Exploring the risks, impacts of future of work on investments

The future of work and the impacts of automation, robotics and artificial intelligence (AI) on society and the economy is a mega-trend that will impact on superannuation investment on a number of levels.

A recent Morgan Stanley report notes four changes that will impact how companies manage human capital – automation, robotics and AI, business model disruption, and labour cost regulatory pressure, and demographic and societal changes. These disruptions will not only impact the companies that super funds invest in, but also impact on the accumulation of superannuation as employment patterns change.

The Morgan Stanley report cites studies by Oxford University and the OECD that estimate “up to 47% of jobs in the US and 35% in the UK could potentially be at risk by the early 2030s.” There is a risk and an opportunity in those estimates – there will be jobs created that are not currently imagined, meaning there are needs to retrain and reskill workers, and also attract people with data science and analytics skills. Further, the Morgan Stanley study points out that energy transition and shift to electronic, autonomous and shared transport as well as increasing ecommerce “are some of the changes likely to impact human capital management.”

There is also the potential for downward wage pressure, increased economic inequality, and demographic and societal changes – Morgan Stanley says “the proportion of people aged 55-64 will rise from 13 to 15% of the global population in the next 10 years according to the UN World population prospects, requiring employers to rethink how they manage this part of the labour market. We think companies will also need to adapt human capital strategies to satisfy millennials’ calls for more flexible and independent work.”

Pauline Vamos, chief executive of Regnan, believes the future of work is an issue that institutional investors should be grappling with.

“Our analysts are looking at what’s going on, particularly around the impacts of AI and workforce reorganisation,” she said. “It’s happening now. It’s been happening for a while and the pace of change is accelerating….  You look at ANZ and NAB, because they’ve both gone through significant workforce reduction because of the impacts of new technologies, the ability to become more agile as a workplace, and the offshoring of professions including accountants, lawyers, and designers. There are big, a lot of providers try to reduce cost, that’s already having a significant impact on the workplace, and then we look at what’s been happening for a long time with the mining industry, autonomous vehicles. We see what’s happening in retail.  It’s been happening for a while, and the number of workers relative to productivity has reduced.”

This reverberates through the economy, Vamos said.

“You look at what does that do for the economy, what does that do particularly from the part of the economy to that the consumer, and we know that consumption is changing and the way people are consuming is changing, and that has a massive impact,” she said. “Then you go to, what does that mean in terms of, I look at some of the ACTU lobbying recently around raising minimum wage – how does that happen where you have the risk of more and more people being unemployed, or casualised or part-time work. That money has to go further.”

The Morgan Stanley report notes that increased AI and robotics could mean the “nearshoring” or reshoring of production that had moved from developed economies to emerging economies due to lower wage costs.

The casualization of the workforce as well as relatively stagnant wages and underemployment means there is less in contribution for superannuation funds, which also impacts on the ability to invest, Vamos noted.

“It’s’ an economic issue, but it’s also an investment issue, and of course, it’s ultimately a social issue,” she said. “The organisation itself may be better, more efficient, more cost effective, have higher productivity and better occupational health and safety outcomes, but it could mean a lot less people who can earn money and who can consume other parts of the economy. What does that mean for the whole financial ecosystem? We’re all joined together – there’s an ecosystem, and we all have our part to play, and the impact on one can have indirect impacts on everyone else. We’ve been engaging for a long, long time, and it really comes out of our strategic human capital work.”

The Morgan Stanley report also points out that organisations are being challenged to preserve corporate culture while balancing the needs for flexibility from older workers and younger workers, noting “we believe it could become a competitive advantage to attract new talents,” and “the increase in the contingent workforce may offer greater recruitment flexibility for companies, but will require them to adapt to the different risks of dealing with a contingent work force. “

The Morgan Stanley report cited an EY study that found that “87% of full time employees in the UK either work flexibly or want to. And this seems likely to only increase in future, with 92% of young workers in the same study wanting flexibility.”

This of course will impact in Australia as well.

“There is a role for unions and the role of employers in ensuring that there is an orderly transition within various industries,” Vamos said. “On a company by company basis, there’s the issue of losing staff too quickly by ‘abandoning the ship’. How to manage that as a win/win is being discussed, and that is more a workplace morale status. But then, around that, of course the whole way you look at the percentage of people in the gig economy, they’re avoiding the main economy. It’s one of the outputs of technology. The gig economy, because it’s part of the informal economy, they’re unlikely to have superannuation. What does that mean for aged pension going forward, what does that mean for the fundamental strength of the superannuation system? Then you look at how the winding back of lending practise in bank will have a huge impact on those in the gig economy.”

Morgan Stanley sees risks and opportunities in the gig/freelance economy.

“Companies may decide to employ more people as freelancers to remain attractive in the competition for talent,” the report said. “This could particularly affect younger generations and older workers, who express more interest in becoming freelance workers. However, this could create new challenges for employers in terms of managing a contingent workforce. On the other hand, companies would benefit from greater flexibility over recruitment, which may allow them to better adapt to technological changes by tapping into a pool of new tech specialists.”