A strong correlation exists between the levels of pension assets and net household debt, with growth in household debt in developed and growth economies paired with the growth in assets held by pension funds, according to the 2019 Melbourne Mercer Global Pension Index (MMGPI).
The MMGPI, supported by the Victorian Government of Australia, is a collaborative research project between the Monash Centre for Financial Studies (MCFS) – a research centre based within Monash Business School at Monash University in Melbourne – and professional services firm, Mercer.
South Africa’s retirement income system comprises a means-tested public pension and tax-supported voluntary occupational schemes. The country ranked 52.6 in this year’s overall index value, which compares with 52.7 in a similar study carried out in 2018. This drop was attributed to a number of small changes in the sustainability sub-index.
The report also highlights some of the ways South Africa’s index value can be increased. This includes introducing a minimum level of mandatory contributions into a retirement savings fund. Additionally, in order to increase the level of contributions and assets, there is a need to boost the coverage of employees in occupational pension schemes
“The South African Regulator has introduced several measures.” says Craig Bentley, Head of the Pan-Africa solution ‘Arrive’ at Alexander Forbes. “Some of the initiatives include the Retirement Fund Default Regulations that aim to improve outcomes for members of retirement funds to help meet their retirement objectives through: default investment portfolios, default preservation funds and portability, annuity strategy, and retirement benefit counseling.”
The Index compares 37 retirement systems across the globe and covers almost two-thirds of the world’s population. It highlights the broad spectrum and diversity of the world’s pension systems, demonstrating even the world’s best systems have shortcomings. The 2019 Index includes three new systems – Philippines, Thailand and Turkey.
While each pension system has a unique set of circumstances, the report makes clear there are common improvements, which can be made to the challenges all regions are facing.
“Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens. It’s imperative that policy makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future,” said Dr Knox.
The Index uses the weighted average of the sub-indices of adequacy, sustainability and integrity to measure each retirement system against more than 40 indicators. The 2019 Index takes a new approach to calculate the net replacement rate, that is, the level of retirement income provided to replace the previous level of employment earnings. While most previous Index reports have calculated a net replacement rate based on the median income earner, the current report uses a range of income levels based on the Organisation for Economic Co-operation and Development data to represent a broader group of retirees.
“Now in its eleventh year, the Melbourne Mercer Global Pension Index is a great source of data on pension systems around the world, and the high international standing of this report is testament to Melbourne’s reputation as a global centre of industry research, innovation and financial expertise,” said the Minister for Jobs, Innovation and Trade, Martin Pakula.
By the numbers
The Netherlands had the highest index value (81.0), and has consistently held first or second position for 10 out of the past 11 MMGPI reports. Thailand had the lowest index value (39.4).
For each sub-index, the highest scores were Ireland for adequacy (81.5), Denmark for sustainability (82.0) and Finland for integrity (92.3). The lowest scores were Thailand for adequacy (35.8), Italy for sustainability (19.0) and Philippines for integrity (34.7). South Africa ranked in the lower quartile for adequacy with a score of 42.3, scored 46 for sustainability and ranked in the upper quartile for integrity with a score of 78.4.
Sustainability still a weakness in an ageing and defined contribution future
Measuring the likelihood a current system will be able to provide benefits into the future, the sustainability sub-index continues to highlight the weakness of many systems.
In particular, the sustainability issue of many South American and Asian systems has been confirmed with an average sustainability grade of D. For example, although Chile achieves a strong 71.7 in this sub-index, Brazil and Argentina scored 27.7 and 31.9, respectively. Similarly, in Asia, while Singapore achieves 59.7, Japan scored only 32.2.
However, this issue is not restricted to developing economies. Many European economies face similar pressures. Although Denmark achieves the highest score for the sustainability sub-index at 82.0, Italy and Austria scored only 19.0 and 22.9, respectively.
While some measures that contribute to the sustainability score are difficult to change, others can be influenced to strengthen the long-term effectiveness of a system. Recommendations include encouraging or requiring an increased level of savings for the future, gradually raising the state pension age and enabling or persuading people to work a little longer.
“Although some systems are still anchored by defined benefit schemes that may practice liability-driven investment strategies, defined contribution plans are playing increasingly important roles in the accumulation of individuals’ retirement savings. Maximising risk-adjusted investment returns for defined contribution plans by diversifying the assets held by a pension fund is critical,” said Professor Deep Kapur, Director of the MCFS.
“It’s essential the state pension or retirement age is reconsidered in line with increasing longevity – a step some governments have already taken – to reduce the costs of publicly financed pension benefits,” he said.
2019 Melbourne Mercer Global Pension Index
About the Monash Centre for Financial Studies
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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