27 October 2015

Ireland, Dublin

Reliance on the State pension affecting sustainability of pension system in Ireland according to global study

• Ireland’s pension system is ranked 11th out of 25 countries for a second year.
• Sustainability of Irish pension system ranked in just 20th place.
• Reliance on the state pension is a key factor affecting Ireland’s sustainability ranking.
• According to Mercer RED C Survey, 1 in 4 pension scheme members never review their pension.

Ireland ranked 11th out of 25 countries in the 2015 Melbourne Mercer Global Pensions Index (MMGPI), for the second year. While this indicates a relatively strong Irish pension system, the report ranks the sustainability of this system in just 20th position.

The key issue here is that Ireland is heavily reliant on the State pension which is provided on a “pay-as-you-go” basis. This means that funding is not set aside in advance and benefits are paid from PRSI contributions made by the current workforce. Given future expected improvements in life expectancy and our current economic status, it is clear that steps to reduce reliance on the state pension are required.

According to Mairéad O’Mahony, DC Leader for Mercer Ireland, “This report highlights the importance of measures that aim to improve the sustainability of our pension system, whether that means adjusting the state pension age, increasing participation in pension schemes amongst our workforce, or funding additional contributions for future retirement income.”

She added, “An important step to achieving increased participation will be to simplify the regulation currently surrounding the pension industry. This will pave the way for implementing a clear, understandable approach to auto-enrolment. Doing so will improve participation rates and ultimately enhance peoples’ financial security in retirement.”

Now in its seventh year, the MMGPI measured 25 retirement income systems against more than 40 indicators under the sub-indices of adequacy, sustainability and integrity. The MMGPI is the world’s most comprehensive comparison of pension systems. It covers close to 60% of the world’s population and suggests how governments can provide adequate and sustainable benefits that protect their citizens against longevity risk, the risk of their aging population outliving their savings, potentially one of the biggest economic and social risks facing many retirees today.

This is Ireland’s second 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

What are the critical takeaways from this report for Ireland?

According to Mairéad O’Mahony, “A critical takeaway for Ireland from this year’s report is the need to reduce the reliance on the State pension.”

“The introduction of an auto-enrolment system would serve to increase participation in private pension saving and would be a strong step in the right direction. However, we need to ensure that this is matched by a commitment to improve plan engagement to ensure that members have a clear understanding of the savings they will need for their retirement.”

A recent survey carried out by Mercer in conjunction with RED C investigated how pension plan members engage with their plan. This showed that, while 67% of respondents with a private pension felt they should review their pension at least annually, only 43% actually do so. In fact, 1 in 4 pension scheme members do not review their pension at all.

The survey also found that the majority of people (51%) would take more interest in their pension if they had a better understanding of how pensions worked in general. This is particularly true of younger members, with 66% of pension scheme members under the age of 34 reporting that better pension education would increase their likelihood of engaging with their pension scheme.

Overall, the results of the survey show that pension engagement can be improved by tailoring the method of communication to members’ preferences. While access to independent advice is seen as key for older members, many middle aged respondents reported that they would engage more with their pension scheme if they had easy access to interactive online tools, videos and articles related to pensions.

In terms of the MMGPI, Denmark held onto the top position for the fourth consecutive year in 2015 with an overall score of 81.7. Denmark’s well-funded pension system with its good coverage, high level of assets and contributions, the provision of adequate benefits and a private pension system with developed regulations are the primary reasons for its top spot.

Author of the report and Senior Partner at Mercer, Dr David Knox, said, “Implementing the right reform to improve pension systems and provide financial security in retirement has never been more critical for both individuals and societies.”

“The MMGPI is an important reference for policy makers around the world to learn from the most adequate and sustainable systems. 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,” said Dr Knox.

Amy Auster, Executive Director of the Australian Centre for Financial Studies said the Index continued to be used by policy makers and researchers to assess the merits of their pension systems.

“The Index is used internationally both to highlight the relative strengths of pension systems and to identify opportunities and options for improvement. Looking back at the results from the past seven years we can see several countries that have adopted recommendations from our annual reports to strengthen their pension systems.

“It is encouraging to see that the insight provided by the Index encourages and supports policymakers and industry practitioners to take a long-term view, and work toward the betterment of their pension systems.”

“This is not always easy in the face of demographic pressures and changing market conditions, but we see clear evidence that policy-makers are continuing to enhance their pension systems in order to adequately serve future generations,” said Ms Auster.

We’re spending longer in retirement

All of the 11 countries that have been part of the MMGPI since it began in 2009 have experienced an increase in the expected length of retirement from 2009 to 2015, with the average length rising from 16.6 years to 18.4 years.

Five countries – Australia, Germany, Japan, Singapore and the UK – have increased their pension age to offset the increase in life expectancies, but these are not enough to halt the increasing length of retirement.

The Index also looks at the average expected length of retirement in 20 years, and by this measure, three countries have witnessed a reduction. For Canada and the Netherlands this is due to a projected increase in the state pension age from 65 to 67 during the 20 years, while for the USA, life expectancy has reduced slightly. The other eight countries showed an increase.

Increasing workforce participation of older workers: good for the economy & individuals

For the 16 countries that have been part of the MMGPI since the 2011 report, the average labour force participation rate for 55-64 year olds has increased from 57.9% to 62.2% between 2011 and 2015, or just over 1% per year.

However, averages can be misleading. The labour force participation rate at older ages actually went backwards in the USA. In Brazil, India and China, it increased by less than 4%.

“Extending the years that individuals spend in the workforce is one of the most positive ways of developing sustainable retirement systems when life expectancies are increasing,” Dr Knox said.

“While there is a natural limit to the participation rate at older ages, with most countries still below 70%, the scope for significant increases across the world remains, which would improve the sustainability of many pension systems,” Dr Knox added.

Preventing financial strain on the next generation

The sustainability of a pension fund cannot be assessed without reviewing the level of funds set aside today to pay future retirement benefits so that the expected pension are not a financial strain on the next generation.

There is an enormous variety in the level of pension assets held ranging from 1.8% of GDP in Indonesia and 6.0% of GDP in Austria to 160.6% of GDP in the Netherlands and 168.9% of GDP in Denmark.

“The diversity in pension assets held as a percentage of GDP recognizes that some countries have very limited private pension arrangements whereas others have well-developed and mature pension systems. However, it is an important warning for all countries to prepare, prepare, prepare,” said Dr Knox.

The Index looks objectively at both the publicly funded and private components of a system as well as personal assets and savings outside the pension system. It is published by the Australian Centre for Financial Studies (ACFS) in conjunction with Mercer and is funded by the Victorian State Government.

About the Australian Centre for Financial Studies

The Australian Centre for Financial Studies (ACFS) is a not-for-profit consortium of Monash University, RMIT University and Finsia (Financial Services Institute of Australasia) which was established in 2005 with seed funding from the Victorian Government.

The mission of the ACFS is to build links between academics, practitioners and government in the finance community to enhance research, practice, education and the reputation of Australia's financial institutions and universities, and of Australia as a financial centre. ACFS conducts leading edge finance research, commentary and thought leadership. More information can be found at and on the Index