Unsustainable pension systems in some countries need to learn from leading countries or risk creating intergenerational equity issues and disappointed retirees.
Now measuring 30 countries and covering 60% of the world’s population, this year’s ninth edition of the Melbourne Mercer Global Pension Index urges countries with unsustainable pension systems to take action now, rather than risk the need to take even more drastic action in the future.
Jacques Goulet, President of Health and Wealth at Mercer, stresses the need for countries to address sustainability when considering pension reform.
“Increasing life expectancies and low investment returns are having significant long term impacts on the ability of many systems around the world to deliver adequate retirement benefits both now and into the future,” Mr Goulet says. “These pressures have alerted policymakers to the growing importance of intergenerational equity issues.”
Mr Goulet says Japan, Austria, Italy and France are examples of developed economies whose pension systems don’t represent a sustainable model that will support current and future generations in their old age.
“This is due to a combination of factors including a lack of assets set aside for the future, low labour force participation at older ages, and significant demographic changes towards an ageing population,” says Mr Goulet. “If left unchanged, these systems will create societal pressures where pension benefits are not distributed equally between generations.”
Author of the report and Senior Partner at Mercer, Dr David Knox, says it’s not all doom and gloom; every country can be taking action now to move towards a better pension system.
“The primary objective of the Index is to benchmark each country’s retirement income system so we can learn to understand what best practice may look like, both now and into the future,” says Dr Knox. “From our research, it is clear which countries are leading the way in providing sustainable pension systems with adequate benefits and what others can learn from them to improve. Denmark, Netherlands, and Australia are three such countries which, whilst taking different approaches depending on their starting point, adopt a strong multi-pillar approach as highlighted in the Index.”
Professor Edward Buckingham at the Australian Centre for Financial Studies says that the report tells us that Australia’s pension system is good but there is room for improvement.
“Without the immigration of young people from other countries our ageing locally-born population would face significant challenges funding their retirement. The reason is simply that as we live longer, healthcare and public service costs will escalate and our society, like others, will face pressure to fund the needs of the old at the expense of the young. Optimising the use of savings set aside for retirement is a perennial responsibility that demands strategic improvement of pension systems worldwide,” says Professor Buckingham.
“Besides demographic constraints the various frameworks we create to guide investment decisions include moral and ethical dimensions that will shape the nature of wealth creation and transfer. This report contributes a uniquely global survey which provides a basis for articulating the merits and faults of many different approaches to these challenges."
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.
Mr Ken Ryan AM, Commissioner for Victoria to Europe says, “with a strong financial services sector and deep talent pool, Melbourne continues to lead the way in funds management, a central part of any superannuation and annuities system. The 2017 Global Financial Centres Index, released in September, ranked Melbourne in 13th place reflecting the progress the Victorian Government is making to ensure Victoria is recognised as a leading global financial centre.”
Some countries face a steeper path to system 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 create 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 Colombia, New Zealand and Norway; the Index measures 30 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.
This year’s Index reveals that Denmark, in its sixth year running, has retained the top position with an overall score of 78.9, ahead of the Netherlands and Australia at 78.8 and 77.1 respectively.
While Canada maintained its B rating and saw its overall score increase slightly (from 66.4 to 66.8), Canada also saw its sustainability score fall based on a new indicator that measures the level of real economic growth in the country.
“Canada’s recent change to maintain the eligibility for Old Age Security at age 65, rather than gradually increase this eligibility to age 67, resulted in a slight decline in its sustainability score,” said Scott Clausen, Partner in Mercer Canada’s Wealth business. “One of the top recommendations for all countries is to increase the eligibility age for state pension plans to reflect increasing life expectancy – something that is already occurring in many developed countries around the world.”
The Index does not yet reflect the enhancement to the Canada Pension Plan, as contribution increases will not start to be phased in until 2019.
“The upcoming enhancement to the Canada Pension Plan, including the fully funded nature of the enhancement, is expected to help increase Canada’s overall score in the coming years,” added Mr. Clausen. “As we found in our recent white paper, Bold Ideas for Mending the Long-Term Savings Gap, bold action is needed from both governments and employers to close Canada’s retirement savings gap, presently estimated at nearly $3 trillion. The enhancement of the Canada Pension Plan is a good first step, and we hope Québec will soon announce a similar enhancement to the Québec Pension Plan.”
New entrants to the Index, Norway and New Zealand, achieved a credible overall index value of 74.7 and 67.4 respectively. Both countries were noted as having a sound structure, with many good features, but have some areas for improvement. Colombia, with an overall index value of 61.7, was noted as a system with some good features, but also a system with some major risks and shortcomings that need to be addressed.
In maintaining the integrity and relevance of the Index, two new questions have been included which has resulted in no country achieving the elusive ‘A’ grade. The first question addresses real economic growth in the sustainability sub-index, while the second question makes some allowance for voluntary pensions.
Naturally, the addition of a new question in the sustainability sub-index has resulted in the questions relating to assets and contribution levels having had their weightings reduced. Countries that have seen a significant improvement in their index value are those which have had high real economic growth during the last three years and where this is projected to continue during the next three years. These include China, India, Indonesia, Ireland and Malaysia. Conversely, countries with significant pension assets and high mandatory contributions but with lower real economic growth have seen a decline in their sustainability sub-index value. These include Canada, Denmark and the Netherlands.
“The Index is an important reference for policy makers 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.”
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.
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.
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 22,000 employees are based in 43 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 60,000 colleagues and annual revenue over $13 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.ca. Follow Mercer on Twitter @MercerCanada.
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. Its research is mainly funded by a range of corporate partners and collaborators and is accessible, evidence-based and independent, and aims to inform public policy, community debate and industry practice. This report with Mercer is an important example of the research output.
The mission of the ACFS is to support the essential role of financial services in the economy through evidence-based research, insightful dialogue and meaningful collaboration across industry, government and academia. For more information, visit www.australiancentre.com.au.
TRADE AND INVESTMENT VICTORIA
Trade and Investment Victoria leads the Victorian Government's strategy to increase the state's export opportunities as well as attract international business investment to Victoria to create Victorian jobs and grow the economy.
Through its global network of 22 Victorian Government Trade and Investment offices, Trade and Investment Victoria provides free professional investment advice and services to potential and existing overseas partners, helping facilitate investment and access to export markets.
Businesses looking to invest, explore commercial opportunities or create research linkages in Victoria should contact Trade and Investment Victoria for more information.
Victoria - The State of Momentum.