Global pension index uncovers strong correlation between household debt and pension assets

Global pension index uncovers strong correlation between household debt and pension assets

Global pension index ranks U.S. 16th out of 37 retirement systems while uncovering strong correlation between household

  • October 21, 2019
  • United States, New York
  • Eleventh annual Melbourne Mercer Global Pension Index, comparing 37 retirement systems, expanded to cover almost two-thirds of world population
  • The Netherlands and Denmark retain first and second place respectively and the coveted ‘A-grade’
  • U.S. system ranks 16th overall, with ‘shortcomings that should be addressed’
  • Relationship found between level of pension assets and household debt

A strong correlation exists between the levels of pension assets and net household debt, with growth in household debt in developed and growth economies paired with the growth in assets held by pension funds, according to the 2019 Melbourne Mercer Global Pension Index (MMGPI).

The MMGPI, supported by the Victorian Government of Australia, is a collaborative research project between the Monash Centre for Financial Studies (MCFS) – a research center based within Monash Business School at Monash University in Melbourne – and professional services firm, Mercer.

The report is the first international study of its kind to document the “wealth effect” – i.e., the tendency for spending to increase with rising wealth – in relation to pension assets. The MMGPI’s data suggests as pension assets increase, individuals feel wealthier and therefore are likely to borrow more.

Dr. David Knox from Mercer, author of the study, said the growth in assets held by pension funds means households feel more financially secure in having future income from their nest egg, thereby allowing them to borrow funds prior to retirement to improve their current and future living standards.

“As the wealth of an individual grows, whether it be in home ownership, investment portfolios or their retirement savings, so does their comfort with amassing debt. The evidence suggests on a global basis, for every extra dollar a person has in pension assets, their net household debt rises by just under 50 cents,” Dr. Knox said.

The Index compares 37 retirement systems across the globe and covers almost two-thirds of the world’s population. It highlights the broad spectrum and diversity of the world’s pension systems, demonstrating even the world’s best systems have shortcomings. The 2019 Index includes three new systems – Philippines, Thailand and Turkey.

While each pension system has a unique set of circumstances, the report makes clear there are common improvements which can be made to the challenges all regions are facing.

“Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens. It’s imperative that policy makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future,” said Dr. Knox.

“In some regards, the retirement system in the United States allows individuals to accumulate sufficient wealth for retirement, though pieces of the system are lacking,” said Peter Stewart, Global Wealth Consultant, Multinational Client Group, Mercer. “The increased risk of a person outliving their retirement savings due to longer life expectancies, and the shift from defined benefit plans to defined contribution plans, has placed additional burden on individuals. The time is now to assess how the American retirement system can be enhanced to improve its adequacy and integrity, helping to improve retirement outcomes for Americans.”

The Index uses the weighted average of the sub-indices of adequacy, sustainability and integrity to measure each retirement system against more than 40 indicators. The 2019 Index takes a new approach to calculate the net replacement rate, that is, the level of retirement income provided to replace the previous level of employment earnings. While most previous Index reports have calculated a net replacement rate based on the median income earner, the current report uses a range of income levels based on the Organisation for Economic Co-operation and Development data to represent a broader group of retirees.

“Now in its eleventh year, the Melbourne Mercer Global Pension Index is a great source of data on pension systems around the world, and the high international standing of this report is testament to Melbourne’s reputation as a global center of industry research, innovation and financial expertise,” said the Minister for Jobs, Innovation and Trade, Martin Pakula.

By the numbers

The Netherlands had the highest index value (81.0), and has consistently held first or second position for 10 out of the past 11 MMGPI reports. Thailand had the lowest index value (39.4).

The United States ranked 16th overall, with an index value of 60.6, meaning its current system has some good features, but also major risks and shortcomings that should be addressed.

For each sub-index, the highest scores were Ireland for adequacy (81.5), Denmark for sustainability (82.0) and Finland for integrity (92.3). The lowest scores were Thailand for adequacy (35.8), Italy for sustainability (19.0) and Philippines for integrity (34.7).

Sustainability still a weakness in an ageing and defined contribution future

Measuring the likelihood a current system will be able to provide benefits into the future, the sustainability sub-index continues to highlight the weakness of many systems.

In particular, the sustainability issue of many South American and Asian systems has been confirmed with an average sustainability grade of D. For example, although Chile achieves a strong 71.7 in this sub-index, Brazil and Argentina scored 27.7 and 31.9, respectively. Similarly, in Asia, while Singapore achieves 59.7, Japan scored only 32.2.

However, this issue is not restricted to developing economies. Many European economies face similar pressures. Although Denmark achieves the highest score for the sustainability sub-index at 82.0, Italy and Austria scored only 19.0 and 22.9, respectively.

While some measures that contribute to the sustainability score are difficult to change, others can be influenced to strengthen the long-term effectiveness of a system. Recommendations include encouraging or requiring an increased level of savings for the future, gradually raising the state pension age and enabling or persuading people to work a little longer.

“Although some systems are still anchored by defined benefit schemes that may practice liability-driven investment strategies, defined contribution plans are playing increasingly important roles in the accumulation of individuals’ retirement savings. Maximizing risk-adjusted investment returns for defined contribution plans by diversifying the assets held by a pension fund is critical,” said Professor Deep Kapur, Director of the MCFS.


“It’s essential the state pension or retirement age is reconsidered in line with increasing longevity – a step some governments have already taken – to reduce the costs of publicly financed pension benefits,” he said.

-ENDS-

2019 Melbourne Mercer Global Pension Index

 System

Overall index value

Sub-index values

Adequacy

Sustainability

Integrity

 Argentina

39.5

43.1

31.9

44.4

 Australia

75.3

70.3

73.5

85.7

 Austria

53.9

68.2

22.9

74.4

 Brazil

55.9

71.8

27.7

69.8

 Canada

69.2

70.0

61.8

78.2

 Chile

68.7

59.4

71.7

79.2

 China

48.7

60.5

36.7

46.5

 Colombia

58.4

61.4

46.0

70.8

 Denmark

80.3

77.5

82.0

82.2

 Finland

73.6

73.2

60.7

92.3

 France

60.2

79.1

41.0

56.8

 Germany

66.1

78.3

44.9

76.4

 Hong Kong SAR

61.9

54.5

52.5

86.9

 India

45.8

39.9

44.9

56.3

 Indonesia

52.2

46.7

47.6

67.5

 Ireland

67.3

81.5

44.6

76.3

 Italy

52.2

67.4

19.0

74.5

 Japan

48.3

54.6

32.2

60.8

 Korea

49.8

47.5

52.6

49.6

 Malaysia

60.6

50.5

60.5

76.9

 Mexico

45.3

37.5

57.1

41.3

 Netherlands

81.0

78.5

78.3

88.9

 New Zealand

70.1

70.9

61.5

80.7

 Norway

71.2

71.6

56.8

90.6

 Peru

58.5

60.0

52.4

64.7

 Philippines

43.7

39.0

55.5

34.7

 Poland

57.4

62.5

45.3

66.0

 Saudi Arabia

57.1

59.6

50.5

62.2

 Singapore

70.8

73.8

59.7

81.4

 South Africa

52.6

42.3

46.0

78.4

 Spain

54.7

70.0

26.9

69.1

 Sweden

72.3

67.5

72.0

80.2

 Switzerland

66.7

57.6

65.4

83.0

 Thailand

39.4

35.8

38.8

46.1

 Turkey

42.2

42.6

27.1

62.8

 UK

64.4

60.0

55.3

84.0

 USA

60.6

58.8

62.9

60.4

Average

59.3

60.6

50.4

69.7

About the Monash Centre for Financial Studies

A research center based within Monash University's Monash Business School, Australia, the MCFS aims to bring academic rigor 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.  

About Mercer

Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan Companies (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people with 76,000 colleagues and annualized revenue approaching $17 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.

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