14 October 2014

Canada, Toronto

Canada’s retirement income system continues to rank high globally

Canada’s retirement income system maintained its “B” in the 2014 edition of the highly-regarded Melbourne Mercer Global Pension Index, reinforcing its position as one of the leading retirement income systems in the world.

Now in its sixth year, the Melbourne Mercer Global Pension Index (MMGPI) measured 25 retirement income systems against more than 50 indicators under the sub-indices of adequacy, sustainability and integrity. While Canada’s ranking fell from 6th to 7th after the addition of five new countries, Canada’s overall score in the index increased slightly from 67.9 to 69.1.

“Canada’s retirement system continues to be one of the strongest retirement systems in the world by providing a combination of universal pensions, income-tested pensions employer pensions, individual RRSPs and individual TFSAs, although there is always room for continued improvement” according to Scott Clausen, a Partner in Mercer’s retirement business in Toronto.

Denmark continued to hold onto the top position in 2014 with an overall score of 82.4. Denmark’s well-funded pension system with its good coverage, high level of assets and contributions, the provision of adequate benefits and a private pension system with developed regulations are the primary reasons for its top spot.

How can Canada’s retirement savings system improve?
According to the Melbourne Mercer Global Pension Index, the overall score for the Canadian system could be increased by:

  • increasing the coverage of employees in occupational pension schemes through the development of an attractive product for those without an employer-sponsored scheme;
  • increasing the level of household savings for middle income earners; and
  • increasing the labour force participation rate amongst older workers

According to Scott Clausen, “The retirement income of Canadians could also be improved by a reduction in the level of investment management fees charged under capital accumulation plans.”

Certain provinces are in the process of taking action to implement some of these measures including Quebec with the introduction of Voluntary Retirement Savings Plans and Ontario with the announced introduction of an Ontario Retirement Pension Plan. In both provinces, these plans are aimed at increasing retirement savings for employees without an occupational pension scheme.

Significance of the Melbourne Mercer Global Pension Index in assessing retirement systems
The MMGPI found again there is no perfect system that can be applied universally around the world, but there are many common features that can be shared for better outcomes for individuals. The MMGPI now covers 25 countries and close to 60 per cent of the world’s population. It has grown from 11 countries in 2009 and is the most comprehensive comparison of pension systems globally.

Professor Deborah Ralston, Executive Director of the ACFS said the expansion of the Index reflects the fact most countries are grappling with the social and economic effects of ageing populations and global comparisons can lead to global lessons for government, industry and academia as they debate how best to provide for an ageing population.

“Although each country’s retirement income system reflects a unique history, there are some common themes as many countries face similar problems in the decades ahead and the Index aims to highlight the best solutions and share them globally,” said Professor Ralston.

“It’s pleasing to note average scores are increasing over time, suggesting pension reform around the world is having a positive effect.  The average score for the 14 countries in 2010 was 61.7 compared to 64.3 for the same countries in 2014,” she said.

Good governance critical for success in changing world
Beyond the Index rankings, the 2014 MMGPI looked at the importance of trust and transparency in a retirement income system.

“The tides of accountability for ensuring financial security in retirement are shifting from government and employer responsibility to individuals in many countries,” said Dr. David Knox, Senior Partner at Mercer responsible for the firm’s contribution to the MMGPI. This trend will persist as life expectancy continues to increase and many governments reduce the per capita expenditure on their aged population. This shift means communication to members has never been more important or come under more scrutiny from members, regulators, employers, consumer groups, politicians and the media.

“Ensuring transparency and the trust of individuals is becoming increasingly important. If you lose community trust in a pension system; you risk losing the effectiveness of the system.”

“Governments, regulators and financial industries have to ensure good governance frameworks and practices that promote regular easy to understand communication, clear benefit projections, and access to comparative information in a cost-efficient manner.”

“The pension industry must develop efficient methods to be transparent in meaningful and relevant ways to all stakeholders. There is now no alternative,” Dr. Knox said.

Challenges common to many countries include the need to:

  • Increase retirement age to reflect increasing life expectancy
  • Promote higher labour force participation at older ages
  • Encourage higher levels of private saving
  • Increasing coverage of the private pension system with an element of compulsion or automatic enrolment
  • Reduce the leakage from the system prior to retirement
  • Improve the governance of private pension plans and require improved transparency

The Index looks objectively at both the publicly funded and private components of a system as well as personal assets and savings outside the pension system. It is published by the Australian Centre for Financial Studies (ACFS) in conjunction with Mercer and is funded by the Victorian State Government.

“The analysis contained within the report acts as a great ambassador for Victoria’s financial services sector,” said Michael Kapel, Commissioner for Victoria to the Americas. “It demonstrates not only its strengths in fund management but its role as the home of leading edge research and the institutional centre of Australia’s A$2 trillion fund management market - the largest in Asia and the third-largest in the world. Melbourne, Victoria is a key business centre in the Asia-Pacific region. Its GSP is larger than that of Malaysia, Singapore and Hong Kong. With over 1,000 financial services operations across the state and six of the top 12 pension funds in the country based there, numerous opportunities are presented. It is with this in mind that the Victorian government is proud to support the Melbourne Mercer Global Pension Index and we encourage companies to explore with us the case for setting up a presence in Melbourne, Victoria.”

The Australian Centre for Financial Studies (ACFS) is a not-for-profit consortium of Monash University, RMIT University and Finsia (Financial Services Institute of Australasia) which was established in 2005 with seed funding from the Victorian Government. The mission of the ACFS is to build links between academics, practitioners and government in the finance community to enhance research, practice, education and the reputation of Australia's financial institutions and universities, and of Australia as a financial centre. ACFS conducts leading edge finance research, commentary and thought leadership. More information can be found at www.australiancentre.com.au and on the Index www.globalpensionindex.com.

Mercer is a global consulting leader in health, wealth and careers. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in more than 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With annual revenue of $13 billion and 60,000 employees worldwide, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.ca. Follow Mercer on Twitter @MercerCanada.