Ireland is ranked in 11th place overall out of 37 countries in the 2019 Melbourne Mercer Global Pensions Index (MMGPI) and achieved a B rating. The index placed Ireland ahead of countries such as the Germany, UK, France, Spain and Austria. However, this relatively high score masks an underlying imbalance that is storing up future problems for the government and for retirees.
The main concern is that while Ireland ranked in 1st place (A rating) for the adequacy of the expected benefits, it only ranked 27th (D rating) when it comes to sustainability. There are a number of key forces at play here. Ireland has a comparatively generous state pension, boosting the adequacy ranking. However this is offset by the low level of occupational pension coverage and the fact that Ireland’s population is ageing rapidly.
With the ratio of workers to pensioners set to fall from 5:1 today to 2:1 by 2050, there will be less workers to fund the state pension in the future. In the meantime, occupational pension coverage of less than fifty percent will see a growing strain on these shrinking resources, if we don’t take steps to redress this imbalance.
Commenting on the 2019 results, Caitriona MacGuinness, DC and Master Trust Leader at Mercer in Ireland said: “Ireland’s relatively high ranking masks an underlying imbalance. It’s clear that our comparatively generous state pension will come under increased strain as the population continues to age rapidly between now and 2050. The government has committed to the introduction of an auto-enrolment system by 2022 which has the potential to significantly alleviate this strain. However, progress to date on rolling this out has been limited. Without auto-enrolment it is clear that future retirees will continue to depend on an increasingly unsustainable state pension”
The key recommendations for Ireland from the 2019 MMGPI report are to:
According to Ms. MacGuinness, “Looking to the future it is important to recognise the role of private pension saving in helping to deliver secure retirement outcomes for the next generation of retirees. The proposed introduction of auto-enrolment in Ireland will help expand pension coverage to support a more sustainable system for all. This is a noble aspiration, however, aspiration is not enough on its own – now is the time for action to deliver on the promises made before the 2022 deadline is missed.”
The MMGPI, supported by the Victorian Government of Australia, is a collaborative research project between the Monash Centre for Financial Studies (MCFS) – a research centre based within Monash Business School at Monash University in Melbourne – and professional services firm, Mercer.
The Index compares 37 retirement systems across the globe and covers almost two-thirds of the world’s population. It highlights the broad spectrum and diversity of the world’s pension systems, demonstrating even the world’s best systems have shortcomings. The 2019 Index includes three new systems – Philippines, Thailand and Turkey.
While each pension system has a unique set of circumstances, the report makes clear there are common improvements which can be made to the challenges all regions are facing.
“Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens. It’s imperative that policy makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future,” said Dr Knox.
The Index uses the weighted average of the sub-indices of adequacy, sustainability and integrity to measure each retirement system against more than 40 indicators. The 2019 Index takes a new approach to calculate the net replacement rate, that is, the level of retirement income provided to replace the previous level of employment earnings. While most previous Index reports have calculated a net replacement rate based on the median income earner, the current report uses a range of income levels based on the Organisation for Economic Co-operation and Development data to represent a broader group of retirees.
“Now in its eleventh year, the Melbourne Mercer Global Pension Index is a great source of data on pension systems around the world, and the high international standing of this report is testament to Melbourne’s reputation as a global centre of industry research, innovation and financial expertise,” said the Minister for Jobs, Innovation and Trade, Martin Pakula.
By the numbers
The Netherlands had the highest index value (81.0), and has consistently held first or second position for 10 out of the past 11 MMGPI reports. Thailand had the lowest index value (39.4).
For each sub-index, the highest scores were Ireland for adequacy (81.5), Denmark for sustainability (82.0) and Finland for integrity (92.3). The lowest scores were Thailand for adequacy (35.8), Italy for sustainability (19.0) and Philippines for integrity (34.7).
Sustainability still a weakness in an ageing and defined contribution future
Measuring the likelihood a current system will be able to provide benefits into the future, the sustainability sub-index continues to highlight the weakness of many systems.
In particular, the sustainability issue of many South American and Asian systems has been confirmed with an average sustainability grade of D. For example, although Chile achieves a strong 71.7 in this sub-index, Brazil and Argentina scored 27.7 and 31.9, respectively. Similarly, in Asia, while Singapore achieves 59.7, Japan scored only 32.2.
However, this issue is not restricted to developing economies. Many European economies face similar pressures. Although Denmark achieves the highest score for the sustainability sub-index at 82.0, Italy and Austria scored only 19.0 and 22.9, respectively.
While some measures that contribute to the sustainability score are difficult to change, others can be influenced to strengthen the long-term effectiveness of a system. Recommendations include encouraging or requiring an increased level of savings for the future, gradually raising the state pension age and enabling or persuading people to work a little longer.
“Although some systems are still anchored by defined benefit schemes that may practice liability-driven investment strategies, defined contribution plans are playing increasingly important roles in the accumulation of individuals’ retirement savings. Maximising risk-adjusted investment returns for defined contribution plans by diversifying the assets held by a pension fund is critical,” said Professor Deep Kapur, Director of the MCFS.
“It’s essential the state pension or retirement age is reconsidered in line with increasing longevity – a step some governments have already taken – to reduce the costs of publicly financed pension benefits,” he said
2019 Melbourne Mercer Global Pension Index
System |
Overall index value |
Sub-index values |
||
Adequacy |
Sustainability |
Integrity |
||
Argentina |
39.5 |
43.1 |
31.9 |
44.4 |
Australia |
75.3 |
70.3 |
73.5 |
85.7 |
Austria |
53.9 |
68.2 |
22.9 |
74.4 |
Brazil |
55.9 |
71.8 |
27.7 |
69.8 |
Canada |
69.2 |
70.0 |
61.8 |
78.2 |
Chile |
68.7 |
59.4 |
71.7 |
79.2 |
China |
48.7 |
60.5 |
36.7 |
46.5 |
Colombia |
58.4 |
61.4 |
46.0 |
70.8 |
Denmark |
80.3 |
77.5 |
82.0 |
82.2 |
Finland |
73.6 |
73.2 |
60.7 |
92.3 |
France |
60.2 |
79.1 |
41.0 |
56.8 |
Germany |
66.1 |
78.3 |
44.9 |
76.4 |
Hong Kong SAR |
61.9 |
54.5 |
52.5 |
86.9 |
India |
45.8 |
39.9 |
44.9 |
56.3 |
Indonesia |
52.2 |
46.7 |
47.6 |
67.5 |
Ireland |
67.3 |
81.5 |
44.6 |
76.3 |
Italy |
52.2 |
67.4 |
19.0 |
74.5 |
Japan |
48.3 |
54.6 |
32.2 |
60.8 |
Korea |
49.8 |
47.5 |
52.6 |
49.6 |
Malaysia |
60.6 |
50.5 |
60.5 |
76.9 |
Mexico |
45.3 |
37.5 |
57.1 |
41.3 |
Netherlands |
81.0 |
78.5 |
78.3 |
88.9 |
New Zealand |
70.1 |
70.9 |
61.5 |
80.7 |
Norway |
71.2 |
71.6 |
56.8 |
90.6 |
Peru |
58.5 |
60.0 |
52.4 |
64.7 |
Philippines |
43.7 |
39.0 |
55.5 |
34.7 |
Poland |
57.4 |
62.5 |
45.3 |
66.0 |
Saudi Arabia |
57.1 |
59.6 |
50.5 |
62.2 |
Singapore |
70.8 |
73.8 |
59.7 |
81.4 |
South Africa |
52.6 |
42.3 |
46.0 |
78.4 |
Spain |
54.7 |
70.0 |
26.9 |
69.1 |
Sweden |
72.3 |
67.5 |
72.0 |
80.2 |
Switzerland |
66.7 |
57.6 |
65.4 |
83.0 |
Thailand |
39.4 |
35.8 |
38.8 |
46.1 |
Turkey |
42.2 |
42.6 |
27.1 |
62.8 |
UK |
64.4 |
60.0 |
55.3 |
84.0 |
USA |
60.6 |
58.8 |
62.9 |
60.4 |
Average |
59.3 |
60.6 |
50.4 |
69.7 |
About the Monash Centre for Financial Studies
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.
About Mercer
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 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan Companies (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people with 76,000 colleagues and annualized revenue approaching $17 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 www.mercer.com. Follow Mercer on Twitter @Mercer.
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