Ageing populations continue to pose a challenge to governments worldwide, with policymakers struggling to balance the twin goals of delivering financial security for their retirees that is both adequate for the individual and sustainable for the economy.
Now in its tenth year, the Melbourne Mercer Global Pension Index reveals who is the most and who is the least prepared to meet this challenge.
Measuring 34 pension systems, the Index shows that the Netherlands and Denmark (with scores of 80.3 and 80.2 respectively) both offer A-Grade world class retirement income systems with good benefits - clearly demonstrating their preparedness for tomorrow’s ageing world.
In Asia alone, the Index shows that Singapore ranks first with a score of 70.4 with a B rating, climbing 1 point from 2017 due to improvements in the sustainability sub-index, demonstrating a system that has a sound structure with good features but with some areas for improvement.
Singapore’s retirement income system is mainly based on the Central Provident Fund (CFP) which covers all employed Singaporean residents and permanent residents. Garry Hawker, Mercer’s Mercer’s Director of Strategic Research, Growth Markets, talks how the Singaporean system could continue to grow from strength to strength and improve its Index score.
“Having one of the most developed pension schemes in Asia, Singapore has continued to make improvements through the CPF by providing more flexibility to its members. The overall index value for the Singaporean system could be further increased by reducing the barriers to establishing tax-approved group corporate retirement plans; opening CFP to non-residents who comprise more than one-third of the labour force; and increasing the age at which CFP members can access their savings that are set aside for retirement, as life expectancies rise.”
Malaysia, which has a strong pension infrastructure and has recorded an increase in adequacy, sees its sustainability score drop from 61.2 to 60.5, based on the index. There still exists a gap which poses risks in terms of the long-term sustainability in the system and the need to address it is crucial as there are still many Malaysians without access to any form of pension savings.
Hong Kong SAR, which was included for the first time in the Index this year, ranked third in Asia (with an overall score of 56). Adeline Tan, Wealth Business Leader, Mercer Hong Kong, said she expects further improvement in Hong Kong’s score for Adequacy, if the government’s recent proposals on providing personal tax incentives for MPF voluntary contributions, as well as the abolishment of MPF offsetting are implemented.
Additional boost to the Adequacy score could come from development of the private annuity market. “We are confident that the overall Index value for the Hong Kong pension system can be further increased with a close collaboration between the public and private sector,” she added.
Improvements to the pension system in Indonesia have earned the country a grade C from a grade D a year ago. While its pension system has some good features, Indonesia has room for improvements to reduce major risks or shortcomings in order to improve on the country’s efficacy and long-term sustainability of its pension system.
With the growing ageing population in Asia living longer and staying productive well into their 70s and even 80s, it is critical to improve the provision of adequate and sustainable retirement income, said Janet Li, Wealth Business Leader, Mercer.
“Revisiting traditional retirement age, increasing the coverage of private pensions across the labour force, and encouraging financial planning or savings early on to reduce dependency on government—should be the area of focus for employers and policy makers,” she added.
However, common across all results was the growing tension between adequacy and sustainability. This was particularly evident when examining Europe’s results. Denmark, Netherlands and Sweden score A or B grades for both adequacy and sustainability, whereas Austria, Italy and Spain score a B grade for adequacy but an E grade for sustainability thereby pointing to important areas needing reform.
Author of the study and Senior Partner at Mercer Australia, Dr David Knox says that the natural starting place to having a world class pension system is ensuring the right balance between adequacy and sustainability.
“It’s a challenge that policymakers are grappling with,” says Dr Knox. “For example, a system providing very generous benefits in the short-term is unlikely to be sustainable, whereas a system that is sustainable over many years could be providing very modest benefits. The question is – what’s an appropriate trade-off?”
As highlighted in Chart 1, all systems should consider adjusting their strategy so they are moving towards the top right quadrant. Through the study, policymakers can understand the characteristics of leading systems and find ways to improve their own.
Chart 1: Adequacy versus Sustainability ratings for global pension systems
Source: Melbourne Mercer Global Pension Index 2018
Dr Knox adds that it’s not enough for a system to be sustainable or adequate; an emerging dimension to the debate about what constitutes a world class system is “coverage” and the proportion of the adult population participating in the system.
“In some countries, broad coverage has been successfully accomplished through compulsory workplace pension systems or, in some cases, auto-enrolment arrangements,” he says.
“However, with changes in the way people are working around the world, we need to ensure these schemes include everyone so that the whole workforce is saving for the future. This includes contractors, self-employed, and anyone on any income support, be that parental leave, disability income or unemployed benefits.”
David Anderson, President, International at Mercer added that it was a positive step to see governments tackle pension reform as life expectancies continue to rise.
“Developed economies have been aware of the demographic challenges facing their pension systems for some time. Where economies are less developed, it’s pleasing to see many governments recognising the same trends emerging in their own populations and taking steps now to address this. Such actions make future pension systems more sustainable over the longer term,” he said.
“Ageing populations, high sovereign debt levels in some countries and the global competition to lower taxes constrain the ability of some jurisdictions to improve retirement income security. With a decade of unique data, the MMGPI and associated research can provide valuable global comparative insights to planners and policymakers on the way forward”, said Professor Deep Kapur, Director of Australian Centre for Financial Studies.
Supported by the Victorian Government and bringing together the best minds in Australia’s financial services and research expertise fields, the Index is testament to Victoria’s dominant position in the superannuation and financial services sectors.
Minister for Industry and Employment, The Honourable Ben Carroll, said that the result demonstrates the success of Victoria’s thriving financial sector, which is home to approximately 60 per cent of the nation's institutional investors.
“Melbourne is the undisputed capital of Australia's pension industry and is home to six of the eight largest industry superannuation funds in the country. Our top four funds manage AU$300 billion, demonstrating the ongoing success of Victoria’s strong and sophisticated financial services sector.”
What does the future look like?
Some pension systems face a steeper path to long term sustainability than others, and all start from a different origin with their own unique factors at play. Nevertheless, every country can take action and move towards a better system. In the long-term, there is no perfect pension system, but the principles of “best practice” are clear and nations should consider creating policy and economic conditions that make the required changes possible.
With the desired outcome of creating better lives, this year’s Index provides a deeper and richer interpretation of the global pension systems. Having now expanded to include Hong Kong SAR, Peru, Saudi Arabia and Spain; the Index measures 34 systems against more than 40 indicators to gauge their adequacy, sustainability and integrity. This approach highlights an important purpose of the Index – to enable comparisons of different systems around the world with a range of design features operating within different contexts and cultures.
Melbourne Mercer Global Pension Index by the Numbers
This year’s Index reveals that many North-Western European countries lead the world in developing world class pension systems. The Netherlands, with an overall score of 80.3, beat Denmark to first place, a spot held by Denmark for six years, by 0.1. Finland bumped Australia (72.6) out of third place with an overall score of 74.5 and Sweden (72.5) coming in fifth place.
“The Index is an important reference for policymakers around the world to learn from the most adequate and sustainable systems,” Dr Knox says. “We know there is no perfect system that can be applied universally, but there are many common features that can be shared for better outcomes.”
Melbourne Mercer Global Pension Index – Overall index value results
The Index uses three sub-indices – adequacy, sustainability and integrity – to measure each retirement income system against more than 40 indicators. The following table shows the overall index value for each country, together with the index value for each of the three sub-indices: adequacy, sustainability, and integrity . Each index value represents a score between zero and 100.
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Melbourne Mercer Global Pension Index
The Melbourne Mercer Global Pension Index is published by the Australian Centre for Financial Studies (ACFS), in collaboration with Mercer and the State Government of Victoria who provides most of the funding. Financial support has also been provided by The Finnish Centre for Pensions.
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About the Australian Centre for Financial Studies
The Australian Centre for Financial Studies (ACFS) is a research centre within the Monash Business School. The Centre was established in 2005 with seed funding from the Victorian Government and became part of Monash University in 2016. The asset management and pension industries are an area of particular focus for the Centre. For more information, visit www.australiancentre.com.au.
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