Ireland ranked 10th out of 27 countries in the 2016 Melbourne Mercer Global Pensions Index (MMGPI), and was awarded an overall C+ rating for the third year running. While this indicates a relatively strong Irish pension system with high scores for adequacy and integrity, Ireland ranks in just 20th position in terms of sustainability for which it was awarded an E rating, the lowest point on the Index’s grading scale.
The ageing population, low levels of occupational pension coverage, and a heavy reliance on the state pension are the key factors influencing Ireland’s sustainability ranking. Possible measures to enhance the sustainability of Ireland’s pensions system include:
Commenting on the report Aisling Kelly, Consultant at Mercer in Ireland noted, “We are living longer and spending more time in retirement, so we need to ensure that the Irish pensions system can support the population in achieving adequately-funded retirements. Definitive action is needed now to improve Ireland’s sustainability rating and improve our position in the index. Receiving an E grade for the sustainability of our pension system should be ringing alarm bells in government”.
Minister for Social Protection, Leo Varadkar, has previously indicated strong support for the introduction of a universal savings scheme aimed at increasing pension coverage and the overall level of pension savings. While he has described pensions as being an area of focus for next year, he has also indicated that a universal savings scheme could take some time to deliver.
In the meantime, the Irish pension system faces key challenges as the population ages and the ratio of workers to pensioners continues to fall. By 2055, it is estimated there will be just two workers for every retiree compared to five today.
Given that Ireland’s state pension is provided on a “pay-as-you go” basis, with benefits paid from contributions made by the current workforce, it is clear that steps to reduce reliance on the state pension are required. The scale of this issue is demonstrated by the fact that the future cost of providing public sector and state pensions is estimated at €440 billion.
Recent CSO statistics indicate that less than 47% of workers are currently saving in occupational pension schemes. Unless more is done both to improve this level of participation and to increase the overall levels of pension savings, a large proportion of our population may face poverty in their retirement.
Ms Kelly commented, “The government must act now to protect today’s workers from the threat of pensioner poverty. In light of the pressures on the state pension, it is imperative that the government prioritise the development of a clear roadmap with timelines, targets and deadlines for increasing coverage and levels of pension savings across all employees. We should adopt the best features of other international systems and develop a robust yet simplified structure that delivers for our future pensioners.”
The MMGPI is the world’s most comprehensive comparison of global pension systems, and this year it covered close to 60 per cent of the world’s population, measuring 27 systems against more than 40 indicators to gauge their adequacy, sustainability and integrity. It included diverse countries across the Americas, Europe and Asia-Pacific regions, this year examining Malaysia and Argentina for the first time.
This is Ireland’s third year to participate in the Index. This participation is sponsored by Mercer, the Irish Association of Pension Funds, the Irish Association of Investment Managers, the Irish Brokers’ Association and publicpolicy.ie.
About the Melbourne Mercer Global Pension Index
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.
The Index is the premier research tool available to guide governments to develop policies that provide adequate and sustainable benefits for all their citizens in retirement.
"With a strong financial services sector and deep talent pool, Victoria continues to lead the way in funds management, a central part of any superannuation and annuities system,” said Victorian State Minister for Industry and Employment, Wade Noonan.
"Through our Future Industries Fund, the Victorian Government is working closely with the financial services sector to deliver continued expansion, investment and jobs growth."
According to Professor Rodney Maddock, of the Australian Centre for Financial Studies “We are living longer, living larger portions of their life in retirement and spending more in retirement, so we need to be well-placed to ensure fulfilling, adequately-funded retirements.”
The 2016 MMGPI – A closer look at the impact of ageing populations
This year, the MMGPI has looked at the impact of rapidly ageing populations, and the preparedness of countries’ retirement systems to deal with the significant financial pressures this presents.
Author of the report and Senior Partner at Mercer, Dr David Knox said the impact of longer life expectancies, combined by global declining birth rates, is much more significant than has been recognised by many governments and communities.
“This year’s report includes a projected old age dependency ratio which will raise alarm in many regions. The range of the ratio is stark – predicting that in South Africa there will be one retiree for every 7 people of working age while in Japan the number drops to one retiree for every 1.44 people of working age by 2040.”
The MMGPI presents the evidence, and recommends the urgent changes that governments need to make to ensure that current retirement systems are sustainable and able to provide adequate benefits for decades to come.
Dr Knox issued a stern warning: “It is a political imperative that all countries, regardless of their size, and current standing on the MMGPI, implement the necessary policy changes to withstand future challenges presented by the globally ageing population.”
The mitigating factors that determine each country’s old age dependency ratio
The MMGPI shows the relative position of each country’s old age dependency ratio in respect to five key factors:
The labour force participation of older workers aged 55-64
The labour force participation of older workers aged 65 and over
The increase in the labour force participation rate of 55-64 year olds from 2000-2015 which determines whether the country is actually experiencing more people working at older ages
The projected increase in the retirement period from 2015-2035 allowing for the expected increases in life expectancy and the projected increase in the normal eligibility age for social security or the publicly funded pension
The level of pension fund assets expressed as a percentage of GDP in each country.
Dr Knox said although these indicators are not foolproof, they are indicative of developments which impact sustainability and community confidence in the provision of future retirement benefits.
The graph below plots the relative position of each country in respect of both the projected old age dependency ratio and the impact of the five mitigating factors.
“Indonesia is an interesting example, with its relatively low old age dependency together with a comparatively high labour force at older ages and a significant increase in the retirement age” said Dr Knox.
Melbourne Mercer Global Pension Index – overall index value results
The overall index value for each country’s system represents the weighted average of all three sub-indices
About the Australian Centre for Financial Studies
The Australian Centre for Financial Studies (ACFS) is a not-for-profit research centre of Monash Business School. ACFS specialises in leading-edge finance and investment research. It aims to boost the global credentials of Australia’s financial industry, bridge the gap between academia and industry, and support Australia as an international centre for finance practice, research and education.
ACFS facilitates linkages between academics, industry practitioners and government, and draw on the expertise and experience of each of these groups to promote the transmission of knowledge throughout the greater finance community. ACFS has developed a strong reputation as an independent voice on industry-relevant matters. ACFS contributes to public debate on financial sector issues; conduct detailed, expert analysis; deliver unbiased contracted research to industry partners; host a wide range of knowledge-sharing activities including conferences, lecture series, lunchtime briefings, twilight seminars and roundtable discussions; and facilitate three Research Program Committees that link senior industry and academic leaders in the fields of banking, funds management and insurance. ACFS also engages with major government reviews such as the Financial System Inquiry, Tax White Paper, and Productivity Commission inquiries.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers 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 annual revenue of $13 billion and 60,000 colleagues worldwide, 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 www.mercer.com. Follow Mercer on Twitter @Mercer.