South Africa’s pension system has some good features, but has major risks and shortcomings that should be addressed. Without these improvements, its efficacy and long-term sustainability can be questioned.
This is the assessment put forward in this year’s Melbourne Mercer Global Pension Index. Now in its tenth year, the index is regarded as the world’s most comprehensive comparison of pension systems. It measures the retirement income systems for 34 countries against more than 40 indicators. These include sub-indices measuring the adequacy, sustainability and integrity of the retirement system.
South Africa’s index value currently stands at 52.7 – a slight increase in comparison to its rating of 48.9 in 2017. The country’s index rating falls within the range comparable to that of developing countries including Brazil, Indonesia and Malaysia as well as developed nations like the USA, Austria, Spain and Italy.
Nicolette Hendricks, CEO, South Africa at Mercer, says the purpose of the index is to provide a benchmark against which countries can measure their retirement income systems. “Every country has its own unique economic, social and political circumstances. Nevertheless, every country can take action and move towards a better system. In the long-term, there is no perfect pension system, but the principles of ‘best practice’ are clear.”
“Ageing populations, high sovereign debt levels in some countries and the global competition to lower taxes constrain the ability of some jurisdictions to improve retirement income security. With a decade of unique data, the MMGPI and associated research can provide valuable global comparative insights to planners and policymakers on the way forward”, said Professor Deep Kapur, Director of Australian Centre for Financial Studies.
For example, the MMGPI researchers recommend that South Africa can increase its overall score in the index through, amongst other steps, introducing a minimum level of mandatory contributions into a retirement savings fund or increasing the level of preservation of benefits when members withdraw from occupational funds.
What does the future look like?
Author of the study and Senior Partner at Mercer Australia, Dr David Knox says that the natural starting place to having a world class pension system is ensuring the right balance between adequacy and sustainability.
“It’s a challenge that policymakers are grappling with,” says Dr Knox. “For example, a system providing very generous benefits in the short-term is unlikely to be sustainable, whereas a system that is sustainable over many years could be providing very modest benefits. The question is – what’s an appropriate trade-off?”
As highlighted in Chart 1, all systems should consider adjusting their strategy so they are moving towards the top right quadrant. Through the study, policymakers can understand the characteristics of leading systems and find ways to improve their own.
Chart 1: Adequacy versus Sustainability ratings for global pension systems
Source: Melbourne Mercer Global Pension Index 2018
This year’s Index also reveals that many North-Western European countries lead the world in developing world class pension systems. The Netherlands, with an overall score of 80.3, beat Denmark to first place, a spot held by Denmark for six years, by 0.1. Finland bumped Australia (72.6) out of third place with an overall score of 74.5 and Sweden (72.5) coming in fifth place.
However, common across all results was the growing tension between adequacy and sustainability. This was particularly evident when examining Europe’s results. Denmark, Netherlands and Sweden score A or B grades for both adequacy and sustainability, whereas Austria, Italy and Spain score a B grade for adequacy but an E grade for sustainability thereby pointing to important areas needing reform.
David Anderson, President, International at Mercer added that it was a positive step to see governments tackle pension reform as life expectancies continue to rise. “Developed economies have been aware of the demographic challenges facing their pension systems for some time. Where economies are less developed, it’s pleasing to see many governments recognising the same trends emerging in their own populations and taking steps now to address this. Such actions make future pension systems more sustainable over the longer term,” he said.
Melbourne Mercer Global Pension Index – Overall index value results
The following table shows the overall index value for each country, together with the index value for each of the three sub-indices: adequacy, sustainability, and integrity. Each index value represents a score between zero and 100.
Melbourne Mercer Global Pension Index
The Melbourne Mercer Global Pension Index is published by the Australian Centre for Financial Studies (ACFS), in collaboration with Mercer and the State Government of Victoria who provides most of the funding. Financial support has also been provided by The Finnish Centre for Pensions.
Mercer delivers advice and technology-driven solutions that help organizations meet the health, wealth and career needs of a changing workforce. Mercer’s more than 23,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With nearly 65,000 colleagues and annual revenue over $14 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer-africa.com
About the Australian Centre for Financial Studies
The Australian Centre for Financial Studies (ACFS) is a research centre within the Monash Business School. The Centre was established in 2005 with seed funding from the Victorian Government and became part of Monash University in 2016. The asset management and pension industries are an area of particular focus for the Centre. For more information, visit www.australiancentre.com.au.
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