Global Pension Index highlights an urgent need to focus on pension scheme sustainability in Ireland

 

20 October 2020

  • Twelfth annual Global Pension Index ranks Ireland 14th out of 39 retirement systems
  • Ireland ranks 24th on sustainability of pension system due to the pressures of an ageing population and relatively high State pension
  • The Netherlands and Denmark retain first and second place respectively and the coveted ‘A-grade’

Ireland is ranked in 14th place out of 39 countries in the 2020 Mercer Global Pensions Index and achieved a ‘B’ rating.  The Index placed Ireland ahead of countries such as Belgium, the UK, France, Spain and Austria. The Netherlands topped the index again this year despite significant pension reform currently under way there.

 

According to the 12th annual Mercer CFA Institute Global Pension Index; increasing life expectancies are placing greater demands on public resources to support the health and welfare of ageing populations - a situation that is being exacerbated by COVID-19. It is also clear that the widespread economic impact of COVID-19 is heightening the financial pressures facing current and future retirees.

 

Ireland’s relatively high ranking in this year’s index masks an important underlying sustainability issue.  In fact, when it comes to the sustainability subcategory, Ireland’s pensions system is ranked in just 24th place. This points to future challenges as the population ages: the ratio of workers to pensioners in Ireland is set to fall from 5:1 today to 2:1 by 2050. This means that there will be fewer workers to fund the State pension in the future. The planned increase in the State pension age to 67 in 2021 was designed to help address this imbalance but, as announced in Budget 2021, this has now been deferred.

 

In the two other subcategories Ireland ranked 5th in terms of the adequacy of its pension system, down from 1st position last year. Whereas for integrity, defined as the level of trust in the system’s ability to deliver, it remained in the middle of the group, ranking in 20th place. 

 

Mercer sees a number of key forces at play. Ireland has a comparatively generous State pension, supporting the adequacy ranking. However, concerns remain regarding the low level of occupational pension coverage and the fact that Ireland’s population is ageing rapidly. The fall from 1st place to 5th on adequacy was driven by the lack of increase in the rate of the contributory State Pension in Budget 2020. 

 

Commenting on the 2020 results, Caitriona MacGuinness, DC and Master Trust Leader at Mercer in Ireland said: “At a high level, Ireland compares well in a global context.  However, there continue to be significant challenges when we consider the details of the ranking.  The State Pension continues to be generous in an international context.  And while this supports those currently in retirement, it will be increasingly difficult to maintain this level of support in future as the population continues to age, particularly in light of the confirmation in Budget 2021 that plans to increase the State pension age next year have been put on hold. 

 

While the Programme for Government indicated an intention to progress the introduction of an auto-enrolment system, there have been no further developments on this.  With the additional challenges of COVID-19, the target introduction date of 2022 is now very unlikely to be achieved.  Without auto-enrolment, supporting future retirees will continue to be a challenge for policy makers with concerns on sustainability going forward.”

 

The key recommendations for Ireland from the 2020 Mercer Global Pensions Index report are to:

  • increase coverage of employees in occupational pension schemes and introduce a minimum level of mandatory savings to retirement accounts, which would be the key benefits of introducing an auto-enrolment system. 
  • improve the regulatory requirements for private pension plans
  • reduce government debt

According to Ms. MacGuinness, “It is critical that Irish pension savers have confidence in the ability of pension providers to deliver retirement benefits over many years into the future. The upcoming implementation of a European Pensions Directive (IORPII), as well as increased supervisory actions by the Pensions Authority, will likely increase the ranking for Ireland in the future.  While one of the suggested actions is to reduce government debt to improve the sustainability score, this clearly has to be balanced against competing priorities for spending during the current environment.”

 

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 on 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.” 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.

 

COVID-19 has also increased gender inequality in pension provision.

 

“Even before COVID-19 disrupted economies across the world, many women faced retirement with fewer 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

 

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).

 

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 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 (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of $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.

 

 

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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