In their paper, Pension Reform in Challenging Times, Mercer and the CFA Institute compared 43 government pension systems (often referred to as pensions outside the US) and rated each country.
This year is especially important as the effects of the pandemic, the paper notes, “with reduced wage growth, historically low interest rates and lower investment returns in many asset classes, are putting additional financial pressure on existing retirement income systems.”
Using the Mercer CFA Institute Global Pension Index, each country’s system is assessed against three sub-indices measuring adequacy, sustainability and integrity. Mercer/CFA Institute recognizes that the different systems can be extensive and different.
David Knox, senior partner of Mercer, notes in the paper that the figure states:
- What benefits are future retirees likely to receive?
- Can existing systems continue to perform despite demographic and economic pressures?
- Are the systems well managed to build community trust in the long term?
This year’s report also takes into account gender differences in retirement outcomes for the first time, finding that “the average pension for women is lower, and in some situations much lower than the average pension for men.”
The report argues that this gap could be due to three broad areas: employment, pension accrual and socio-cultural issues. Of the 34 countries selected by the Organization for Economic Co-operation and Development, the largest gap was in Japan, followed by Mexico, Austria, the United Kingdom and Luxembourg. The United States had the seventh largest gender gap.
The smallest gender gaps were in Estonia, Denmark, Slovakia, Iceland and the Czech Republic.
The three sub-indexes that make up the overall index cover certain areas of varying weight:
- fitness (40%): benefits, system design, savings, government support, home ownership, growth potential
- Durability (35%): pension coverage, total assets, demographics, government spending, government debt, economic growth
- Integrity (25%): regulation, governance, protection, communication, operating costs
These are the numbers, the index level and the countries:
- A first-class pension system that provides good benefits, is sustainable and has a high degree of integrity.
- Index value >80
- To land: Iceland, Netherlands, Denmark
- Index value: 75-80
- To land: Israel, Norway, Australia
- A system with a solid structure, with many good features, but with some points for improvement.
- Index value: 65-75
- To land: Finland, Sweden, UK, Singapore, Switzerland, Canada, Ireland, Germany, New Zealand, Chile
- Index value: 60-65
- To land: Belgium, Hong Kong SAR, United States, Uruguay, France
- A system that has some good qualities, but also has major risks and/or shortcomings that need to be addressed. Without these improvements, long-term efficacy and/or sustainability may be questioned.
- Index value: 50-60
- To land: UAE, Malaysia, Spain, Colombia, Saudi Arabia, Poland, China, Peru, Brazil, South Africa, Italy, Austria, Taiwan, Indonesia
- A system that has some desirable features, but also has major weaknesses and/or omissions that need to be addressed. Without these improvements, its effectiveness and durability are questionable.
- Index value: 35-50
- To land: Japan, Mexico, South Korea, Turkey, India, Philippines, Argentina, Thailand
Breaking it down
Averages across the index and sub-indexes were critical. For example, the average of all countries in the overall index was 61.0, while the United States was ranked 61.4.
A closer look reveals the following:
- In terms of adequacy, the average was 62.2 – the US scored 60.9.
- For sustainability, the overall average was 51.7 – the US scored 63.6.
- For integrity, the mean was 72.1 – the US scored 59.2.
Uruguay, which got the same figure as the United States, had a much higher Integrity ranking, 74.4, while Sustainability was much lower, 49.2.
Overall, it seems that most countries outperformed in 2021 in 2021. The United States’ score rose from 60.3 in 2020 to 61.4 in 2021. Peru, New Zealand, South Korea, Indonesia , India and Argentina all fell nearly a point or more in overall index rankings.
The study examines each country’s pension and social security issues, but generally makes some recommendations, including:
- Increase coverage of employees (including non-standard workers) and self-employed in the private pension system, recognizing that many individuals will not save for the future without an element of coercion or automatic enrollment.
- Raise the state pension age and/or retirement age to take life expectancy into account.
- Promoting a higher employment rate in old age, in particular to save more and shorten the retirement period.
- Encourage higher levels of private savings to reduce future reliance on public pensions, while also adjusting the expectations of many workers.
- Introduce measures to reduce the gender pension gap.
- Reducing leakage of retirement savings before retirement, especially through taxation.
- Check the indexation of these pensions to ensure that the fair value is preserved.