Singapore’s retirement system takes the top spot among Asian countries, ranking seventh out of 37 retirement systems, according to the 2019 Melbourne Mercer Global Pension Index (MMGPI). The index values of Asian retirement systems generally saw an increase on previous years.
Both Hong Kong SAR and Malaysia have improved from previous C-grades to C+. Assessing retirement systems across the sub-indices of adequacy, sustainability and integrity, Hong Kong SAR scored the highest in integrity across Asia, ranking fourth out of 37 retirement systems in the integrity sub-index.
The MMGPI compares 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.
Using the weighted average of the sub-indices of adequacy, sustainability and integrity, the Index measures each retirement system against more than 40 indicators. Against a global average of 59.3, Asia’s overall index value average was 52.1. Asia’s average adequacy value was more than 10 points short of the global adequacy average at 50.3, and the region’s integrity average fell nine points below the global integrity average. Systems around the world struggled with sustainability, with Asia’s average falling just 2.3 points shy of the global sustainability average of 50.4.
The MMGPI, supported by the Victorian Government of Australia, is a collaborative research project between the Monash Centre for Financial Studies (MCFS) – a research centre based within Monash Business School at Monash University in Melbourne – and professional services firm, Mercer.
This year’s 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. Revealing a strong correlation between the levels of pension assets and net household debt, 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.
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.
“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 centre 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.
In Asia, D-grade systems were China (48.7), India (45.8), Japan (48.3), Korea (49.8), Philippines (43.7) and Thailand (39.4), with Thailand having the lowest index value of all 37 systems. Indonesia achieved a C-grade (52.2), Hong Kong SAR and Malaysia were graded C+ (61.9 and 60.6 respectively), and Singapore achieved a B-grade (70.8).
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)
Recommendations for improvement in Asia
Mercer’s Wealth Business Leader for Asia Janet Li said Asia’s retirement systems were on the right track, and that concerted and continued efforts are required from governments, employers, and individuals.
“Asia’s retirement systems should continue to focus on adequacy and integrity where we are falling short of the global average. And, while we sit close to the global average for sustainability, it is generally the weakest sub-index both locally and globally. We need to consider sustaining inter-generational retirement systems which do not put undue burden onto future generations,” said Ms Li.
“There is no one size or structure that fits every retirement system. Each market in Asia is unique from the next and are at different stages of development.
“There are, however, some common recommendations that will help to improve outcomes for Asia’s retirees. This includes increasing the minimum level of support for our poorest aged individuals, ensuring that a portion of retirement benefits is taken as an income stream, and raising the age at which older people can access their retirement savings in line with increasing life expectancy,” she said.
Professor Deep Kapur, Director of the MCFS, said the move away from defined benefit schemes towards defined contribution plans was playing an increasingly important role 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 Kapur.
“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.
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2019 Melbourne Mercer Global Pension Index
About the Monash Centre for Financial Studies
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.
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.hk. Follow Mercer on Twitter @Mercer.
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