White House weighed in on the Alaska problem. Ruben Barrales, President Bush's director of intergovernmental affairs, lobbied wavering Republican legislators, arguing in favor of replacing pensions and traditional retiree health benefits with private savings accounts for new employees. Mr. Barrales noted that the president was seeking similar changes in Social Security, including a plan for private accounts.

The union that represents state employees in Alaska said the narrower benefits would make it harder to recruit qualified teachers and government workers. "They keep chiseling away" at school employees' pay and benefits, said Julia Black, a single mother and union activist who earns $11 an hour as an aide in classes for disabled children in Juneau.

Actuaries say that about 5.5 million retired public employees have health benefits of some kind - and accountants joke that there are not enough actuaries in the country to do all the calculations necessary to estimate how much all these retirees have been promised.

Though it may seem strange after a decade of double-digit health cost inflation, hardly any public agencies have been tracking their programs' total costs, which must be paid out over many years. The promises seemed reasonable when they were initially made, officials say.

In Duluth, Mayor Bergson said the city actually offered free retiree health care as a cost-cutting measure back in 1983. At the time, Duluth was trying to get rid of another ballooning obligation to city workers: the value of unused sick leave and vacation days. Public workers then were in the habit of saving up this time over the course of their careers and cashing it in for a big payout upon retirement. Compared with the big obligations the city had to book for that unused time, substituting free retiree health care seemed cheap. "Basically, they traded one problem for another," Mayor Bergson said.

WITH some exceptions, most states and cities have set aside no money to pay for retiree medical benefits. Instead, they use the pay-as-you-go system - paying for former employees out of current revenue. Agencies did not have to estimate the total size of their commitment to retiree health care, so few did so.

Under the new accounting rule, local governments will still not have to set aside any money for those promises. But they will be required to lay out a theoretical framework for the funding of retiree health plans over the next 30 years, and to disclose what they are doing about it. If they fail to put money behind their promises to retirees, they may feel the unforgiving discipline of the financial markets. Their credit ratings may go down, making it harder and more expensive to sell bonds or otherwise borrow money.

Parry Young, a public finance director at Standard & Poor's, the credit rating agency, said his analysts look at total liabilities, including pension and now other "post-employment" obligations. Many governments, he added, have already been grappling with big deficits in their employee pension funds.

A few agencies are wrestling with the daunting task of estimating their total retiree health obligations and coming up with a way to slice it into a 30-year funding plan. They are finding that under the new method, the benefit costs for a particular year can be anywhere from 2 to 20 times the pay-as-you-go costs they have been showing on their books.

Maryland, for example, now spends about $311 million annually on retiree health premiums. But when that state calculated the value of the retirement benefits it has promised to current employees, the total was $20.4 billion. And the yearly cost will jump to $1.9 billion under the new rule, according to an analysis for the state by actuaries at Aon Consulting, which advises companies on benefits.

That is because Maryland would not be recording just its insurance premiums as the year's expense, but instead would report the value of the coverage its employees have earned in that year as well as a portion of the $20.4 billion they amassed in the past. After 30 years, the entire $20.4 billion should be accounted for.

Michigan says it has made unfunded promises that are now valued at $17 billion for teachers, part of a possible $30 billion total for all public agency retirees. Other places that have done the math include the state of Alabama; the city of Arlington, Tex.; and the Los Angeles Unified School District. New York City has not yet completed an actuarial valuation of its many retiree benefit plans. But in its most recent financial statements, the city said it expected that the new rule would "result in significant additional expenses and liabilities being recorded" in the future.

The numbers can vary wildly by locality, depending on how rich its benefits are, what assumptions its actuary uses about future demographics and investment earnings, and that great unknown: the cost of health care 30 years in the future.

"Fifteen years ago, who would have projected 10 years of double-digit increases in health care costs?" said Frederick H. Nesbitt, executive director of the National Conference on Public Employee Retirement Systems, an advocacy group in Washington. Mr. Nesbitt pointed out that when the accounting rulemakers began requiring a similar change in financial reporting for companies in the 1990's, it was followed by a sharp decline in the retiree medical benefits provided by corporate America.

Today, only one in 20 companies still offers retiree benefits, according to Don Rueckert Jr., an Aon actuary. The rate for large companies is less than one in three, down from more than 40 percent before the private-sector accounting change, according to Mercer Human Resource Consulting. General Motors and Ford are among the big companies that still offer retiree health benefits. But G.M. recently persuaded the United Automobile Workers union to accept certain reductions, and Ford is seeking similar cuts.

"We expect the same thing in the public sector, unless we help employers do the right thing," said John Abraham, deputy research director for the American Federation of Teachers.

The Governmental Accounting Standards Board, known by the acronym GASB (pronounced GAZ-bee), is a nonprofit organization based in Norwalk, Conn., and a sister to the Financial Accounting Standards Board that writes accounting rules for the private sector. Karl Johnson, the project manager for the retiree-benefits rule, said GASB began hearing from public employees' unions as soon as it issued a first draft of its new standard. The unions said that if governments were forced to disclose the cost of their plans, they would probably cut or drop them, just as companies have done.

Mr. Johnson said the accounting board had no interest in trying to reduce anyone's benefits, and no power to dictate local policy even if it wanted to. "Accounting is just trying to hold up a good mirror to what's happening," he said. "These are very expensive benefits."

Under the new rule - outlined in the board's Statement No. 45 in June 2004, and known widely as GASB 45 - large public governments and school boards with large health care obligations to retirees will have to start reporting their overall benefits cost in 2007 - either on Jan. 1 of that year or, for most big governments, on the start of the fiscal year beginning June 1, 2007. Smaller governments will start using the new method in the two years after that.

The change comes at a rough time for state and local governments. Spending on Medicaid and education has been spiraling, and Congress continues to cut federal taxes and shift burdens of governing away from Washington. In some areas, including parts of Michigan, governments are also suffering from the financial difficulties of important local industries. Max B. Sawicky, an economist at the Economic Policy Institute, a liberal research group in Washington, called the new requirement "another straw on the camel's back" for state and local governments already straining under their budget burdens.

Mr. Johnson said the accounting board had tried to issue the retiree health care rule 10 years ago, when the economic picture was rosier. It did succeed then in issuing an accounting standard for government pension plans, but before it could turn to the related issue of retiree health care, other urgent accounting issues crowded onto its agenda. The board finally cleared its decks and voted to address retiree benefits in 1999. Coming up with the new methodology took five years.

Now that it is here, "the general sense in the marketplace is that GASB 45 is going to lead to a watershed in public-sector health benefits," said Dallas L. Salisbury, president of the Employee Benefit Research Institute, a nonpartisan research center in Washington.

Indeed, the handful of states and cities that have already calculated their obligations to retirees have concluded they must also rein in the costs. Michigan, for example, with its possible $30 billion in largely unfunded health care promises, is already considering legislation that would shift "a considerable amount of the cost for health insurance to the retiree," said Charles Agerstrand, a retirement consultant for the Michigan Education Association, a teachers union. The legislation would require teachers retiring after 20 years to pay 40 percent of their insurance premiums, as well as co-payments and deductibles, he said.

The pressure is greatest in places like Detroit, Flint and Lansing, where school systems offered especially rich benefits during the heyday of the auto plants, aiming to keep teachers from going to work in them. Away from those cities, retiree costs may be easier to manage. In the city of Cadillac, 100 miles north of Grand Rapids, government officials said they felt no urgent need to cut benefits because they promised very little to begin with. Instead, Cadillac has started putting money aside to take care of future retirement benefits for its 85 employees, said Dale M. Walker, the city finance director.

Ohio is one of a few states to set aside significant amounts. Its public employee retirement system has been building a health care trust fund for years, so it has money today to cover at least part of its promises. With active workers contributing 4 percent of their salary, the trust fund has $12 billion. Investment income from the fund pays most current retiree health costs, said Scott Streator, health care director of the Ohio Public Employee Retirement System. "It doesn't mean we can just rest," he said. "It is our belief that almost every state across the country is underfunded." He said his system plans to begin increasing the employee contributions next year.

In Duluth, Mayor Bergson grew quiet for a moment at the thought of a robust trust fund. "There was not a nickel set aside" in Duluth, he said. "The reason was, if you set money aside, you'd do less 'pretty projects.' Less bricks and mortar. Fewer streets. Fewer parks. So no one set the money aside. "If the city had set $1 million aside every year for those 22 years" since the promise was made, he added, "we'd be in really good shape right now."

Mayor Bergson said his city intends to start setting aside money for the first time in 2006, but he is also trying to rein in the growth of new obligations. He raised to 20 from 3 the number of years that an employee must work for the city in order to qualify for retirement benefits.

He also imposed a hiring freeze and pledged not to lift it until Duluth could hire employees without promising them free lifetime health care. As the city has lost police officers, firefighters, an operator of its huge aerial lift bridge and other workers, the remaining employees have racked up more than $2 million in overtime. But Mayor Bergson says that this is still cheaper than dealing with free retirement health care once the new accounting rule takes effect.

Most recently, he reached out for what may prove a political third rail: he took issue with the idea that once a public employee has retired, his benefits can never be reduced. This idea, as applied to pensions, is rooted in the constitutions of about 20 states, and unions argue that it also protects retiree health care.

Active employees in Duluth have had to start paying more for their health care under the city plan, Mayor Bergson said. If active workers must make concessions, he said, retired workers should make concessions, too. Otherwise, in relative terms, they are pulling ahead of the active work force.

Europeans to work till 68!!!

2005-12-07T11:44:00.000+05:30

The demographics catching up with them!

Will the pension funds start becoming more riskier? I remember reading pension funds in the US are moving about USD 3bn to the hedge funds claiming that they produce better returns with lower risk (I will never understand this, will I?)

More thoughts on this later...
_______________________________________________________________

Turner report calls for rise in pension age to 68
By FT reporters
Published: November 29 2005 21:52 | Last updated: November 30 2005 11:38

Lord Adair Turner published his eagerly-awaited recommendations for British pension reform on Wednesday which included restoring the link to earnings, increasing the state retirement age from 65 up to 68, and the establishment of a pensions savings scheme.

Key points of the report

• 5 per cent automatic contribution from employees
• 3 per cent compulsory contributions from employers
• Voluntary top ups allowed
• Employees automatically enrolled but can opt out
• Gradual increase in pension age up to 68 by 2050
• National pensions savings scheme

Lord Turner said his aim was to stimulate a rational debate by recommending “policies which over time will make state pension provision more generous and less means-tested but with the state pension age rising gradually as life expectancy increases.”

“The trade-off must reflect a point of view on equity between generations on the economic impact of increased taxes and on the importance of pensions relative to other public expenditure priorities,” Lord Turner added.

TUC chief Brendan Barber called the report bold and hard headed. He said: “It sets politicians - and all of us involved in the pensions debate - a real challenge to create the consensus needed to implement its radical agenda. ”

The savings industry made clear it wants as big a share as possible of the increased pensions investment to flow through private schemes.

Stephen Haddrill, director general, said: “The ABI supports automatic enrolment into pension schemes, with a matching employer contribution where the employee does not opt out. But we don’t need to create a new, expensive and risky state quango; we should use the expertise and infrastructure of our existing private sector to put this vision into effect. Doing so will give Britain a head start.”

Tony Blair paved the way for the landmark report by backing its central recommendation that the UK should move to a more generous earnings-linked basic state pension.

The prime minister – who was given a copy of the study earlier this month – on Tuesday declared that “the basic construct of Turner is right”.

Although Gordon Brown, the chancellor, is concerned that state pension increases in line with earnings would entail big tax rises, Mr Blair said Britain “needs a system that enshrines a decent basic state pension, funded by the taxpayer.”

In a sign that the government will try to forge a firm policy next year, Mr Blair promised in advance that he would respond to the Turner report with “comprehensive, detailed proposals” in the spring.

Downing Street and the Treasury are playing down suggestions that the report will trigger off new tensions.

http://news.ft.com/cms/s/0368bf62-6121-11da-9b07-0000779e2340,_i_rssPage=7eb2a08a-cbe5-11d7-81c6-0820abe49a01.html

Aging in Europe

2005-11-30T11:42:00.000+05:30

Just read an interesting article in Business Standard by Samuel Brittan (syndicated from FT). He talks about the usual stuff about demographic changes that are taking place in the OECD countries. Couple of interesting points that he makes:
a) I like the phrase: "It is not just a matter of financial machinery to provide entitlements. It is a question of high real transfers"
b) Interesting numbers: ratio of older inactive people to workers will double from 38% to 70% in OECD (and to 100% in Europe!) by 2050.

He has an oft-touted solution: allow immigration. (He ends there, after the mandatory I-wash-my-hands-off-after-the-intellectual-debate warning: "Of course, wider social considerations involved here, but so they are in nearly all aspects of the policy towards ageing."). Let us then look at a few aspects.

The problem, as we all know is that the population growth is slowing in the developed countries and the population that remains is becoming greyer. It is interesting that both the issues - slow pop growth and long life - are an off-shoot of the progress that these countries in particular and the world in general have made in the last 50 years post WWII. These countries are trying hard - at least tactically to meet the problem midway: The Scandinavian countries have grants for the ladies who will bear the additional fruit.

Europe made rapid gains in productivity since the end of the WWII and has been at the forefront of the world growth for many a years. Their time has sadly come: the last decade was not an economic story about Europe, it was about China. The next decades will also not be about Europe, they will be about China and India! Manufacturing doe not seem to be the forte of most of these countries. The less we talk about the subsidized agriculture, the better: the WTO negotiations will quickly chew away at that protectionist barrier. However, one respects the past and looks at the wealth that the past efforts have created for Europe. It is hard to expect that the people of that land having slogged so hard to create the wealth to accept the life with lesser entitlements when they retire. They are caught in the classic "wealth effect" (ratchet-effect, I believe it is called in economics, but like Bertram Wooster, I will have to check that up!). What they hence need is some economic force that will keep the economy going so strong that the retirement bills of the grey population are tended to.

I remember the summer of 2003 when I headed to Barcelona for a conference there: the city, in conjunction with ESADE, the business school had organized a meet for the future leaders (a euphemism for current B School students) from across the world. There were two key take-aways for me from that conference:
a) Spain (in particular and Europe in general?) had realized that its time for being the manufacturing hub had come to an end. The city was proud that it served as a significant manufacturing base for quite sometime till the early 90s but was now facing immense competition from East Europe and Asia. (I remember since one discussion I had was on how manufacturing keeps moving eastward!)
b) Barcelona was proud on how it changed its character from an old (and reasonably dirty city!) to a world-class city in the 8 years before Olympics.

The solution that Barcelona had thought of was simple: it traced the development of human progress and saw how Man had moved from agriculture to manufacturing to (knowledge-based) services. It has decided to follow the same path. It boasted of world-class facilities that it could offer in various fields of research and government support for the same. It agreed and understood that its labour was high cost but that, it hoped, was mitigated by the quality infrastructure. So the economic solution is to keep the high value-add with itself while it let goes off the dirty and cut-throat manufacturing jobs to the third world countries (Who wants to keep the dirty jobs anyways?). It is not easy to be at the forefront of technological progress but that is the risk that these countries will have to take.

What interests me is that Europe realizes that it is cost disadvantaged. It has to necessarily be a place where the wage rate is high. That is because of the wealth that it has generated for itself. The way I look at it is that a certain percentage of income will always be spent in "maintaining the wealth": that is to live according to the status demanded by the wealth. One gets used to a certain life style and it is very painful to have a step-down from the life style that one has become used to (the ratchet effect we talked about earlier). It is hardly surprising then that the social support system in Europe is one of the best and billions spent on the same every year. Wages once high hence tend to be sticky.

However, put that in light of the solution given by Mr. Brittan. He wants freer policies on immigration. If there is one thing that an immigrant does not bring with him, is his wealth (he rarely would immigrate if he had wealth in the first place!). He looks upon the new land as a place that will provide him the economic opportunity to build his wealth. In many cases, the immigrant comes to the economy lured by its wealth (past) and its ability to sustain him in the future. What he does bring with himself, though, is his culture.

Note that the people that Europe will need to attract would be the top-notch people, as they have to lead the innovation and value addition that will keep Europe going. When I say labour, if it gives you the impression of a blue collared mechanic, be forewarned: it is the white collared knowledge worker that Europe is after. (One just needs to look at the demand for India doctors and nurses in UK to get the picture).

Let us look at the economic implications and social consequences of the Arrival of the Immigrant: The immigrant who goes to a country with grey hair needs to remember that he will not only be working for himself but also for an older native there. What the older native holds there is not just wealth but the political power that makes the laws of the land. The older native will need to design laws that will keep two things in check with the arrival of the immigrant:
a) a job for his off spring (howsoever limited their numbers might be!) and
b) some method of "high real transfer".

The first will call for very protectionist (affirmative action for the Whites!) means of keeping the jobs home. I will not be surprised, if in the name of national security, there will be positions that will be reserved for natives. Whether it is through reservations or some other means, calls for protectionism will start growing stronger. (We have all seen the passion that exists in the States when it looses jobs: recall BPOs and GM closing its plants).

The way the second point will pan out will possibly be in the form of higher taxes. The State will become an enormous and huge Robin Hood, a financial monster whose objective will be to collect money from the working immigrant and pass it on to the older infirm native. What will be interesting if countries come up with differential tax norms: charging a higher rate of tax for the immigrants so that the income of these immigrants can be used to support the natives (Was that not the original purpose of inviting the immigrants?)

The problem becomes interesting because glass ceilings and higher taxes actually reduce the incentive for the immigrant to come over. His prime incentive to come to the country was to gain monetarily and if possible, in social status. He will begin to clamor for more rights in his chosen place of work. It will not be long before the realization dawns upon the various immigrant communities that it is they who run the economic system of the country - not necessarily the political one though. Calls for movement to the political system, though bitterly opposed by the natives, will only grow stronger and eventual crossovers will happen.

I juxtapose this with what I hear about the Rise of the Right in Europe. I have read with horror the Burning of Paris and the growing significance of the Right in Germany (not that the country welcomes immigrants with open arms even today). A quick look at the countries that will be labour rich - and hence will supply labour - is also illuminating. It will mostly be the African. Middle-Eastern and Asian economies. Interestingly, though I am not sure that such a classification has been made till now, a very high number of these immigrants will possibly be Muslim. If the 2000 years of Christian-Muslim relations are anything to go by, one does not look forward to a future brimming with peace and harmony. In any case, almost all the labour rich countries will be non-Christian.

What hence is economically most important (almost existential) will possibly the least desirable socially. How Europe decides to balance the two will determine (not only its but also the world's) growth and its peace. More thought needs to go into how to open the societies for more immigration: it will not be an overnight task. It will need effective handling by the politicians and leaders of that land. There is no single answer that is true for all societies: they will have to develop their responses on their own. The responses no doubt will be molded by the circumstances and the questions that individual societies face but it will be instructive for the leaders to start framing the answers now! Barcelona evolved itself in 8 years, Europe will have a couple to decades to think this problem over: it better be ready with the right solution!

BCG Goa Outing!

2005-11-23T17:45:00.000+05:30

One of the best parties that I have been to! And it is not just because of the dance and alcohol and the (winning) gambling! It was because of the people I went with!

Here is my cohort!

Cheers,
Akhilesh

Second day at Kotak

2005-11-09T18:36:00.000+05:30

I guess the name of the blog is very obvious!

The day had 3 high points:

1. lunch with RamG and Swapnil: good discussion based on how not following rules leads to utilisable happiniess (more below)

2. Bloomberg training: the initiation happened - there is no need to fear the black box and the key board (it was good to find that I could use the learning to graph the IKF tech that Pissu was talking about)

3. The discussion set up with the IIT prof: something interesting should come out of it tomorrow! Need to prepare the questionnaire for him though...

RamG described how coming to office on a Tuesday at 9:43 am (he said 9:40 to 9:45: but I like point estimates - revised upwards!!) is a pleasure and he said that he liked such sudden unpredictableness (is sudden redundant here?) for himself: having tea in the morning, reading newspapers, etc. The thing quickly got abstracted when I pointed out that the fun is not in the unpredictability itself but in the joy that one gets by breaking the rules. We always feel good when we are able to defy the shackles that rules create around us. Reaching office at dot 9 is a rule and no one is very excited following the drab rule day in and day out. However, when we create a surprise around ourself / our lives, we feel more energised. Somehow the word "surprise" came into the conversation (I think it was Swapnil) and the discussion quickly moved to the fact that even markets like to be pleasently surprised.

And that was that! (No more enthu to type!)

Culture in a Small Firm

2005-10-30T21:37:00.000+05:30

Guess when the firm is no longer small enough: we need to find a way where people connect to each other. I don't know how powerful the One Firm philosophy of McKinsey is in actual practice - but for a firm thriving on the intellectual capital of its people, it is most critical that people are - and feel! - connected.

In my mind, one-off home office days are of limited use, esp. if what one wants to share / showcase is also the work done by the case teams. I don't think the new joinees of the family feel the "family touch" to the firm. I might be seeing too much of the family thing, but if you read my farewell mail, you will realize that the biggest sense of association that I have with the firm is that in its people I have found huge variety which I can connect at different levels. It is this association that makes me feel comfortable with them. And hence, planning to watch a cricket match with a partner even after resigning is something I can do with ease. It is very important to build in that sense of comfort for every member of the family. It is very interesting to see how the family evolves. This needs deep thought - and preparation against the same.

As any firm grows bigger, what will start becoming important are processes: processes for people to share information, processes for people to share experience, processes for people to "know" each other. Immediate pain points are becoming obvious. As it grows, processes become stricter as also the norm. I am not saying that having strong processes in place is a bad thing per se. However, what it does is it creates an over-bearing sense of structure and bureaucracy in the system - the very shackles we want to be free from and the ones that take away the sense of being in a family.

Pain points in terms of people not leveraging each other's knowledge / experience are not so obvious now. I, for example, don't know what I can leverage the 2005 cohort (SAs/Cs/PLs) for? What contacts do they bring, what experience do they have, what passions they might have, etc etc. I guess we will never ever know any person fully - but then the system should have enough knowledge that the right person for the right objective is leveraged at the right time. Is there a process that we can develop? Are there forums that we need to define?

I think the big reason firms that are regarded as having a people touch are regarded as thus, is that they have a legacy of being "small". Being small helps the informal networks in the firm grow stronger, which provides a strong support system to all in the company. Hence, when a presenter talks about his company, he can relate to his life in the company where he finds a strong friendly environment. What quickly happens if you don't know what your cohort mate is doing is that you begin to develop a sense of unease with the person and the situation: Is he doing better than me? Am I upto the mark? And since you are anyways not in a social position to talk to him about his successes and failures, you are unable to get answers to your questions. And then comes the feeling of competition which brings with it the touches of aggression and politics. Is that why the BIG firms have the reputes of being aggressive, is something that I can only conjecture.

I think it will be a bad loss for any small firm if this spirit of camaraderie is lost!

What does an MBA get paid for?

2005-10-30T21:36:00.000+05:30

What does an MBA get paid for?

My unequivocal answer to the above question would have been: the intelligence that 1 brings to the table. Intelligence, in my mind, was always associated with defining thought-through strategies and processes, making the processes more effecient and effective, finding loopholes in processes (and laws!), etc etc.

However, having heard about life on the trading floor, there is a very interesting dimension that got added to the answer to the question above: the amount of stress that the job forces on you. From what I heard from Madhur M, I could clearly sense that trading is not so much a call upon 1's intelligence (after one has mastered the basic skills) but is severly taxing emotionally. The 6 hours * 5 days of a market are enough to drain you out for the entire weekend!

As with consultants, I would add the third dimension where a recruit from the IIMs is helpful: one where you have to make him work hard in very trying circumstances. I can see all my sales manager friends at HLL, Asian Paints, Colgate, etc. What they bring to the table is not just much above the average intelligence to the system but also the emotional maturity to survive in trying circumstances in far-flung states away from their homes.

When I look back at life at IIMA now, I can now visualise why banks and FMCGs love to recruit traders / SMs from MBA schools: it is not necessarily for the intelligence (which no doubt facilitates the work) but for the ability to handle the huge stress and show the emotional maturity that the job demands (and is there any place better than IIMA that prepares you for the same?)!

PS: Why do software companies hire from campus? :)

Intellectual Discussion

2005-10-30T21:35:00.000+05:30

Intellectual discussion:

One of the things that I have realised (thanks to a long discussion with Madhur M yesterday) is that there is a huge value in discussing 1's thoughts and ideas with people who have a completely varied background (for context, I was discussing the mail on a firm's culture) and taking inputs before freezing 1's framework.

For any intelligent deduction on any topic, I thought, all that was required was peace of mind and some spare time to think. I would try and think of a problem, gather about my thoughts on the same, and having thought through on my own, I would assume that I had come to an complete (and correct!) solution and would passionately defend the same. All the gyan that the management books made about having variety in 1's team to bring about variety in perspectives, I thought was just that: gyan.

However, the discussion with him (he coming from a trading floor in HSBC, London) made me see the difference in how our perception of ideas / concepts / events is coloured by lenses through which we see. I have been, for some inexplicible reason, been very attached to the idea of a "BCG family" and how it is evolving (in my views, becoming more transactional than personal, as was earlier the case). I guess it is because I can relate to so many people in the office at so many different levels.

He coming from the trading floor saw no reason why that should be the case! For a business that is so completely individual dependant (you will rarely hear about a star consultant, however, the world abounds with Star Traders), he sees no reason why there should be the soft mushy feeling of culture and family around the office environment. Yes, it would be helpful to have it, he says, but then if the feeling of competition is getting the firm more revenues and profits (with one ST gunning after the other), there is no reason why the firm leadership should promote a sense of "family" in the company. It might be helpful, he concedes, in the team environment in which consultants work but even there, there is no demonstratable proof that a feeling of camaraderie (or more than sharing just a transactional relationship with your colleagues) will actually help bolster productivity or creativity.

I obviously cannot prove that to him with hard numbers. However, it is interesting that my framework has now evolved: it now comes with a caveat that the family culture is of importance in a team driven situation rather than in a individual performance driven work environment. (The need for social support to the employee is still there, but it is not necessarily given by the colleagues he works with, but by his out-of-work mates and friends).

The next big challenge to my framework: what should be the size of the team sharing the camaraderie? What I hear from RamG, Shaleen, Sharad etc seems to suggest that even if the case teams share a friendly bond, that should be enough. I will however miss the fact that by growing - and growing fast! - we might be splitting the large joint family into small nuclear households. While all function effectively, the lost feeling of one-ness does make me (and Tushar?) feel sad.

Perspective Changing Events

2005-10-30T21:34:00.000+05:30

Perspective Changing Events:

In light of the move to the new job, there was an interesting remark made by someone in office (was it Guninder?) that resigning from a job takes you out of the frame. I thought it also gave one a new perspective! (Puns rock!)

Refining the framework further with Gouri, I now have a three stage "prespective altering framework". Perspective about how important your job is - and how much you should worry about the same - changes with the change in your environment: how far you are out of the picture (frame!).

In ascending order of getting clarity of perspective, the events are:
1. going home for a vacation (thanks Gouri)
2. resigning from 1's job, and
3. getting married (thanks to a discussion with Bruce and Harsh, I could make a complete three point framework).

Those who belong to the consulting fraternity will realise the import of the statement in parenthesis above: "It always has to be in three points!". However, similar background people will quickly realise that there is no point in making a 2 by 2 of this framework, esp if the other axis is (what else!) "ease of implementation". As 1 can quickly figure out, the ease of implementaion of the above is in descending order and would make a very comfortable r^2=-1 (the buggest joy of any associate trying to prove a hypothesis!)

For a person like me who has intermitently done point 1 and has just executed against point 2, ask me about the "ease of implementation" of point 3! Boy, is it hard! (25 years of my life just prove the point!)

Branding in KPO

2005-10-24T16:42:00.000+05:30

From: Tilotia Akhilesh
Sent: Monday, October 24, 2005 1:16 PM
To: Iyer Ramganesh; Raja Kanishka; Pawar Swapnil
Subject: RE: The power of Brand - How relevant to India

cartel is the word that i was looking for....and the way i look at things (patents, brands, incumbent-protection rules in any market) are just means by which the businesses make money....

my idea in the ed sector (in context of this mail being "how relevant to India") was: can we think of making a KPO brand in India for educating the firang students (i do hope the discussion does not waver here!!). the DPS, Xavier's etc have created a name for themselves in the physical world...in context of KPO, can we create a Brand where we can make the tons of money? i can visualize the profit pool based on the huge PPP and other arbitrage opportunities...

cheers,
akhilesh

ps: the other big reason for putting a sector name was to see if we can think more on the implementation issues of these mails than just long theoretical debates!

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From: Iyer Ramganesh
Sent: Monday, October 24, 2005 12:55 PM
To: Tilotia Akhilesh; Raja Kanishka; Pawar Swapnil
Subject: RE: The power of Brand - How relevant to India

education? of course there are brands all over the place
dps in the north / west and psbb in south are examples

i agree with ur last sentence... in fact i read an article somewhere saying that almost all money in the market (in the absence of protective tariff) is being made through cartels (more abundant than monopolies)

ramg

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From: Tilotia Akhilesh
Sent: Monday, October 24, 2005 12:49 PM
To: Raja Kanishka; Iyer Ramganesh; Pawar Swapnil
Subject: RE: The power of Brand - How relevant to India

am no marketing expert but the way I look at brands is that it is the creation of a mini monopoly profit pool - just like patents. what i find interesting is Kan's logic of branding a low cost product (which i think is superfluous): a brand will typically command a much higher price than its cost.

what 1 is trying to do when 1 brands a product is to make the customer come to my product again and again...and this is more powerful than the patents that provide a more legal (forced) and time bound monopoly. brands - since they connect at the more emotional level (which given that man has remained heart-ruled than head-ruled for the last 5,000 years - and I dont see that changing till we plunge into a black hole) will always provide a much better fortification to the monopoly than the forced patents (people like ranbaxy's will keep hitting at your - pfizer's - patents)

look at the industry that ramG has pointed out, note that none have been able to establish an emotional connect with the consumers. to establish emotional connect what one needs to provide the customer the assurance of the same (hopefully world class!) quality consistently (which can happen in case of both products and service and hence BCG is a brand name)

what interests me is that the educaton sector, esp the primary and the seconday sector does not hae powerful "brands"? think we can create on here in this era of KPO?

cheers,
akhilesh

ps: WB rocks: he has introduced me to the concept of monopoly profit pools which i believe is fundamental to any business

--------------------------------------------------------------------------------
From: Raja Kanishka
Sent: Monday, October 24, 2005 12:30 PM
To: Iyer Ramganesh; Pawar Swapnil; Tilotia Akhilesh
Subject: RE: The power of Brand - How relevant to India

very little idea about 1&2. so wont comment....3 is useless brand or no brand....but as for 4, have had an up close & personal look at what cos. have been doing to establish themselves as a brandin India & worldwide and it is extremely fascinating!

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From: Iyer Ramganesh
Sent: Monday, October 24, 2005 12:19 PM
To: Pawar Swapnil; Raja Kanishka; Tilotia Akhilesh
Subject: RE: The power of Brand - How relevant to India

i agree with kanishka on this...
despite major time information flow nowadays with all technology, 1 has not seen a decline in power of brands in most industries
in fact, industries with no brands (or no major brands) have never made money and have seen significant churn of companies

e.g. 1. aluminium (no joker in the world has made money)
2. HRC steel (no money again), though CRC steel and value add steel has brands and hence Arcelor etc have made money there
3. airlines (where there are brands, but consumers dont care much)
4. cement - another graveyard for many (however cos. now desperately trying to brand their product)

ramg

--------------------------------------------------------------------------------
From: Pawar Swapnil
Sent: Monday, October 24, 2005 11:54 AM
To: Raja Kanishka; Iyer Ramganesh; Tilotia Akhilesh
Subject: RE: The power of Brand - How relevant to India

which brings me to the point of my steady state proposition..

In the long run, (with human beings still around and companies still existant), there weould be no brands..

brands are a transient distortion brought about due to information assymetry, longing for exclusivity and concerns for quality.. (each applicable in different measures to various brands)

coke is thought worth 10 bucks due to concern for quality.. whatever be details of pesticides etc, the myth or reality is that coke is centrally manufactured, is consistent in terms of taste and is drunk by millions.. kind of a quality assurance in a beverage..

eventually, people will start evolving into higher human beings with exclusivity brought about by more inherenht features than acquired ones..
quality will cease to be an issue with advances in standardization.. and information assymetry will also go down with technological and customer rights progress..

so then, everything will be a commodity.. !!!

PS: brands would not be older than 200 years.. and in a true sense have only arrived in last 100 years.. what say?

--------------------------------------------------------------------------------
From: Raja Kanishka
Sent: Monday, October 24, 2005 11:44 AM
To: Iyer Ramganesh; Tilotia Akhilesh; Pawar Swapnil
Subject: RE: The power of Brand - How relevant to India

I do agree with the network effect bit on MSFT but what I dont agree with certainly is your hypothesis of brands being associated with snob value. Without getting into jargon ( I dont know any), there is I think something called cultbrands (or some such name) whose central value proposition is exclusivity. So they work by taking you to a higher perceived pedestal and may have low utility per se. Harley Davidson, Rolls Royce, Apple (used to be one till about 2-3 years back but everyone has an iPod these days) are classic examples.

However, Coke is one of the longest surviving and valuable brands and that does not have snob value as a value proposition. A bottle of coke, when I last heard, would cost the company about 2.40-2.50 including the bottle. It sells for 8-10 bucks because there is a taste and a unique flavor that you associate with Coke. Now some of that taste difference may be actually there, most of it might be due the brand effect but the bottomline is you will not think twice before paying 10 bucks for a coke bottle but you will certainly raise your eyebrows if the lemonade vendor on the street starts selling a glass of lemonade for more than 4-5 bucks.

conclusion: Every brand has its USP, it may be snob value for some (Rolex), same taste (Coke ) for others, prompt & assured service for some others (Fedex) but I owuld certainly not think that snob value is the sole driver.
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From: Iyer Ramganesh
Sent: Monday, October 24, 2005 11:31 AM
To: Raja Kanishka; Tilotia Akhilesh; Pawar Swapnil
Subject: RE: The power of Brand - How relevant to India

This point is true - but I believe only to a certain extent.

MSFT is hardly an example of brand - I think its success is not due to people's awe of the Windows brand, but due to the network effect, where I cant change my OS even if I want to, since I want connectivity and applications to run on my machine....its similar to, but much stronger than, the efffect of phone number change playing on stickiness to a particular provider. I stick to Orange not due to its brand, but due to pain of number change.

Brand is much more relevant in things like Nike, Rado, Longines, etc
Here I have a hypothesis - the more the snob value in a product, the more successful a brand can become...
This is bcos the brand then gets dissociated from the functionality of the product per se - why will a sensible man buy a watch for a few lakhs?

Shoes have snob value - but less than watches... so moderate success of brands here

For a country like India, where miniscule % of people can afford to have snob value, I think the volume game is more relevant than the brand game

Ramg

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From: Raja Kanishka
Sent: Monday, October 24, 2005 11:22 AM
To: Iyer Ramganesh; Tilotia Akhilesh; Pawar Swapnil
Subject: RE: The power of Brand - How relevant to India

I dont think the central argument of the guy's plea is that the volume / low cost route is bad.....I totally agree with the Chinese argument of great productivity by playing the volume game. Similar is starting to be seen for India with their gameplan of lowcost IT offshoring / outsourcing and what now. So there is no doubt that the India/Chinese strategy brings in its rewards and on a sustainable basis (i guess ~20 years of Chinese whirlwind growth is long enough to be called sustainable)

The argument which hits me hard is that the efficiency and impact of a brand is so huge that all other strategies fall on their face. The MSFT example is really compelling. It speaks volumes (no pun intended) about the price points that an MSFT will be able to charge on a sustainable basis because of its extremely high brand equity. I think that as Indian talent and brainpower becomes recognised worldwide, it is time someone thought of building a global brand whose value proposition is unparalleled quality/service rather than 1/3rd the price at which it is available in the west. Imagine if you had a brand like Wal-Mart and you could combine it with a low cost gameplan : the two strategies put together can potentially lead to a blockbuster arrangement!

In A, we did some work on brand valuations where we came across this Interbrand (the global authority on brand valuations) study which stated that for the top 20 brands globally (like Intel, MSFT,Coke etc) , the value of the brand is close to 50-60% of their mkt cap! I dont know if the biggest Indian brands will be able to match even 1/10th of that !

~KR

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From: Iyer Ramganesh
Sent: Monday, October 24, 2005 11:04 AM
To: Tilotia Akhilesh; Pawar Swapnil; Raja Kanishka
Subject: RE: The power of Brand - How relevant to India

fair point...
though it doesnt explain how china is making its unbelievable growth through the volume route, not the brand one....

ramg

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From: Tilotia Akhilesh
Sent: Sunday, October 23, 2005 12:31 AM
To: Iyer Ramganesh; Pawar Swapnil; Raja Kanishka
Subject: FW: The power of Brand - How relevant to India

very interesting article.

cheers,
akhilesh

ps: in many cases, i keep spamming you guys with articles that interest me. in case you come across articles that interest you, please do keep spamming me!

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From: Mankad Shishir
Sent: Friday, May 27, 2005 8:15 PM
To: Mall Amitabh; Garg Ashish; Srivastava Ravi; Bansal Seema; Sinha Abhinav; Sharma Puneet; Jhunjhunwala Pranay; Verma Sharad; Tilotia Akhilesh; Gupta Gouri; Vohra Rohit
Subject: FW: The power of Brand - How relevant to India

I guess this is an old one but nevertheless very provoking and inspiring.....a little longish though.

There's a small question-and-answer game I play with business audiences
when I'm called to address them. I ask them to estimate what they'd pay
for two pieces of leather, about 12" by 6" in size. The answer's
typically about Rs 50 or so.

I then ask what they'd pay for two pieces of flat rubber, about 10" by
4". Again, the consensus is about Rs 20. Now I ask their quote for two
pieces of sturdy string, measuring about three feet long each. A rupee
or two, I'm told.

What would they pay for an hour of manual labour? Oh, about Rs 20, they
say. I then ask them to add up the cost of the goods and labour; some
attentive soul says it's Rs 92. Now I ask them, suppose you took that
leather and instructed the labourer to spend an hour shaping it over the
rubber, pass the strings through the top - and make a decent pair of
shoes that you could sell at a roadside vendor, what would you get for
it? About Rs 150 or so, I'm told. When asked for the profit margin, some
wag quipps that it's about 35%.

I then ask for the cost of four tiny pieces of leather, cut into shapes
of letters of the alphabet. Oh, another two rupees at the most, I'm
reassured. The revised total cost? Rs 94. And what if I arranged those
little pieces in the order 'N', 'I', 'K' and then 'E' on the shoes and
THEN sold them? What would I get? There's typically silence in the
house, and then pandemonium. What would the profit margin be, I ask?
Nobody bothers to calculate in the hubbub.

I do this to illustrate a simple point: that brands earn more. Not being
accustomed to jargon, I did pick up the concept that this line of
activities involved in creating a product - from the slightly reluctant
cow, to the tanner, the dyer, the rubber moulder, the lace-maker, the
cobblers and cobbling machines, to the stockists, the retailers and
finally the eager Michael Jordan fans - is called a value chain.

And the greatest value in this chain is at the end of it. That's where
the money is. I also note that virtually, without fail, all of Indian
industry has been concentrated at the wrong end of the value chain. In
every business, be it leather goods or garments or even computer
software, we have largely been the leather and cobbler suppliers to the
world. A simple calculation brought this home. An Indian IT service firm
was making loud whooping noises about crossing a billion dollars in
revenues. I read they had some 25,000 people who took them to that
number. I looked then at a former client of mine, Microsoft, who - with
twice the number of people - pulled off $32 billion in revenues. A
productivity-per-employee figure that is not twice or 4 times, but 16
times that of one of our more admired companies.

when will we begin to learn that building end-user brands - and not
low-cost processes - is what brings the moolah home? That's what will
increase our GDP, bring in the wealth, and actually make us a developed
nation.

Why is it that we teach thousands of B-school students the art of brand
creation - from understanding customer needs, competitive strengths, gap
identification and obscure market research techniques - and then deploy
them at multinationals selling soap with "new, increased carbolic acid"
rather than with someone creating global brands from right here in
India? Beats me.

I see today's entrepreneurs from Tirupur proudly claim to sell
top-quality t-shirts to Tommy Hilfiger for Rs 150 - and then use the
money they earn to go abroad and buy the same thing back at Rs 1,000 a
piece.
Somebody told me that to create a brand, you must be near consumers, and
we can't do that if consumers are in the US. Nonsense. Today, TV and the
internet are global.

My six-year-old in Bombay tells me what's cool among six-year olds in
Boston. If the Japanese can sell cars and perfumes globally, and the
Koreans handsets, we can certainly give the world our brands.

We can be more than just cobblers to the world ... Think about it

Market Effeciency

2005-10-18T16:07:00.000+05:30

Gan,

most of your fundae on markets and institutions like the govt. assume an artificially intelligent mechanism in place (assuming the market & institution is an inaminate entity) which must ensure its efficient working. while the theory on efficient markets would say certain things, I think there are enough aberrations, loopholes that people continually exploit and profit from, be it IPO pricing or hedge funds. I agree that the long term profitability of such aberrations might be suspect; however, they do exist in the short term and the id (Bart-speak for idea) is to make money from them while they last.

As for govt removing money from you and giving poorer people goes, I think it is wishful socialist intellectual masturbation!
_____________________________________________
From: Iyer Ramganesh
Sent: Tuesday, October 18, 2005 3:41 PM
To: Tilotia Akhilesh; Pawar Swapnil; Raja Kanishka
Subject: RE: jis prakar se bazzar gir raha hai,

its the difference between what is good for the individual and what is good for the society
if i am here for speculation, market shud stop me

something like - i wud rather have more money than less
but govt. has to remove money from me and give a poorer guy

ramg

_____________________________________________
From: Tilotia Akhilesh
Sent: Tuesday, October 18, 2005 3:39 PM
To: Iyer Ramganesh; Pawar Swapnil; Raja Kanishka
Subject: RE: jis prakar se bazzar gir raha hai,

and I thought we were proponents of limited liquidity :)

_____________________________________________
From: Iyer Ramganesh
Sent: Tuesday, October 18, 2005 3:38 PM
To: Pawar Swapnil; Tilotia Akhilesh; Raja Kanishka
Subject: RE: jis prakar se bazzar gir raha hai,

good

healthy market exists bcos of such divergent views

ramg

_____________________________________________
From: Pawar Swapnil
Sent: Tuesday, October 18, 2005 3:37 PM
To: Iyer Ramganesh; Tilotia Akhilesh; Raja Kanishka
Subject: RE: jis prakar se bazzar gir raha hai,

on the contraary, i was thinking of longing now!!!

_____________________________________________
From: Iyer Ramganesh
Sent: Tuesday, October 18, 2005 3:35 PM
To: Tilotia Akhilesh; Pawar Swapnil; Raja Kanishka
Subject: RE: jis prakar se bazzar gir raha hai,

wow !
its phenomenal !!

but am still waiting for it to fall to 6500 before longing

ramg

_____________________________________________
From: Tilotia Akhilesh
Sent: Tuesday, October 18, 2005 3:32 PM
To: Iyer Ramganesh; Pawar Swapnil; Raja Kanishka
Subject: jis prakar se bazzar gir raha hai,

hume lagta hai hamari naukri gaye :)

cheers,
akhilesh

ossum bear hug!

Hedge Funds

2005-10-18T15:56:00.000+05:30

From: Tilotia Akhilesh
Sent: Tuesday, October 18, 2005 9:21 AM

To: Iyer Ramganesh; Pawar Swapnil; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

am not sure why we need less liquidity - is not the fundamental premise that more the liquidity the better the price discovery? and in the case of the hedge funds, the "limited utility" that they provide is not just in terms of the increased liquidity but their ability (and willingness) to remove even the smallest of arbitrages (through all the convoluted deals, etc)
also, speculation is very different from manipulation - which is what these crashed funds had gotten into. in case of both bayou and refco, they hid 400 mn$ each of their losses as assets - not unlike what enron did. it is a more basic case of the "accounting" regulator not being able to devise a better disclosure mechanism than for the "market" regulator to stop them from manipulating the markets...for SECs and SEBIs of the world, the problem is to identify the black sheep - who is the fellow who is most probable to indulge in manipulation (as opposed to speculation and plain arbitraging)....
the trick there would be to distill learnings from these disasters and devise some early warning mechanism...some I could think of (and 1 can devise a framework):
1. flamboyant advertising (HomeTrade in India)
2. significantly high returns earned by the fund - are they "asset"ing their losses to show a good performance
3. sudden spurt in business volumes - esp if prompted by point 2 above
I guess the point that I am going back to is the same one that we made in the small paper we wrote: hedge funds need more regulation in terms of assessing their health on a periodic basis...may not be stifling regulations that take the creativity out of them, but such that their risks are known to the market at large
thoughts / ideas?
cheers,
akhilesh
ps: should we be blogging all the mails? much easier to keep a record also.
_____________________________________________
From: Iyer Ramganesh
Sent: Monday, October 17, 2005 11:37 AM

To: Pawar Swapnil; Tilotia Akhilesh; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

one simple way is to exactly reverse the current STT structure for day trading vs. delivery
ramg

_____________________________________________
From: Pawar Swapnil
Sent: Monday, October 17, 2005 11:31 AM

To: Iyer Ramganesh; Tilotia Akhilesh; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

so the next question is how do you promote liquidity without promoting speculation of the chart types?
i would go a step further and question, how much liquidity do we need? or let's say, can we do with less liquidity?
to me, the purpose of liquidity is efficient price discovery..
any ideas?
_____________________________________________
From: Iyer Ramganesh
Sent: Monday, October 17, 2005 11:27 AM

To: Pawar Swapnil; Tilotia Akhilesh; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

exactly
their limited utility is in ensuring liquidity
i am opposed to it going through the roof, as it quickly tends to do
ramg

_____________________________________________
From: Pawar Swapnil
Sent: Monday, October 17, 2005 11:22 AM

To: Iyer Ramganesh; Tilotia Akhilesh; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

i am somewhat more liberal than that..
i would say, let them speculte in casinos and horse races..
some idiotic hedge funds playing with psyche of managements is not very healthy..
i doubt value of such a stock market most of whose active participants are speculators ... and that too not on how something will affect a company and its value but on how majority will think about it.. you know a second order speculation..
agreed that these guys provide the much needed liquidity to the securities.. but they become a bloody pain when they go belly down..
if they need to be promoted only for liquidity, i think we need to look at better solutions..
what say?
_____________________________________________
From: Iyer Ramganesh
Sent: Monday, October 17, 2005 11:14 AM

To: Tilotia Akhilesh; Pawar Swapnil; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

i think speculation in any form is avoidable... and when such activity goes through the roof, regulators have to step in to stop it....
in any case as saand said, in india they are insignificant. if they cause some panic in US stock markets, just all the better...
thats why i think charging lower taxes for day trading and all are retrograde steps, encouraging such speculation as against term investment.. so before india goes the same way, we shud correct our laws
ramg

_____________________________________________
From: Tilotia Akhilesh
Sent: Monday, October 17, 2005 11:10 AM

To: Iyer Ramganesh; Pawar Swapnil; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

we might think low of hedge funds, america, mcdonalds, etc etc...
but these things do have a huge value attached to them and when they crash, they take the whole damn world down with them! :(
cheers,
akhilesh
_____________________________________________
From: Iyer Ramganesh
Sent: Monday, October 17, 2005 11:07 AM

To: Tilotia Akhilesh; Pawar Swapnil; Raja Kanishka
Subject: RE: 3 hedge funds have crashed in the last month or so...

i hope so
i think pretty low of hegde funds anyway
ramg
_____________________________________________
From: Tilotia Akhilesh
Sent: Saturday, October 15, 2005 1:49 PM

To: Iyer Ramganesh; Pawar Swapnil; Raja Kanishka
Subject: 3 hedge funds have crashed in the last month or so...

Wood River Capital
Bayou
Refco
Will this be the next big challenge facing the financial markets?
Cheers,
akhilesh