Thursday, October 25, 2018

Risks to Canada's Retirement System?

Steve Randall of Wealth Professional reports, Canada’s retirement system is strong but there are risks:
The aging population remains a risk to the stability of Canada’s retirement system but overall things are in good shape.

The annual Melbourne Mercer Global Pension Index has looked at 34 pension systems to assess which nations are best placed to meet the challenges ahead.

Canada is ranked 10th overall with the Netherlands and Denmark best placed with A-Grade world class retirement income systems with good benefits - clearly demonstrating their preparedness for tomorrow’s ageing world.

The right balance between adequacy and sustainability is a good starting place for a strong pension system, says study author and Senior Partner at Mercer Australia, Dr. David 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?” he asks.

Canada scored a B, increased score


Canada maintained its B rating and saw its overall score increase from 66.8 to 68.0 in 2018, due to small improvements in its sustainability, adequacy, and integrity scores.

“Canada’s multi-pillared approach of providing universal government programs, combined with a tax system that promotes voluntary pension and savings programs continues to provide Canadians with a strong retirement system,” said Scott Clausen, Partner, Mercer Canada’s Wealth business.

The key risks are low pension coverage among private sector workers, rising debt and healthcare costs, which will prove challenging as the population ages.

“Canadian governments are already taking steps to help ensure the workforce will be able to adapt to changing needs with the upcoming enhancements to the Canada and Quebec Pension Plans, but more work needs to be done – organizations, government and employees need to come together to drive the future of work,” said J.P. Provost, Senior Partner, Mercer Canada’s Wealth business. “Continuing efforts to find attractive retirement options for Canada – including reducing costs, easing plan management responsibilities, providing Canadians with access to better outcomes and reconsidering increasing the eligibility age for public pension plans to reflect increasing life expectancy – should remain an important focus.”

Alice Uribe of top100funds.com also reports, Dutch end Denmark’s reign in retirement:
The Netherlands ended Denmark’s six-year winning streak by clinching first place in the 10th-annual Melbourne Mercer Global Pension Index (MMGPI), released on Monday. Finland’s system ranked third, followed by Australia’s.

The index measures 34 pension systems, revealing both the Netherlands and Denmark to have A-grade, world class retirement income systems with scores of 80.3 and 80.2 respectively.

Common across all results was the growing tension between adequacy and sustainability, author of the study and a senior partner at Mercer, David Knox said.

Australia has dropped from third to fourth place in the world, weighed down by declines in household savings and the tougher age pension assets test.

In 2018, Australia’s overall index value was 72.6, down from 77.1 last year. Australia’s peak score was 79.9, in 2014.

The index is based on an assessment of both the public and private pension systems using 40 indicators to gauge adequacy, sustainability and integrity.

Knox, said ensuring the right balance between adequacy and sustainability was the “natural starting place” for a world-class pension system.

“It’s a challenge policymakers are grappling with,” Knox said. “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?”

Knox said it was not enough for a system just to be sustainable or adequate.

“An emerging dimension to the debate about what constitutes a world-class system is ‘coverage’ and the proportion of the adult population participating in the system,” he said. “With changes in the way people are working around the world, we need to ensure these schemes include everyone so that the whole workforce is saving for the future. This includes contractors, the self-employed and anyone on any income support, be that parental leave, disability income or unemployed benefits.”

In 2018, Hong Kong SAR, Peru, Saudi Arabia and Spain were included in the index for the first time.
Douglass Appell of Pensions & Investments also reports, Melbourne Mercer Global Pension Index points to challenges of maintaining benefits:
The 10th annual Melbourne Mercer Global Pension Index report on the adequacy and sustainability of national pension systems, released Monday, warns of growing challenges in balancing those twin goals as the Baby Boom generation retires.

The Netherlands took the top spot in the latest rankings — measuring 34 national pension systems for adequacy, sustainability and public trust — with a score of 80.3, edging out last year's leader, Denmark, at 80.2. At the other end of the spectrum, Argentina's pension system ranked 34th with a score of 39.2.

While the average score for all the measured systems edged up to 60.5 from 59.9, the report didn't accentuate the positive.

The tension between "what you offer and how long you can offer it" is growing as more baby boomers enter retirement, and the latest results should serve as a "wake-up call," said David Knox, author of Monday's report and a senior partner at Mercer Australia, in an interview.

While a number of national pension systems provide decent retirement benefits now, many will struggle to maintain those benefit levels over the long term, Mr. Knox predicted.

He cited Italy, Austria and Spain — with relatively high adequacy scores of 67 or 68 but sustainability rates of between 20 and 28 — as examples of countries that could "hit the pressure point" relatively soon.

"Most countries haven't moved up a lot" in the past year, but one that did improve noticeably was Indonesia, which introduced major pension reforms, said Mr. Knox. The new pension system put in place there recently helped lift Indonesia’s adequacy score to 47.3 from 40.1 the year before, boosting its overall score to 53.1 from 49.9.

By contrast, Japan's adequacy score improved — to 54.1 from 48 — because of the introduction of a new measure of household debt in Melbourne Mercer's analysis, said Mr. Knox. The Japanese, on average, have relatively low levels of household debt. High levels of debt can undermine what might appear to be adequate pension benefits, if those benefits have to be used to pay off that debt, he noted.

The Melbourne Mercer Global Pension Index is published by the Australian Centre for Financial Studies in collaboration with Mercer and the State Government of Victoria.
There are many more articles on the Melbourne Mercer Global Pension Index here including one which states the US retains a "C" ranking which is no surprise to me or anyone else reading this blog.

The full report on the 2018 Melbourne Mercer Global Pension Index is available here and below is a snapshot of top rankings (full rankings are available in the report and here):


Canada came in number 10, a slight improvement from the previous year when it ranked 11th overall.

If Canada's large and some small pensions are in great shape, why isn't Canada's retirement system ranked among the top five?

As stated above, the key risks are low pension coverage among private sector workers, rising debt and healthcare costs, which will prove challenging as the population ages.

Go back to read my recent comments on how CAAT is increasing its membership and on the pension dashboard where I discussed how Nest Wealth's Randy Cass is trying to improve retirement savings for employees of private sector small and medium sized businesses.

The same goes for OPTrust's new pension initiative to cover Ontario non-profit sector. At the margin, all these initiatives help improve coverage and once enhanced CPP kicks in, it will significantly improve Canada's retirement system but a lot more needs to be done, a point made in the report.

Importantly, we already have a two-tiered retirement system, one where public sector employees enjoy the full benefits and peace of mind which comes with a well-managed gold plated defined-benefit plan, and one where a huge chunk of the population has a pittance saved up for retirement and is at risk of ultimately succumbing to pension poverty once they run through those meager savings.

"So what? Tough luck, that's capitalism, it's even worse int he US."

Well, when it comes to healthcare or retirement, we shouldn't be looking to the US for guidance, we need to improve on our great DB plans and look at improving coverage for everyone regardless of whether they work in the public or private sector.

More importantly, we should be looking at the Dutch which seem to have solved their pension problem and continue doing well despite the challenges to that system (watch clips below).


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