Canada remains steady in 2022 Mercer CFA Institute Global Pension Index highlighting key challenges of defined contribution plans for retirees 

October 11, 2022

Canada, Toronto

• Index compares 44 retirement income systems, covering 65 percent of the world’s population
• Canada maintains B rating, placing 13th on the index
• Index sees Iceland top the list for second year in a row
• As more employers shift from defined benefit to defined contribution plans, retirees will take on greater financial risks

Today, Mercer and the CFA Institute released its 14th annual Mercer CFA Institute Global Pension Index (MCGPI). Iceland’s retirement income system has once again topped the list, with The Netherlands and Denmark retaining second and third places respectively in the rankings. As more employers have stepped away from defined benefit (DB) plans, the study also investigates the challenges and opportunities with the global shift towards defined contribution (DC) plans where individuals bear increased financial responsibility. 

The MCGPI is a comprehensive study of 44 global pension systems, accounting for 65 percent of the world’s population. It benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would help provide more adequate and sustainable retirement benefits.

Senior Partner at Mercer and lead author of the study, Dr. David Knox, highlighted the importance of strong retirement schemes in light of growing external uncertainty.

“Individuals have been assuming more responsibility for their retirement savings for some time; amidst high levels of inflation, rising interest rates and greater uncertainty about economic conditions, they are doing so in an increasingly complex and volatile environment. Despite differences in social, political, historical or economic influences across geographies, many of these challenges are universal. And while the necessary reforms may take time and careful consideration, policymakers must do all they can to ensure retirement schemes are supported, developed and well-regulated,” said Dr. Knox.

CFA Institute President and CEO, Marg Franklin, CFA, underscored the dynamic environment of the investment industry.

“Since the inception of the Mercer CFA Institute Global Pension Index, the investment management and pension industry at large have faced extraordinary challenges. New financial products and strategies will be required to deliver adequate returns for beneficiaries. This past year, we’ve gone from a ‘lower for longer’ interest-rate environment to significant rates of inflation, quadrupling of interest rates in some global markets and a rise in the cost of living for many, all of which have a significant impact on the fixed income of retirees,” said Ms. Franklin.

“At CFA Institute, we believe financial professionals can serve as a force for good in society to support individuals through this complex time. This report provides insights on how retirement plans need to adapt or are adapting to the changing environment, and also makes recommendations for a range of reforms that can be implemented to improve the long-term outcomes from our retirement income systems,” she added.

As employers continue to step away from the financial security which has been offered in DB plans, individuals bear the risks and opportunities before and after retirement. Unlike DB plans where an individual receives regular income payments for life upon retiring, typically DC plans provide individuals with a lump sum benefit at retirement. Additionally, many governments are considering reducing their level of financial support during retirement to ensure the country’s financial sustainability over the longer term.

The result is that many individuals will no longer be able to rely on significant financial support from their previous employers and/or government during their retirement years. Therefore, it is essential individuals make the best financial decisions at retirement to maximize the value of their available DC pension assets. Just as diversification is a key part to any investment scheme, individuals may also seek to diversify their retirement savings between regular income, appropriate protection and access to capital, as well as different sources of financial support including government, private pensions and individual savings.

“Households will have to consider what the right balance is between receiving a steady income, access to some capital and protection from future risks, given the many uncertainties faced by retirees,” said Dr. Knox.

“It is critical that we understand whether or not the retirement income systems around the world will be able to meet the needs and expectations of their communities for decades to come,” he continued. “There is no single or perfect answer – the best system is the one that helps individuals maintain their previous lifestyles into retirement. Governments, employers, policymakers, and the pension industry should use the full array of products and policies available so individuals can retire with dignity, confidence, and financial security.”

Canada maintained its B rating and saw its index value increase slightly from 69.8 in 2021 to 70.6 in 2022.

“While Canada’s retirement system continues to rank well globally, there are risks that employers and employees need to manage in the current environment,” said F. Hubert Tremblay, Principal and Senior Wealth Advisor with Mercer Canada. “As DC pension plans continue to make up a-greater part of Canadians retirement, turbulent markets, soaring inflation and a higher cost of living are all impacting older workers that are transitioning to full or part-time retirement.”

“It is important for Canadians to make sound financial decisions to maximize the value of their available DC pension assets as they move toward retirement.” said Tremblay. “Employers can support this transition for their plan members by providing and promoting financial wellness tools and benefits to employees at all stages of their careers. The retirement industry also needs to support workers transitioning into retirement by providing good options to convert accumulated assets into retirement income, low investment fees, and helping future retirees understand how the Canada/Québec Pension Plans can be leveraged to deal with investment and longevity risks.”

CFA Societies Canada Managing Director, Michael Thom, CFA, recognized the quality of Canada’s retirement savings system as reflected in this rating, but also the opportunity to collaborate for continued progress.

“Canada has had a respectable rating since the inception of the Mercer CFA Institute Global Pension Index, and has much to be proud of across the Canadian investment management and pension ecosystem. But challenges remain given inflation, increasing interest rates, and financial market volatility. Canadian investors, investment advisors, pension fund managers, and government policymakers need to continue to holistically examine the opportunities for ensuring cost effective, accessible, and reliable retirement savings solutions. For current or prospective retirees, longevity risk and an escalating cost of living are critical near-term concerns for those receiving or facing fixed retirement income.” said Mr. Thom.

Iceland had the highest overall index value (84.7), closely followed by the Netherlands (84.6) and Denmark (82.0). Thailand had the lowest index value (41.7).

The Index uses the weighted average of the sub-indices of adequacy, sustainability, and integrity. For each sub-index, the systems with the highest values were Iceland for adequacy (85.8) and sustainability (83.8), and Finland for integrity (93.3). The systems with the lowest values across the sub-indices were India for adequacy (37.6), Austria for sustainability (22.7), and the Philippines for integrity (30.0).

In comparison to 2021, Mexico showed the most improvement as a result of pension reform, which improved outcomes for individuals and pension regulation.

The MCGPI benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would provide more adequate and sustainable retirement benefits.

This year, the Global Pension Index compares 44 retirement income systems across the globe and covers 65 percent of the world’s population. The 2022 Global Pension index includes one new retirement income system – Portugal.

The Global Pension Index uses the weighted average of the sub-indices of adequacy, sustainability and integrity to measure each retirement system against more than 50 indicators.

The Global Pension Index is a collaborative research project sponsored by CFA Institute, the global association of investment professionals, in collaboration with the Monash Centre for Financial Studies (MCFS), part of Monash Business School at Monash University, and Mercer, a global leader in redefining the world of work and reshaping retirement and investment outcomes.

For more information about the Mercer CFA Institute Global Pension Index, click here.

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion of ethical behavior in investment markets and a respected source of knowledge in the global financial community. Our aim is to create an environment where investors’ interests come first, markets function at their best, and economies grow. There are more than 190,000 CFA® charterholders worldwide in more than 160 markets. CFA Institute has nine offices worldwide, and there are 160 local societies. For more information, visit www.cfainstitute.org or follow us on LinkedIn and Twitter at @CFAInstitute.

A research centre based within Monash University's Monash Business School, Australia, the MCFS aims to bring academic rigour into researching issues of practical relevance to the financial industry. Additionally, through its engagement programs, it facilitates two-way exchange of knowledge between academics and practitioners. The Centre’s developing research agenda is broad but has a current concentration on issues relevant to the asset management industry, including retirement savings, sustainable finance and technological disruption.

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