The key to the future of investment can be summed up in one word, according to Ronald P. O’Hanley: population.
“The world is getting older,” said O’Hanley, chief executive officer of BNY Mellon Asset Management, speaking before a packed audience in Posner Hall as part of the Tepper School’s W.L. Mellon Speaker Series.
O’Hanley pointed out that from 1950 to 2000, the percentage of the developed world’s population that was 65 and older jumped from 8 percent to 15 percent; by 2050, demographers forecast the proportion will be 27 percent.
And that is why demographics will “govern the careers of a lot of us going forward,” he noted. “As we speak today, if you are a male age 65, you have a 50 percent chance of living to 85 … we’re seeing this unbelievable extension of life. It’s unparalleled.”
The ramifications for the population in general, and specifically money managers, are significant. For example, dependency ratios — the number of people working compared to the number of non-workers — are expected to shift dramatically during the next 35 years.
In 2000, there were 3.8 people working in the United States to support every one non-worker. By 2040, that ratio will be 2 to 1 in the United States, but 1 to 1 in Italy, China, and Japan. By 2041, the Social Security trust fund, now valued at $2 trillion will be depleted.
“This is pretty easy to fix, because you’ve got time on your side,” says O’Hanley of the Social Security problem.
He believes the more significant challenge presented by the aging population will be its effect on health care, and said he hopes some students in today B-schools will eventually work to solve that problem.
“We can’t have a system that by the middle of this century is going to consume half of our gross domestic product,” O’Hanley said. He predicted that annuities will be re-engineered to play a bigger role in financing the costs of retirement, including healthcare. A third of a person’s lifetime expenditures on health care come in the final six to 12 months of life, he noted, posing challenging problems for government and the private sector.
The real question now, for both policymakers and money managers, is this: Who is going to pay those costs?
“You’re seeing a massive shift of responsibility to the individual,” he said, adding that the current system is already expensive and burdensome to both government and employers. For example, payout for Medicare, which is not means-based, is forecast to exceed revenues by 2011.
The retirement and healthcare systems will continue to transform from employer-based plans to programs that employees and retirees are responsible for managing, he said. Employers will continue to play a role, as will government, but individuals must improve their financial literacy if they are going to step up to their responsibility, he said, adding that education in money management is required from the primary grades onward to help people better manage their own financial resources.
O’Hanley also predicted a more complex long-term role for asset managers, citing the September transaction in which U.S. automakers agreed to turn responsibility for managing retiree health care over to a union-run trust. As O’Hanley points out, someone will have to administer that trust.
A veteran of change
O’Hanley is no stranger to unprecedented growth and change. Since joining Mellon in 1997 after a decade with McKinsey & Co. Inc., he has helped Mellon Institutional Asset Management more than double in size. Today, his company is among the top 10 of its kind in the United States, handling more than $1 trillion in assets.
In addition to managing investment subsidiaries, O’Hanley is also responsible for U.S. and international retail, intermediary and institutional distribution activities of The Bank of New York Mellon. Today, the U.S. business consists primarily of The Dreyfus Corporation. Dreyfus, established in 1951, is one of the nation's leading mutual fund companies, currently managing approximately $190 billion in more than 200 mutual fund portfolios nationwide as of the first quarter 2007.
In late November, the Bank of New York Mellon Corp. and Western Securities announced an agreement to establish a joint venture fund management company in China. O’Hanley believes the venture, which is expected to launch in 2008, will help achieve a key strategic priority of accelerating the bank’s growth outside the U.S. While at McKinsey, O’Hanley served as a partner and led the firm’s investment management practice worldwide. He also was co-leader of its North American personal financial services practice.
The W.L. Mellon Speakers Series gives Tepper School students the opportunity to engage in personal exchanges about strategy, world affairs, and other key issues with C-level business executives. Sponsored by the Graduate Business Club and other student organizations, the series includes a presentation open to the entire school, as well as student-only breakout sessions that encourage lively discussions with the speakers in small-group settings.