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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
Canada maintained its B rating and saw its index value increase slightly from 69.2 in 2019 to 69.3 in 2020, due to several improvements in the sustainability sub-index which were largely offset by the decrease in the adequacy sub-index with reductions in the net replacement rates published by the OECD.
“Although Canada’s retirement system continues to have a sound structure, as reflected in its 2020 ranking, there are both near-term and long-term risks that need to be considered and addressed,” said Teresa Palandra, Partner and Wealth Business Leader, Mercer Canada. “In particular, the COVID-19 pandemic has significantly increased the amount of government debt as a percentage of GDP. In addition, there are savings gaps that have a disproportionate impact on certain groups, such as women. This will be particularly important in a COVID-19 context where women are often over-represented in the industries most impacted by the pandemic.”
“Given the widespread effects of COVID-19, retirement planning is more important now than ever before. Our workforce is changing and dealing with unexpected challenges, and retirement planning must continue to evolve to help Canadians manage their future finances in the face of significant disruption,” said Ms. Palandra. “At Mercer, we recognize the challenges of planning in a time of uncertainty and are committed to helping shape the future of retirement in Canada by developing additional offerings that support Canadians in preparing for retirement. For example, Mercer Future Wise™, our delegated defined contribution solution, provides a full suite of services ranging from portfolio management to plan design and fee negotiation. Future Wise™ manages your day-to-day plan governance so that you can focus on broader plan strategies.”
“In the wake of the financial pressures brought on by the pandemic, supporting financial security in retirement and providing guidance to modernize the pension landscape becomes an even greater challenge,” said Michael Thom, CFA, Managing Director, CFA Societies Canada. “Canada has the benefit of being home to a number of world-leading pension management organizations and has long been a source of global thought leadership on pension management and governance. CFA Societies Canada continues to work closely with policymakers, regulators, and business leaders to draw on our collective expertise to make Canada’s pension system stronger for our citizens and pension beneficiaries.”
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 |
68.9 |
65.5 |
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 |
52.8 |
43.0 |
45.7 |
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 approximately 25,000 employees are based in 43 countries and the firm operates in 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 83,000 colleagues and annual revenue of nearly $20 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 mercer.ca. Follow Mercer on LinkedIn and Twitter.
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.
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