Tuesday, October 15, 2013

World's Best Pension Spots?

Justin Harper of the Telegraph reports, Denmark is top of the world's good pension spots:
When it comes to having the world’s best state pension scheme, Denmark sits top of the country rankings.

The health or otherwise of a national pension scheme can have a big impact on an expat's finances, depending on where they decide to head.

According to the Melbourne Mercer Global Pension Index, which compares 20 countries with major retirement schemes, the Netherlands has the second best pension scheme in the world.

Australia, which runs a national pension fund called Superannuation (or Super for short), came in third, which will please British expats relocating Down Under.

If foreign workers qualify for Superannuation and they decide not to retire in Australia they can claim these contributions back when they leave.

Such flexibility helps a national pension scheme’s rankings. The survey also looked at the tax advantages of the pension, its benefits, costs and performance, among 40 criteria.

The US, the second most popular destination for British expats, has slipped out of the top 10 for the first time in the survey’s five-year history. It now falls into the category of “a system that has some good features, but also has major risks and/or shortcomings,” according to Mercer.

Scott Pollack, a principal and consultant at Mercer, said: "The secondary driver (of America's declining score) would be inactivity by the US government compared to other countries in the index who have made proactive changes to their retirement programme, which has improved their scores.

"The countries ranking above us are doing so because they have a more sustainable approach to how they deliver retirement benefits. They also are providing better communication to participants and have a more informed population."

Mercer said America's ranking can be improved by raising the minimum pension for low-income retirees, adjusting the level of mandatory contributions and limiting access to funds prior to retirement.

Canada’s pension plan (CPP) ranks sixth while Singapore’s Central Provident Fund (CPF) is in seventh place. To qualify for CPF contributions from an employer, a worker needs to be a Singaporean citizen or a permanent resident (PR).

Singapore falls into the same B category as the UK, which just made it into the top 10. Both countries have "a sound structure, with many good features, but [with] some areas for improvement".

Germany scraped into 10th position and is classified C along with France, Brazil, Mexico and the US. The lowest ranking country is Indonesia, in 20th spot.
You can download the Melbourne Mercer Global Pension Index 2013 Report by clicking here. An overview of the report is provided on the their website:
Pension systems around the world, whether they be social security systems or private sector arrangements, are now under more pressure than ever before. Rising life expectancies, increased government debt in many countries, uncertain economic conditions and a global shift to defined contribution (DC) plans mean that we are moving to a new environment.

With increased community awareness and growing concern about the future of our retirement income systems it is important that we learn together to understand what best practice may look like, both now and in the years to come.

This fifth edition of the Melbourne Mercer Global Pension Index presents such research and compares retirement income systems in 20 countries which encompass a diversity of pension policies and practices.

Many of the challenges relating to ageing populations are similar, irrespective of each country’s social, political, historical or economic influences.

Many of the desirable policy reforms to alleviate these challenges are also similar and relate to pension ages, the level of funding for retirement, encouraging people to work longer and some benefit design issues that can reduce leakage of benefits before retirement.

It is pleasing to note that since 2009, the sustainability of several systems has improved in two key areas:
  • Some governments have increased pension ages over the longer term.
  • The labour force participation rate of 55-64 year olds in most countries has steadily increased.
Both these trends are important and need to be supported around the world.

The primary objective of this research is to benchmark each country’s retirement income system using more than 50 questions.

An important secondary purpose is to highlight the shortcoming in each country’s system and to suggest possible areas of reform that would provide more adequate retirement benefits, increased sustainability over the longer term and/or a greater trust in the pension system.

Download Melbourne Mercer Global Pension Index 2013 Report
Will leave it up to readers to delve deeply into this report but will tell you that I think they got the first two countries right and bombed on their third pick, Australia. I am simply not impressed with pension lessons from Down Under and question the superiority of the Super funds.

Importantly, while Australia's Super is flexible and does cover most of the working population, it's based on the defined-contribution model which presents all the problems of choice and performance attached to most DC plans. And any country which has 40% of its seniors living in poverty doesn't deserve to be on a list of  the world's best pension spots.

I'm highly critical of the Australian model because shortsighted politicians worried about debt are going to hail it as a monumental achievement. I beg to differ and think that in the long-run countries that promote and bolster defined-benefit plans are going to be way ahead of Australia in terms of providing safe and decent retirement income for their pensioners.

I would have placed Canada in the third spot and know that our country has all it takes to become number one in the world. In fact, if you look at Canada's top ten, you will see why we have some of the best public pension funds in the world and why we should build on their success and enhance the Canada Pension Plan.

Our politicians are one step closer to bolstering our retirement system but more needs to be done. We need to consolidate municipal and local pensions at the provincial level and get rid of company pensions once and for all. The financial services industry and pension consultants won't be thrilled with this proposal but this is what is in the best interest of the country and future retirees.

Think about it this way. Let's say you work for a company and instead of matching your RRSP (401k) contribution or placing you in some mediocre defined-contribution plan, they are mandated by law to pay part of your CPP contributions. The money is managed by CPPIB which in turn invests in the best public and private market managers around the world and lowers costs by investing internally where they can replicate strategies.

What are the benefits to employees? First, if they are part of a defined-benefit plan, they don't have to worry about their company going bankrupt. Second, if they are part of a defined-contribution plan, they don't have to worry about selecting funds and getting eaten alive on fees by closet indexers. Third, their pensions are portable across the public and private sector and managed by a single entity backed by the full faith and credit of provincial and federal governments. Fourth and most important, they can retire in dignity knowing that their retirement fortunes are not tied to the vagaries of financial markets. Yes, there is always a risk of a Greek-type default but that is minimal and mitigated by risk sharing and governance of Canada's top ten.

What are the benefits to companies? Well, companies are already racing to de-risk pensions, which is a rational response on their part. They're offloading retirement risk entirely onto employees who are then left to fend for themselves. The big benefit to companies is they'll be able to focus on their main business, not worry about pension liabilities. Some will complain about the increase in CPP contributions (marginal as it will be phased in over many years) but if the benefits are properly explained, they will sign on knowing it's in their and their employees' best interests.

Back to the Melbourne Mercer Global Pension Index 2013 Report. While I laud the Dutch and Danish pension systems and think highly of ATP and APG, there are problems in these countries too. In particular, the decline of Dutch pensions worries me and confusion reigns over the make-up of Dutch pension assets. In Denmark, households which have the world’s biggest debt load relative to incomes, are about to use a real estate recovery to go further into the red.

In the United States, the situation is grim and getting grimmer. I simply do not see any meaningful pension reforms on the horizon, including reforms to the governance of their public pension funds. Sadly, most Americans are accepting their new pension poverty. An Associated Press-NORC Center for Public Affairs Research poll released Monday finds older Americans are not only delaying their retirement plans, they're also embracing the fact that it won't necessarily mark a complete exit from the workforce:
Some 82 percent of workers 50 and older say it is at least somewhat likely they will work for pay in retirement. And 47 percent of them now expect to retire later than they previously thought — on average nearly three years beyond their estimate when they were 40. Men, racial minorities, parents of minor children, those earning less than $50,000 a year and those without health insurance were more likely to put off their plans.
Keep the above comments in mind when you read articles on the word's best pension spots. The developed world is full of problems, the most important being lack of good paying jobs with benefits and growing income inequality. The retirement systems of some countries are much better than others but there are cracks everywhere and politicians are scrambling to address the looming retirement crisis which will hit future generations hard.

Below, Danish Central Bank Governor Lars Rohde, the former CIO of ATP, talks about liquidity, asset bubbles and interest-only morgages indentified by the International Monetary Fund as "risky." He spoke April 5 with Bloomberg's Tasneem Brogger in Copenhagen.

I see property bubbles developing all over the word, especially in the UK and to a lesser extent, Canada and Australia. The banks love it because people are getting more and more in debt to buy real estate, but when the fundamentals catch up and interest rates rise or unemployment soars, the global property bubble will pop, exposing pensions to serious deflationary headwinds which they are ill-prepared for.

That's a topic for another day. Forget the debt drama in Washington, enjoy the global liquidity rally while it lasts. Listen to billionaire hedge fund managers parading on CNBC telling us why the Fed won't taper for a long time (watch below). But be careful as the market's darkest days might be ahead.