Global Pension Index uncovers impact of COVID-19 on future Australian pensions

 

  • The Mercer CFA Institute Global Pension Index compares 39 retirement income systems, covering almost two-thirds of the world’s population
  • The Netherlands and Denmark retain first and second place respectively and the coveted ‘A-grade’
  • New addition Israel replaces Australia in third place
  • The impact of COVID-19 on the provision of future pensions around the world will be negative due to reduced contributions, lower investment returns and higher government debt
 

The widespread economic impact of COVID-19 is heightening the financial pressures which retirees face, both now and in the future. Coupled with increasing life expectancies and the rising pressure on public resources to support the health and welfare of ageing populations, COVID-19 is exacerbating retirement insecurity, according to the 12th annual Mercer CFA Institute Global Pension Index. 

 

Dr David Knox, Senior Partner at Mercer and lead author of the study, said: “The economic recession caused by the global health crisis has led to reduced pension contributions, lower investment returns and higher government debt in most countries. Inevitably, this will impact future pensions, meaning some people will have to work longer while others will have to settle for a lower standard of living in retirement. 

 

“It is critical that governments reflect on the strengths and weaknesses of their systems to ensure better long-term outcomes for retirees.” 

 

“Even before COVID-19, many public and private pension systems around the world were under increasing pressure to maintain benefits,” said Margaret Franklin, CFA, President and CEO at CFA Institute. 

 

“We have learned a lot about the effectiveness of pension systems over the years, and while there is no single pension system model that will work for every country, the Global Pension Index provides comparative information to differentiate what is possible and practical in each market. CFA Institute is thrilled to be sponsoring this year’s Global Pension Index and we look forward to expanding its impact even further through this collaborative effort.” 

 

 

COVID-19’s impact to the future of pension systems 

 

The impact of COVID-19 is much broader than solely the health implications; there are long term economic effects impacting industries, interest rates, investment returns and community confidence in the future. As a result, the provision of adequate and sustainable retirement incomes over the longer term has also changed. 

 

The level of government debt has increased in many countries following COVID-19. This increased debt is likely to restrict the ability of future governments to support their older populations, either through pensions or through the provision of other services such as health or aged care.

 

To help alleviate the impact of COVID-19, governments deployed a diverse range of responses to support their citizens and pension systems.

 

Professor Deep Kapur, Director of the Monash Centre for Financial Studies (MCFS), said that many governments around the world have responded to COVID-19 with substantial fiscal stimulus, and central banks have adopted unconventional monetary policy. “The outlook for investment returns is muted while volatility may be elevated, adding to the normal challenges of risk management in a pension portfolio.

 

“Additionally, some governments have allowed temporary access to saved pensions or reduced the level of compulsory contribution rates to improve liquidity positions of households. These developments will likely have a material impact on the adequacy, sustainability and integrity of pension systems, thereby influencing the evolution of the Global Pension Index in the coming years,” Kapur added.  

 

For example, Australia enabled individuals whose income had dropped by more than 20% to access up to AUD 20,000 (approximately USD 13,000) from their pension assets, while Chile allowed active contributors to voluntarily withdraw 10% of their individual pension funds up to USD 5,600.

 

“It is interesting to note that the top two retirement income systems in the Global Pension Index, the Netherlands and Denmark, have not permitted early access to pension assets, even though the assets of each pension system are more than 150% of the country’s GDP,” said Dr Knox. 

 

COVID-19 has also increased gender inequality in pension provision.

 

“Even before COVID-19 disrupted economies across the world, many women faced retirement with less savings than men. Now, that gap is expected to widen further in many pension systems, particularly in the hardest hit sectors where women represent more than half of the workforce, such as hospitality and food services,” added Dr Knox.

 

Measuring the likelihood that a current system will be able to provide benefits into the future, the sustainability sub-index continues to highlight weaknesses in many systems. The average sustainability score dropped by 1.2 in 2020 due to the negative economic growth experienced in most economies due to COVID-19. 

 

 

By the numbers

 

Australia achieved an index value of 74.2 overall, 66.8 for adequacy, 74.6 for sustainability and 85.5 for integrity.

 

The Netherlands had the highest index value (82.6) and has retained its top position in the overall rankings, notwithstanding the significant pension reforms occurring in that country. Thailand had the lowest index value (40.8). 

 

“Each of the three countries ranked above Australia – The Netherlands, Denmark and Israel – has a contribution rate into their funded pension arrangements of 12% or higher, which sets aside more money for the future. Unlike the means-tested Age Pension in Australia they all have a universal state pension, which means, together higher contribution rates, their replacement rates, as calculated by the OECD are higher than Australia’s,” said Dr Knox.

 

Maria Wilton, CFA, Vice Chair at CFA Institute said that a key objective of the Index is to highlight areas for improvement for government to consider. “From an Australian perspective, we rank highly in terms of integrity and sustainability. By the numbers, pension fund members can trust the system given the strong governance and regulatory frameworks in place. 

 

“The clear opportunity for improvement is with respect to adequacy – does the whole retirement system deliver enough to retirees? With COVID-19 impacting the government fiscal position for many years to come, it is logical to consider addressing this through private provision and increasing the Superannuation Guarantee Charge (SGC) contributions rate – as is already legislated – rather than hoping for increases in the government funded Age Pension.”

 

 

About the Mercer CFA Institute Global Pension Index

 

Formerly known as the Melbourne Mercer Global Pension Index, the Global Pension Index 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. 

 

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), and Mercer, a global leader in redefining the world of work and reshaping retirement and investment outcomes. 

 

This year, the Global Pension Index compares 39 retirement income systems across the globe and covers almost two-thirds of the world’s population. The 2020 Global Pension Index includes two new systems – Belgium and Israel.

 

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 2020 Global Pension Index introduces new questions relating to public expenditure on pensions, ESG (environmental, social and governance) investing and support for caregivers. 

 

For more information about the Mercer CFA Institute Global Pension Index, click here

 

 

 

2020 Mercer CFA Institute Global Pension Index

 

 System

Overall 2020 index value

Sub-index values

Adequacy

Sustainability

Integrity

 Argentina 

42.5

54.5

27.6

44.4

 Australia 

74.2

66.8

74.6

85.5

 Austria 

52.1

64.4

22.1

74.6

 Belgium

63.4

74.6

32.4

88.9

 Brazil 

54.5

72.6

22.3

70.7

 Canada 

69.3

68.2

64.4

77.8

 Chile 

67.0

56.5

70.0

79.6

 China (mainland)

47.3

57.4

36.2

46.7

 Colombia 

58.5

62.5

45.5

70.5

 Denmark 

81.4

79.8

82.6

82.4

 Finland 

72.9

71.0

60.5

93.5

 France 

60.0

78.7

40.9

57.0

 Germany 

67.3

78.8

44.1

81.4

 Hong Kong SAR 

61.1

54.5

50.0

87.1

 India 

45.7

38.8

43.1

60.3

 Indonesia 

51.4

45.7

45.6

68.7

 Ireland 

65.0

74.7

45.6

76.5

 Israel

74.7

70.7

72.4

84.2

 Italy 

51.9

66.7

18.8

74.4

 Japan 

48.5

52.9

35.9

59.2

 Korea 

50.5

48.0

53.4

50.3

 Malaysia 

60.1

50.1

58.6

78.0

 Mexico 

44.7

36.5

55.8

42.2

 Netherlands 

82.6

81.5

79.3

88.9

 New Zealand 

68.3

63.8

62.9

82.9

 Norway 

71.2

73.4

55.1

90.3

 Peru 

57.2

59.5

49.2

64.6

 Philippines 

43.0

38.9

53.4

34.8

 Poland 

54.7

59.9

40.7

65.9

 Saudi Arabia 

57.5

59.6

51.6

62.4

 Singapore 

71.2

74.1

59.9

82.5

 South Africa 

53.2

43.0

46.7

78.3

 Spain 

57.7

71.0

27.5

78.5

 Sweden 

71.2

65.2

72.0

79.8

 Switzerland 

67.0

59.5

64.2

83.1

 Thailand 

40.8

36.8

40.8

47.3

 Turkey 

42.7

44.2

24.9

65.3

 UK 

64.9

59.2

58.0

83.7

 USA 

60.3

58.9

62.1

59.9

Average

59.7

60.9

50.0

71.3

 

 

 

 

About Mercer

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. 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 (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of USD $17 billion. Through its market-leading businesses including MarshGuy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com.au. Follow Mercer on Twitter or LinkedIn.

 

 

 

About CFA Institute 

 

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 behaviour 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 178,000 CFA charterholders worldwide in 162 markets. CFA Institute has nine offices worldwide and there are 159 local member societies. For more information, visit www.cfainstitute.org or follow us on Twitter at @CFAInstitute and on Facebook.com/CFAInstitute.

 

 

 

About the Monash Centre for Financial Studies (MCFS)

 

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. 

 

CONTACT INFORMATION