Personal accountability, and the risks that lie ahead 

As the economic environment evolves, there is an increased emphasis on individual accountability for retirement income. But this is not without risk. 

The Mercer CFA Institute Global Pension Index 2022 reviews 44 different retirement income systems from around the world, ranking and rating them each according to a set criterion. 

To do this, we analyse three core components – adequacy, sustainability, and integrity. 

With adequacy, we consider the benefits provided and how beneficial these are to retirees. This includes state pensions as well as private savings and home ownership. 

For sustainability, we take a longer-term view of each system’s affordability taking account factors such as changes in longevity, demographic changes and the level of national debt, and look at how these may be expected to develop across multiple decades. We review the progress of each system and consider their affordability relative to the data. 

For example, when looking at the Greek debt crisis of 2015, we believe the pension benefits on offer were excellent, but crucially, unaffordable for the Greek government. Across southern Europe, we see similar patterns emerging now.

Naturally, there’s a tension that exists between adequacy and sustainability. 

Our third field is integrity, through which we consider how reliable each system is, the level and nature of governance and how well-regulated it is today. 

These categories provide an extensive overlay for the multiple stakeholders involved in retirement income systems - government, policymakers, employers, individuals, and increasingly, the media, who each have an important role to help in educating the public on these issues. 

Increasing risks and the need for personal accountability

The economic backdrop throughout 2022 has been challenging for many, and especially for those with lower income levels, with increased inflation and the subsequent rise in interest rates impacting every aspect of day-to-day living.  

For those seeking income protection in retirement, this can be particularly pertinent where income may not be increasing in line with inflation. As a result, retirees are facing a loss of income in real terms, with no clear end in sight. This is not true for all schemes, of course, with some offering more flexibility.

As DC schemes gradually replace DB schemes around the world, we’re recognising greater individual responsibility concerning retirement income. Governments have limited resources, and people can no longer expect their retirement to be fully funded by the state or their employer. 

This may in turn promote a greater degree of engagement from individuals, who now have greater visibility over their own money, but it also highlights a need for greater education within this space.

Another aspect of individual responsibility is homeownership and the increased security that this may afford. Owning a household outright clearly will not protect retirees from inflation, with gas, electricity, and other areas still subject to prices, but it does remove the cost of renting or mortgaging, typically a household’s largest outgoing.

In certain countries, homeownership can also open the possibility of home equity release schemes, whereby part of a property’s value can be extracted and used to fund retirement. While many existing homeowners may view their household as a bequest for their children or families, this is an important option that may allow for a more secure retirement.

Ultimately, education and advice lies at the heart of the matter.

As more and more people become empowered to manage their finances directly, there is an increased need for transparency and understanding of the plethora of options available, and their suitability for each individual’s circumstances.

For more information on this topic and our findings on over 44 individual pension systems, be sure to download the 2022 Mercer CFA Global Pension Index when it is released on October 11th.