Global Pension Index is a timely reminder of the importance of auto-enrolment as Ireland’s pension system ranks poorly for sustainability | Mercer

Global Pension Index is a timely reminder of the importance of auto-enrolment as Ireland’s pension system ranks poorly for sustainability | Mercer

Global Pension Index a timely reminder of the importance of auto-enrolment as Ireland ranks poorly for sustainability

  • 22 October 2018
  • Ireland, Dublin
  • Ireland’s pension system is ranked 12th out of 34 countries, achieving a B rating overall
  • Ireland ranks poorly for sustainability (24th place, D rating) but highly for adequacy (3rd place, B+ rating)
  • Ireland needs to meet the 2022 target set for the introduction of an auto-enrolment system to include many workers who currently have no pensions
  • The Netherlands takes first place overall, and Denmark comes in second

Ireland ranked 12th overall out of 34 countries in the 2018 Melbourne Mercer Global Pension Index (MMGPI) and was awarded an overall B rating. While the Irish pensions system again achieved high scores for both the adequacy of the expected benefits and the standards of governance applied, it was ranked in 24th place, with a D rating, when it comes to sustainability.

This sustainability score is greatly influenced by Ireland’s rapidly ageing population, with the ratio of workers to pensioners set to fall from 5:1 today to 2:1 by 2050. The problem is compounded by Ireland’s low level of pension coverage, with less than fifty per cent of the population currently participating in an occupational pension. It is clear that over-reliance on Ireland’s comparatively generous state pension must be addressed.

Commenting on the 2018 results, Danny Mansergh, Head of Member Communications at Mercer in Ireland, said: “Ireland’s moderately respectable 12th position in the rankings does not tell the full story. The underlying truth is that Ireland provides a comparatively generous state pension, but also one that is set to come under serious fiscal strain as the population ages rapidly between now and 2050. The results of the 2018 Melbourne Mercer Global Pension Index provide a timely reminder that the planned introduction of auto-enrolment for 2022, if done correctly, has the potential to significantly improve the long-run outlook for Irish retirees by reducing dependence on the state.”

In August, the Department for Social Protection launched a public consultation on the introduction of auto-enrolment, which is due to close for submissions on November 4th. The outline proposals envisage a phased introduction of employer and employee contributions, with the Government contributing €1 for every €3 saved into a pension by a scheme member.

The key recommendations for Ireland from the 2018 MMGPI report are to:

  • increase coverage of employees in occupational pension schemes
  • introduce a minimum level of mandatory savings into retirement accounts
  • improve the protection of members’ benefits in defined benefit schemes
  • reduce government debt

According to Dr. Mansergh, “It is right and proper that we should aspire to having a world-leading pension system not just in terms of adequacy and integrity as at present but also in terms of sustainability. We owe this to the current generation of workers, who are, via their PRSI, paying the state pensions of today’s pensioners. Indeed, those workers have every right to expect similar treatment when they come to retire.”

Ageing populations continue to pose a challenge to governments worldwide, with policymakers struggling to balance the twin goals of delivering financial security for their retirees that is both adequate for the individual and sustainable for the economy.

Now in its tenth year, the Melbourne Mercer Global Pension Index reveals who is the most and who is the least prepared to meet this challenge.

Measuring 34 pension systems, the Index shows that the Netherlands and Denmark (with scores of 80.3 and 80.2 respectively) both offer A-Grade world class retirement income systems with good benefits - clearly demonstrating their preparedness for tomorrow’s ageing world.

However, common across all results was the growing tension between adequacy and sustainability. This was particularly evident when examining Europe’s results. Denmark, Netherlands and Sweden score A or B grades for both adequacy and sustainability, whereas Austria, Italy and Spain score a B grade for adequacy but an E grade for sustainability thereby pointing to important areas needing reform.

Author of the study and Senior Partner at Mercer Australia, Dr David Knox says that the natural starting place to having a world class pension system is ensuring the right balance between adequacy and sustainability.

“It’s a challenge that policymakers are grappling with,” says Dr Knox. “For example, a system providing very generous benefits in the short-term is unlikely to be sustainable, whereas a system that is sustainable over many years could be providing very modest benefits. The question is – what’s an appropriate trade-off?”

As highlighted in Chart 1, all systems should consider adjusting their strategy so they are moving towards the top right quadrant. Through the study, policymakers can understand the characteristics of leading systems and find ways to improve their own.

Chart 1: Adequacy versus Sustainability ratings for global pension systems

Source: Melbourne Mercer Global Pension Index 2018

Dr Knox adds that it’s not enough for a system to be sustainable or adequate; an emerging dimension to the debate about what constitutes a world class system is “coverage” and the proportion of the adult population participating in the system.

“In some countries, broad coverage has been successfully accomplished through compulsory workplace pension systems or, in some cases, auto-enrolment arrangements,” he says.

“However, with changes in the way people are working around the world, we need to ensure these schemes include everyone so that the whole workforce is saving for the future. This includes contractors, self-employed, and anyone on any income support, be that parental leave, disability income or unemployed benefits.”

David Anderson, President, International at Mercer added that it was a positive step to see governments tackle pension reform as life expectancies continue to rise.

“Developed economies have been aware of the demographic challenges facing their pension systems for some time. Where economies are less developed, it’s pleasing to see many governments recognising the same trends emerging in their own populations and taking steps now to address this. Such actions make future pension systems more sustainable over the longer term,” he said.

“Ageing populations, high sovereign debt levels in some countries and the global competition to lower taxes constrain the ability of some jurisdictions to improve retirement income security. With a decade of unique data, the MMGPI and associated research can provide valuable global comparative insights to planners and policymakers on the way forward”, said Professor Deep Kapur, Director of Australian Centre for Financial Studies.

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.

Minister for Industry and Employment, The Honourable Ben Carroll, said that the result demonstrates the success of Victoria’s thriving financial sector, which is home to approximately 60 per cent of the nation's institutional investors.

“Melbourne is the undisputed capital of Australia's pension industry and is home to six of the eight largest industry superannuation funds in the country. Our top four funds manage AU$300 billion, demonstrating the ongoing success of Victoria’s strong and sophisticated financial services sector.”

What does the future look like?

Some pension systems face a steeper path to long term 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 consider creating 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 Hong Kong SAR, Peru, Saudi Arabia and Spain; the Index measures 34 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.

Melbourne Mercer Global Pension Index by the Numbers

This year’s Index reveals that many North-Western European countries lead the world in developing world class pension systems. The Netherlands, with an overall score of 80.3, beat Denmark to first place, a spot held by Denmark for six years, by 0.1. Finland bumped Australia (72.6) out of third place with an overall score of 74.5 and Sweden (72.5) coming in fifth place.

“The Index is an important reference for policymakers 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.”

Melbourne Mercer Global Pension Index – Overall index value results

The Index uses three sub-indices – adequacy, sustainability and integrity – to measure each retirement income system against more than 40 indicators. 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[1]. Each index value represents a score between zero and 100.

[1] Melbourne Mercer Global Pension Index 2018, pages 13,14

2018 Results

System

Total

Adequacy

Sustainability

Integrity

 Argentina

       39.2

       40.8

       33.8

       44.1

 Australia

       72.6

       63.4

       73.8

       85.7

 Austria

       54.0

       68.1

       21.5

       76.7

 Brazil

       56.5

       72.5

       28.5

       70.1

 Canada

       68.0

       72.1

       56.0

       78.2

 Chile

       69.3

       59.2

       73.3

       79.7

 China

       46.2

       53.4

       38.0

       46.0

 Colombia

       62.6

       68.4

       50.1

       70.9

 Denmark

       80.2

       77.5

       81.8

       82.2

 Finland

       74.5

       75.3

       61.0

       92.1

 France

       60.7

       79.5

       42.2

       56.5

 Germany

       66.8

       79.9

       44.9

       76.6

 Hong Kong

       56.0

       39.4

       54.9

       84.2

 India

       44.6

       38.7

       43.8

       55.2

 Indonesia

       53.1

       47.3

       49.5

       67.4

 Ireland

       66.8

       79.0

       45.9

       76.6

 Italy

       52.8

       67.7

       20.1

       74.5

 Japan

       48.2

       54.1

       32.4

       60.7

 Korea

       47.3

       45.4

       48.1

       49.3

 Malaysia

       58.5

       45.2

       60.5

       77.1

 Mexico

       45.3

       37.3

       57.1

       41.6

 Netherlands

       80.3

       75.9

       79.2

       88.8

 New Zealand

       68.5

       65.4

       63.4

       80.6

 Norway

       71.5

       71.5

       58.1

       90.2

 Peru

       62.4

       68.0

       54.2

       65.1

 Poland

       54.3

       53.8

       46.2

       66.4

 Saudi Arabia

       58.9

       61.6

       53.3

       62.6

 Singapore

       70.4

       64.4

       69.5

       81.2

 South Africa

       52.7

       41.9

       46.8

       78.2

 Spain

       54.4

       68.7

       27.8

       68.6

 Sweden

       72.5

       67.6

       72.6

       80.2

 Switzerland

       67.6

       58.0

       67.5

       83.2

 UK

       62.5

       57.8

       53.4

       82.9

 US

       58.8

       59.1

       57.4

       60.2

Average

       60.5

       61.1

       52.0

       71.6

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.

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