Global Pension Index reveals bar is being raised, but improvement critical to meet future retirement challenges
- Denmark holds onto #1 for fourth year running
- Sustainability of pension systems under the microscope: A seven-year review
- 'Longevity risk’ the key threat to pension sustainability
The world’s most comprehensive comparison of pension systems has revealed the standard of retirement savings systems across the world is increasing, but the macro trends of increasing life expectancy and an ageing population are placing such incredible pressure on governments that continual review and improvement remains vital to ensuring that pensions systems can continue to deliver.
The Melbourne Mercer Global Pension Index (MMGPI), now in its seventh year and covering close to 60% of the world’s population, measures 25 retirement income systems against more than 40 indicators under the sub-indices of adequacy, sustainability and integrity. It is a unique reference for policy makers around the world to learn from the most adequate, sustainable and trusted pension systems.
Denmark held onto the top position for the fourth consecutive year in 2015 with an overall score of 81.7, ahead of the Netherlands (80.5) and Australia (79.6). Denmark, who along with the Netherlands is the only country to receive an ‘A’ grade for a score exceeding 80, earned top spot for its well-funded pension system, the provision of adequate benefits and a private pension system with developed regulations.
The report is published by the Australian Centre for Financial Studies (ACFS) in conjunction with Mercer and is funded by the Victorian State Government in Australia.
Report author and Senior Partner at Mercer, Dr David Knox, said, “Developing and implementing the right reform to improve pension systems and provide financial security in retirement has never been more critical for both individuals and societies.”
“In coming years, age-related spending around the world, primarily driven by increased pension and healthcare costs, will potentially outstrip the costs of the Global Financial Crisis, the most significant financial crisis in 100 years. It would be remiss of governments and policy makers around the world not to use the MMGPI as a source to strengthen their pension system now and to prevent financial strain on the next generation.
“The MMGPI suggests how governments can provide adequate and sustainable benefits that protect their citizens against longevity risk, the risk of their aging population outliving their savings, potentially one of the biggest economic and social risks facing many retirees today,” said Dr Knox.
“We know there is no perfect system that can be applied universally, but there are many common features that can be shared for better outcomes.
Amy Auster, Executive Director of ACFS, said, “The Index is used internationally both to highlight the relative strengths of pension systems and identify opportunities and options for improvement. Looking back at the results from the past seven years we can see several countries that have adopted recommendations from our annual reports to strengthen their pension systems.
“It is encouraging to see that the insight provided by the Index encourages and supports policymakers and industry practitioners to take a long-term view, and work toward the betterment of their pension systems.
“This is not always easy in the face of demographic pressures and changing market conditions, but we see clear evidence that policy-makers are continuing to enhance their pension systems in order to adequately serve future generations,” said Ms Auster.
Seven years of the MMGPI: Can pension systems keep delivering?
The 2015 MMGPI looked beyond the annual rankings to observe changes over the last seven years and assess which pension systems will continue to deliver and which ones are at risk.
“Our seven-year snapshot highlights the importance of measures such as adjusting the state pension age, increasing workforce participation amongst our ageing population, or funding additional contributions for future retirement income,” said Dr Knox.
We’re spending longer in retirement
All of the 11 countries that have been part of the MMGPI since it began in 2009 have experienced an increase in the expected length of retirement from 2009 to 2015, with the average length rising from 16.6 years to 18.4 years.
Five countries – Australia, Germany, Japan, Singapore and the UK – have increased their pension age to offset the increase in life expectancies, but these are not enough to halt the increasing length of retirement.
The Index also looks at the average expected length of retirement in 20 years, and by this measure, three countries have witnessed a reduction. For Canada and the Netherlands this is due to a projected increase in the state pension age from 65 to 67 during the 20 years, while for the USA, life expectancy has reduced slightly. The other eight countries showed an increase.
Increasing workforce participation of older workers: good for the economy & individuals
For the 16 countries that have been part of the MMGPI since the 2011 report, the average labour force participation rate for 55-64 year olds has increased from 57.9% to 62.2% between 2011 and 2015, or just over 1% per year.
However, averages can be misleading. The labour force participation rate at older ages actually went backwards in the USA. In Brazil, India and China, it increased by less than 4%.
“Extending the years that individuals spend in the workforce is one of the most positive ways of developing sustainable retirement systems when life expectancies are increasing,” Dr Knox said.
“While there is a natural limit to the participation rate at older ages, with most countries still below 70%, the scope for significant increases across the world remains, which would improve the sustainability of many pension systems,” Dr Knox added.
Preventing financial strain on the next generation
The sustainability of a pension fund cannot be assessed without reviewing the level of funds set aside today to pay future retirement benefits so that the expected pension are not a financial strain on the next generation.
There is an enormous variety in the level of pension assets held ranging from 1.8% of GDP in Indonesia and 6.0% of GDP in Austria to 160.6% of GDP in the Netherlands and 168.9% of GDP in Denmark.
“The diversity in pension assets held as a percentage of GDP recognizes that some countries have very limited private pension arrangements whereas others have well-developed and mature pension systems. However, it is an important warning for all countries to prepare, prepare, prepare,” said Dr Knox.
How can countries improve their retirement savings system?
The challenges that are common to many countries include the need to:
- increase the state pension age and/or retirement age to reflect increasing life expectancy, to reduce the costs of publicly financed pension benefits
- promote higher labour force participation at older ages to increase the savings available for retirement and limit the continuing increase in the length of retirement
- encourage or require higher levels of private saving, both within and beyond the pension system, to reduce the future dependence on the public pension and rebalance the expectations of many workers
- increase the coverage of employees and/or the self-employed in the private pension system, recognising that many individuals will not save for the future without an element of compulsion or automatic enrolment
- reduce the leakage from the retirement savings system prior to retirement thereby ensuring that the funds saved, often with associated taxation support, are used for the provision of retirement income
- review the level of public pension indexation as the level and frequency of increases are critical to ensure that the real value of a pension is maintained, balanced by its long term sustainability
- improve the governance of private pension plans and introduce greater transparency to improve the confidence of plan members.
About the Australian Centre for Financial Studies
The Australian Centre for Financial Studies (ACFS) is a not-for-profit consortium of Monash University, RMIT University and Finsia (Financial Services Institute of Australasia) which was established in 2005 with seed funding from the Victorian Government.
The mission of the ACFS is to build links between academics, practitioners and government in the finance community to enhance research, practice, education and the reputation of Australia's financial institutions and universities, and of Australia as a financial centre. ACFS conducts leading edge finance research, commentary and thought leadership. More information can be found at www.australiancentre.com.au and on the Index www.globalpensionindex.com.
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