Retirement to Reefs: the Creativity in Global Economic Innovation

S&P Global
Written By: John Kingston
S&P Global
Written By: John Kingston

Panelists at an early-February Council on Foreign Relations session on "Innovative Finance" discussed how their own institutions are looking at addressing unmet needs in areas as varied as saving barrier reefs to moving money via mobile phone.

The answers they gave set the stage for a broader discussion of how technology, innovation, and private and public capital can come together to improve the financial standing of possibly millions of people. S&P Global is a member of the Council on Foreign Relations and was in attendance.

The following is a recap of the four responses.

Saadia Madsbjerg's innovation--reef insurance, or more formally the reef resilience insurance fund -- is not yet in place. But it is a plan that is now being worked out under the auspices of the Rockefeller Foundation, where Ms. Madsbjerg is managing director.

"We don't think of reefs as natural infrastructure, but they're actually a very efficient way of protecting our coastal areas," she said. "They work as a sea wall would but in a more efficient way. But there isn't enough money to preserve them and protect them."

The reef insurance’s target is the Mesoamerican Barrier Reef System, which has been described as "continuous from Cancún on the north-eastern tip of the Yucatán Peninsula through the Riviera Maya and up to Honduras." It is a natural feature vital to the regional tourist industry.

The reef insurance idea involves a project with Swiss Re and The Nature Conservancy that would draw upon various funding sources from the business community and other institutions. The proceeds from the fund can be used to buy insurance protection which would kick in "when something terrible happens," Ms. Madsbjerg said. The resources needed to rebuild the reef would be chosen in advance and be on a form of standby to launch reconstruction quickly. "Whether more money would be left over after that has yet to be determined," she said.

Sonal Shah's choice was an infrastructure funding project that rewards the chosen contractor for – counterintuitively – reducing the need for the infrastructure in question to be used. Ms. Shah is the executive director of the Beeck Center for Social Impact & Innovation and a former White House staffer under President Obama.

The project she cited is in New Zealand, and it involves, as she said, "the government paying for outcomes." Ms. Shah discussed the project in generalities, but specifically, it was a contract signed in 2012 between the New Zealand Department of Corrections and a consortium dubbed Serco that includes the UK's John Laing (whose marketing tag line is "Making infrastructure happen") to build and maintain a new prison in South Auckland. The prison opened in 2015.

"You're paying the infrastructure builder on how much they reduce recidivism in the jail," she said. "You're getting paid for how many people don't come out." Payment tied in part to how little the infrastructure gets used is an "oxymoron" in the infrastructure world, according to Ms. Shah.

It requires the infrastructure builder to rethink their entire approach, she said. "How do I build a jail that was meant to keep people out, not in?" is the way Ms. Shah described the challenges faced by the builder. Wardens and staff need to be retrained, and metrics need to be studied to determine why people are getting put in the jail, and what will keep them from returning. "They realize they need to change their measurement of risk," she said.

Diane Garnick, the chief income strategist for TIAA, talked in general about customization of financial products in her opening remarks. But later in the session, she turned to Secure Choice, a program adopted by several states—Illinois appears to be the biggest and furthest along--to provide pension-type benefits to those not in position to be enrolled in such a plan. The question naturally arises: What's the benefit from Secure Choice compared to just sticking money into an IRA, since there is no 401K-like match? Her answer: diversification of longevity.

In a defined benefit plan, like a traditional pension, the diversification of longevity helps the strength of the system, where participants receive those benefits for a widely divergent period of time. "If you have savings in a household of two or three people, you don’t get that diversification of different life expectancies, so that’s where the big difference is,” she said.

In an email exchange after the event, Ms. Garnick was asked how someone who enrolls in a Secure Choice account gets that diversification of longevity if they’re not in some sort of annuity or an income stream guaranteed by the state. If it’s just a state-held collection of accounts akin to IRAs, where’s the group benefit?

Target date funds, but with revisions from their current setup, are one way to get that diversification, Ms. Garnick said. “The next generation of target date funds includes a key component of allocating funds to retirees from the target date forward using guaranteed lifetime income,” she wrote. “This one change not only meets the needs of people relying on their retirement savings for safety in retirement, it also helps society ensure that retirees won’t embark on a spending spree one year and run out of savings the next.” Many Secure Choice plans going forward will feature that guaranteed lifetime income aspect, she said, and can be set up so individual account holders can get the benefit of diversification of longevity that can now be obtained through a defined benefit plan. (An annuity would provide the same benefits, though Ms. Garnick did not mention annuities specifically).

Arunma Oteh is vice president and treasurer of The World Bank. She discussed the financial transaction system on mobile phones that have developed with such programs as M-Pesa, which has revolutionized personal finance in Africa. But more intriguing was her discussion about a World Bank initiative launched last year to prepare countries to prepare for a pandemic that may sweep poorer nations, an initiative spurred by the recent Ebola crisis. "We were asked to think about solutions from the market, to make sure there is funding available when it's needed," she said.

The multifaceted plan includes premiums paid by donor countries, bringing in the reinsurance industry, and the use of bonds issued by the World Bank under its catastrophic bonds program, combining to fund a pool of money that can quickly be tapped to stop a pandemic from spreading. "People are excited because the World Bank has a track record and convening power," Ms. Oteh said.

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