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Global Pension Systems by the Numbers: Risks on the Rise

The world’s pension systems are raising the bar to ensure their adequacy, sustainability and integrity, but at the same time, key risks are on the rise. Such macro trends as increasing life expectancy and an aging population are putting significant pressure on many governments. Making improvements in pension systems is vital for the long-term security of retirees.

Those are among the conclusions cited in the recent report, The Melbourne Mercer Global Pension Index, which covers close to 60 percent of the world’s population. The MMGPI measures 25 retirement income systems against more than 40 indicators under the sub-indices of adequacy, sustainability and integrity.

The latest report reveals that Denmark held onto the top position for the fourth consecutive year with an overall score of 81.7, ahead of the Netherlands (80.5) and Australia (79.6). Denmark and the Netherlands are the only countries to receive an “A” grade for a score exceeding 80, earning top honors for well-funded pension systems, the provision of adequate benefits and a private pension system with developed regulations.

The ranking provides an important snapshot of a pension system’s strength and sustainability, while underscoring the urgency of developing and implementing the right reforms to improve pension systems and provide financial security in retirement. In the coming years, age-related spending around the world, primarily driven by increased pension and health care costs, is likely to outstrip the costs of the Global Financial Crisis in many countries.

Source: Mercer

Source: Mercer

Source: Mercer

Source: Mercer

The MMGPI suggests how governments can provide adequate and sustainable benefits to protect their citizens against longevity risk—the risk of an aging population outliving its savings, and potentially one of the biggest economic and social risks facing many retirees today. And while there’s no perfect pension system that can be applied universally, there are many common features that can be shared for better outcomes. These include:

  • Increasing the state pension and/or retirement age
  • Promoting higher labor force participation rates at older ages
  • Encouraging or requiring higher levels of savings, both within and outside the pension system
  • Increasing the coverage of employees and the self-employed in the private pension system
  • Reducing the leakage of funds from the pension system prior to retirement

The United States ranking has slipped from 13th in 2014 to 14th in the 2015 index. This middle-of-the-pack status reflects the adequacy of the typical level of benefits provided under the U.S. system, with its lack of employer-provided supplemental retirement benefits for many Americans. There have been a series of regulatory changes to address these issues, but additional action could improve the adequacy and sustainability of the U.S. system. Recent efforts at both the state and national levels to introduce auto-enrollment and/or state-run Individual Retirement Accounts are steps in the right direction. However, these are the first, small steps in improving retirement adequacy for the majority of Americans.

From a more global perspective, 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, with the average rising from 16.6 years to 18.4 years. And 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 looked 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 that 20-year timespan. For the U.S., life expectancy has nearly remained the same. The other eight countries in the index showed an increase.

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

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

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

Indeed, 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 is not a financial strain on the next generation. There is an enormous variety in the level of pension assets held, ranging from 1.8 percent of GDP in Indonesia and 6.0 percent of GDP in Austria to 160.6 percent of GDP in the Netherlands and 168.9 percent 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, all countries share a common imperative: prepare, prepare, prepare.

David Knox

Senior Partner at Mercer Australia

Based in Melbourne, Australia, Dr. David Knox is a senior partner in Mercer’s Retirement business and the author of Mercer Melbourne Global Pension Risk Index Report. Dr. Knox has a bachelor’s degree and doctorate from Macquarie University and is a Fellow of the Institute of Actuaries of Australia.

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