October 21, 2015

Canada, Toronto

  • Denmark holds onto #1 for fourth year running, Canada places 7th
  • Canada maintains its ‘B’ rating again this year
  • Sustainability of pension systems under the microscope: A seven year review

Canada’s retirement income system maintained its “B” in the 2015 edition of the highly-regarded Melbourne Mercer Global Pension Index (MMGPI), reinforcing its position as one of the leading retirement income systems in the world. Canada’s position in the Index remained strong, for the second year in a row ranking 7th of the 25 countries analyzed.

Canada’s overall score increased from 67.9 and 69.1 in 2013 and 2014 respectively, to 70.0 in 2015. However, this is still a significant gap from an elusive ‘A’ grade, given to pension systems that score above 80.  Denmark and Netherlands are the only countries to achieve an A grade in the history of the index. Canada was ranked third to Australia and Netherlands as having one of the most adequate pension systems globally for a median-income earner but scores dropped in the area of sustainability.

“While Canada’s retirement system continues to be one of the stronger retirement systems in the world, there is room for improvement” according to Scott Clausen, a Partner in Mercer’s retirement business in Toronto.  “A large percentage of workers in the private sector do not have access to a workplace pension plan and rising levels of government debt has the potential to put pressure on the future sustainability of the Canadian retirement system.”

Now in its seventh year, the MMGPI measured 25 retirement income systems against more than 40 indicators under the sub-indices of adequacy, sustainability and integrity. The MMGPI is the world’s most comprehensive comparison of pension systems. It covers close to 60% of the world’s population and suggests how governments can provide adequate and sustainable benefits that protect their citizens against longevity risk, the risk of their aging population outliving their savings, potentially one of the biggest economic and social risks facing many retirees today.

Denmark held onto the top position for the fourth consecutive year in 2015 with an overall score of 81.7.  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.

Author of the report and Senior Partner at Mercer, Dr. David Knox, said, “Implementing the right reform to improve pension systems and provide financial security in retirement has never been more critical for both individuals and societies.” 

“The MMGPI is an important reference for policy makers around the world to learn from the most adequate and sustainable systems.  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,” said Dr Knox.

Amy Auster, Executive Director of the Australian Centre for Financial Studies said the Index continued to be used by policy makers and researchers to assess the merits of their pension systems.

“The Index is used internationally both to highlight the relative strengths of pension systems and to identify opportunities and options for improvement. Looking back at the results from the past seven years we can see several countries that have adopted recommendations from our annual reports to strengthen their pension systems."

“It is encouraging to see that the insight provided by the Index encourages and supports policymakers and industry practitioners to take a long-term view, and work toward the betterment of their pension systems.”

“This is not always easy in the face of demographic pressures and changing market conditions, but we see clear evidence that policy-makers are continuing to enhance their pension systems in order to adequately serve future generations,” said Ms Auster.

Seven years of the MMGPI: How sustainable are the world’s pension systems?

The 2015 MMGPI looked beyond the annual rankings to observe changes over the last seven years and assess which pension systems will continue to deliver and which ones are at risk.

“Our seven-year snapshot highlights the importance of measures such as adjusting the state pension age, increasing workforce participation amongst our ageing population, or funding additional contributions for future retirement income,” said Dr Knox.

We’re spending longer in retirement

All of the 11 countries that have been part of the MMGPI since it began in 2009 have experienced an increase in the expected length of retirement from 2009 to 2015, with the average length rising from 16.6 years to 18.4 years.

Five countries – Australia, Germany, Japan, Singapore and the UK – have increased their pension age to offset the increase in life expectancies, but these are not enough to halt the increasing length of retirement.

The Index also looks at the average expected length of retirement in 20 years, and by this measure, three countries have witnessed a reduction. For Canada and the Netherlands this is due to a projected increase in the state pension age from 65 to 67 during the 20 years, while for the USA, life expectancy has reduced slightly. The other eight countries showed an increase.

Increasing workforce participation of older workers: good for the economy & individuals

For the 16 countries that have been part of the MMGPI since the 2011 report, the average labour force participation rate for 55-64 year olds has increased from 57.9% to 62.2% between 2011 and 2015, or just over 1% year.

However, averages can be misleading. The labour force participation rate at older ages actually went backwards in the USA. In Brazil, India and China, it increased by less than 4%.  The labour force participation rate in Canada increased from 62.7% to 64.5% between 2011 and 2015.

“Extending the years that individuals spend in the workforce is one of the most positive ways of developing sustainable retirement systems when life expectancies are increasing,” Dr Knox said.

“While there is a natural limit to the participation rate at older ages, with most countries still below 70%, the scope for significant increases across the world remains, which would improve the sustainability of many pension systems,” Dr Knox added.

Preventing financial strain on the next generation

The sustainability of a pension fund cannot be assessed without reviewing the level of funds set aside today to pay future retirement benefits so that the expected pension are not a financial strain on the next generation.

There is an enormous variety in the level of pension assets held ranging from 1.8% of GDP in Indonesia and 6.0% of GDP in Austria to 160.6% of GDP in the Netherlands and 168.9% of GDP in Denmark.  Pension assets represent around 100% of GDP in Canada.

“The diversity in pension assets held as a percentage of GDP recognizes that some countries have very limited private pension arrangements whereas others have well-developed and mature pension systems.  However, it is an important warning for all countries to prepare, prepare, prepare,” said Dr Knox. 

How can Canada’s retirement savings system improve?

The MMGPI acknowledges that there is room for improvement in all countries’ retirement income systems.  Suggested measures to improve Canada’s system include:

The overall index value 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 at older ages as life expectancies increase.

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

Certain provinces are in the process of taking action, 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.  The prior conservative federal government recently conducted a consultation on a possible voluntary enhancement to the Canada Pension Plan which, if done on a capital accumulation basis, has the potential to offer individuals professional investment management on a low cost basis.  These provincial and federal proposals have the potential to complement each other as they target different shortfalls in the Canadian retirement system.

The Liberals will have the opportunity to form the next government after the federal election held on October 19, 2015.  The Liberal platform included enhancing Canada Pension Plan benefits in consultation with Provincial and Territorial Governments and reverting OAS eligibility back to age 65 rather than increasing OAS eligibility to age 67.  While the enhancement to the Canada Pension Plan has the potential to increase the level and efficiency of retirement savings in Canada, changing OAS eligibility back to age 65 from age 67 goes in the opposite direction that other countries are adopting to recognize the fact that individuals are living longer.

The Ontario liberal government recently indicated that it may put the introduction of the Ontario Retirement Pension Plan on hold if the Liberal party won the federal election and moved forward with an expansion of the Canada Pension Plan.

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.


About the Australian Centre for Financial Studies

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 and on the Index

About Mercer

Mercer is a global consulting leader in talent, health, retirement and investments. 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 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 57,000 employees worldwide and annual revenue exceeding $13 billion, 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 Follow Mercer on Twitter @MercerCanada.