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.”
United Kingdom
The UK’s index value increased marginally from 64.4 in 2019 to 64.9 in 2020 due to a number of small changes in the sustainability sub-index. Looking at the detail the UK’s index value shows high values for integrity, i.e. the level of trust in the system’s ability to deliver, but low scores on adequacy and sustainability.
Benoit Hudon, Mercer’s UK Head of Wealth, said: “There are numerous levers the Government could pull to improve the UK pensions system, though first a fundamental debate is needed to agree the optimal balance between security, adequacy and affordability. It is almost impossible for any national pensions system to achieve these three objectives fully and simultaneously.
However, we believe too much focus has been put on security at the expense of adequacy and affordability, leaving pensions savers with low investment returns. We need to rethink what represents an acceptable level of risk into our pension system. For example, we believe we should increase access to growth assets, to improve the sustainability of the system, support the economy, and increase the potential for achieving better outcomes for pension savers.”
Mr Hudon added: “The pandemic has put into sharp focus the flaws within the UK pensions system and it’s clear that employers’ part in both supporting the workforce and helping them accumulate and secure wealth, is becoming increasingly important. With the pandemic acting as the ultimate stress test, many companies and pensions schemes are taking a hard look at their governance structures. Some had already started to mitigate future risks and were looking to improve member outcomes by outsourcing elements of their traditional responsibilities – we expect to see this trend accelerate as schemes react to the impact of the pandemic.”
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).
For each sub-index, the highest scores were the Netherlands for adequacy (81.5), Denmark for sustainability (82.6) and Finland for integrity (93.5). The lowest scores were Mexico for adequacy (36.5), Italy for sustainability (18.8) and the Philippines for integrity (34.8).
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. In the UK the Pensions Regulator eased some of its requirements for defined benefit funding and the Government’s furlough scheme ensured pensions contributions for many workers continued. The scheme provided some support for the pension costs of employers with furloughed workers – 3% of qualifying earnings, which matched the minimum auto-enrolment standard.
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.
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.
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