In Asia, Singapore retains top spot while Japan and Malaysia are most improved retirement income systems: Mercer CFA Institute Global Pension Index 

• Singapore is the top Asian retirement income system, followed by Hong Kong SAR and Malaysia
  
• Iceland tops the list for second year in a row, followed by the Netherlands and Denmark respectively
• Index compares 44 retirement income systems, covering 65 percent of the world’s population
• As more employers shift from defined benefit to defined contribution plans, retirees will take on greater financial risks

ASIA, October 11, 2022 – Singapore’s retirement system retains its top spot in Asia, ranking 9th out of 44 retirement systems reviewed in the 14th annual Mercer CFA Institute Global Pension Index (MCGPI). Hong Kong SAR and Malaysia round out the top three in the region, while ranking 19th and 23rd, respectively, against their global peers.

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.

The 2022 MCGPI, which features Portugal as a new addition, measures each retirement system through three sub-indices: sustainability, adequacy and integrity. This year, a thorough review1 of the scoring criteria was also undertaken to improve its integrity and remove any unintended biases that may be present.

While Singapore (74.1) saw a slight dip in its overall index value in 2021, it bounced back this year due mainly to the revised scoring matrix and an increase in net replacement rates. Most retirement income systems in Asia saw overall improvements except for Mainland China (54.5), Indonesia (49.2) and the Philippines (42).

In Asia, Malaysia (63.1) and Japan (54.5) were the most improved systems with the former jumping from C to a C+ and the latter earning a C, up from its D in 2021. Aside from the revised scoring matrix, Malaysia’s increase was also due mainly to higher net replacement rates, while Japan had a revised approach relating to pension plan coverage.

Korea (51.1) was also upgraded to a C, with Hong Kong SAR (64.7), India (44.4), and Taiwan (52.9) also faring better than the year before. Thailand (41.7) still has the lowest index value globally but is showing steady progress. (Please refer to the Appendix for more details of the various systems across Asia.)

Despite progress made over the years, Asia’s retirement systems continue to lag the world with the region’s average overall index value of 53.8, falling behind the global average of 63.

Janet Li, Asia Wealth Business Leader, Mercer, said, “The economic impact of the pandemic, as well as a volatile geopolitical landscape, has led to the readjustment of priorities for not just Asian markets but the world in general. While Asia still lags the global average in the overall index value, we are seeing positive year-on-year improvements for most of the markets. That said, the challenges of longevity will persist indefinitely. Hence, governments cannot afford to put refining and improving their retirement systems on the back burner, but must prioritize and take action promptly.”

Nick Pollard, Managing Director, Asia Pacific, CFA Institute, said, “A challenging near-term outlook, largely driven by sharply higher prices, rising interest rates, currency depreciation, and capital outflows, is hitting Asia’s development at a time when many of the markets here, especially developing markets, are trying to reverse the impact of the pandemic. Longer term, Asia, and the rest of the world, face the risk that these trends persist and become a new normal. As such, there is no market in Asia that doesn’t need urgent pension reforms, and policymakers and industry stakeholders need to take collective action to ensure the adequacy of pension balance sheets and the sustainability of retirement benefits.”

Globally, Iceland’s retirement income system (84.7) has topped the list for the second time in a row, with the Netherlands (84.6) and Denmark (82) retaining second and third places, respectively.

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 a pre-defined sum of pension benefits upon retiring, typically DC plans provide individuals with an amount accumulated in their accounts at retirement. Additionally, many governments are considering more efficient use of their budgets for broader economic impact and may impact the level of social benefits to ensure the country’s financial sustainability over the longer term.

The result is that many individuals are more exposed to potential shortcomings in financial support post-retirement. Therefore, it is essential individuals make the appropriate financial decisions during accumulation and de-cumulation stages to maximize the time value of money. 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.

Ms Li added, “The shift from DB to DC has been a trend in Asia throughout the last decade. Many markets are in the process of — or planning for — active reforms in their pension system design to combat longevity risk. While COVID-19 and political changes may have caused some delays, DB remains on track to become the dominant plan structure. We expect to see more formalized DC contributory arrangements across the region either through mandatory contribution requirements, incentives for additional voluntary contributions, or both. Broad-based financial education and appropriate product design will empower individuals to make better decisions concerning their retirement savings.”

The MCGPI uses the weighted average of the sub-indices of adequacy, sustainability, and integrity. For adequacy, which considers the benefits provided to the poor and a range of income earners as well as several design features and characteristics which enhance the efficacy of the overall retirement income system, the systems in Asia with the highest and lowest values were Singapore (77.3) and India (37.6) respectively.

In Asia, Singapore also had the highest value (65.4) for sustainability, which considers a number of indicators that influence the long-term sustainability of current systems like the labor force participation rate of the older population and the level of real economic growth. Thailand had the lowest value (36.4).

For integrity, which considers three broad areas of the pension system, namely regulation and governance, protection and communication for members, and operating costs, Hong Kong SAR had the highest value (87.6) with the Philippines’ retirement income system scoring the lowest (30.0) in Asia and globally.

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

_{¹ A thorough review of the Index was undertaken to improve its integrity and remove any unintended biases that may be present. The board wanted to ensure that the average score of each question within each sub-index was similar and that there were no statistically significant differences, which may have favored some systems over others. Hence, some scoring calculations, questions and weightings have been modified. The net effect of these changes to the model was to increase the average Index value by 1.09. Naturally, the impact on individual values varied between systems with most changes between minus one and plus two.}

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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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