The Best and Worst Pension Systems 2019

Matthew Burgess of Bloomberg reports on the best and worst pension systems in the world:

The Netherlands and Denmark have the best pensions systems in the world, according to a global study that shines a light on how nations are preparing aging populations for retirement.

The countries took the top two slots in the Melbourne Mercer Global Pensions Index published Monday, both earning an A grade for the level of financial security provided in retirement. Australia came in third, with a B+ grade, while the top 10 was rounded out with Finland, Sweden, Norway, Singapore, New Zealand, Canada and Chile all on B.

The survey of 37 nations, which covers almost two-thirds of the world’s population, uses 40 metrics to assess whether a system leads to improved financial outcomes for retirees, whether it is sustainable and whether it has the trust and confidence of the community.

The Netherlands again took the top spot in 2019 with most workers benefiting from defined benefit plans based on lifetime average earnings. The U.K. and the U.S. both earned a C+ grade, coming in 14th and 16th place respectively. Both could boost their scores by raising the minimum pension for low-income pensioners, according to the report.

Japan came in at No. 31 and was ranked with a D — a grade that reveals “major weaknesses and/or omissions that need to be addressed.” A key recommendation included raising the state pension age as life expectancy continues to increase in the nation. Thailand was in the bottom slot and should introduce a minimum level of mandatory retirement savings and increase support for the poorest, the report said.

The study comes as policy makers grapple with more people entering retirement, living longer and needing a steady flow of income on which to survive. Almost one-fifth of the world’s population is forecast to be of retirement age by 2070, up from about 9 per cent this year, United Nations data show.

“Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens,” said David Knox, the report’s author and senior partner at Mercer. “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.”

While retirement systems in many Asian nations improved from last year the report found they lack transparency and workers aren’t saving enough for retirement compared to their global peers.

The study also explores the so-called wealth effect — the tendency for spending to increase with rising wealth. Mercer found that as pension assets increase, people feel wealthier and are more likely to borrow.

“Such an outcome is not a bad thing,” Knox said in the report. “The assurance of future income from existing pension fund assets enables households to improve both their current and future living standards.”

You can read the full Melbourne Mercer Global Pensions Index 2019 report here.

Dr. David Knox, Senior Partner at Mercer, wrote the preface to the report:

Pension systems around the world, including social security systems and private sector arrangements, are now under more pressure than ever before. Significant ageing of the population in many countries is a fact of life. Yet this is not the only pressure point on our pension systems. Others include:

• The low-growth/low-interest economic environment which reduces the long-term benefit of compound interest, particularly affecting defined contribution arrangements
• The increasing prevalence of defined contribution schemes and the related increased responsibility on individuals to understand the new arrangementsƒ
• the lack of easy access to pension plans for some workers in both developed and developing economies, whether it be due to informal labour markets or the growing importance of “gig employment”
• government debt in some countries which affects the ability to pay benefits in pay-as-you-go systems while high household debt in other countries will affect the long term adequacy of the benefits provided
• the need to develop sustainable and robust retirement income products as retirees seek more control and flexibility over their financial affairs

As significant pension reform is being considered or implemented in many countries, it is important that we learn together to understand what best practice may look like, both now and into the future. This 11th edition of the Melbourne Mercer Global Pension Index presents such research and compares 37 retirement income systems which encompass a diversity of pension policies and practices.

The primary objective of this research is to benchmark each retirement income system using more than 40 indicators. An important secondary purpose is to highlight some shortcomings in each 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 private pension system.

Many of the challenges relating to ageing populations are similar around the world, irrespective of social, political, historical or economic influences. Further, the policy reforms needed to alleviate these challenges are also similar and relate to pension ages, encouraging people to work longer, the level of funding set aside for retirement, and some benefit design issues that reduce leakage of benefits before retirement. However, it should be noted that these desirable reforms are often not easy and may require long transition periods.

The preparation of this international report requires input, hard work and cooperation from many individuals and groups. I would like to thank them all.

First, we are delighted that the Victorian Government continues to be the major sponsor of this project.

Second, the Monash Centre for Financial Studies within Monash University has played an important role in this project, particularly in establishing an expert reference group of senior and experienced individuals who have provided helpful comments throughout the project.

Third, Mercer consultants around the world have been invaluable in providing information in respect of their retirement income systems, checking our interpretation of the data, and providing insightful comments. In this respect, we also appreciate the support of the Finnish Centre for Pensions.

I hope that you enjoy reading this report and that it continues to encourage pension reform to improve the provision of financial security for all retirees.

Again, take the time to read the full report here.

Not surprisingly, The Netherlands and Denmark have the best pension systems in the world, but as I recently discussed, the world's best-run pensions are starting to worry as negative rates swamp Europe and overly restrictive regulations are exacerbating the problem by forcing pensions to de-risk, buying more negative bonds and artificially inflating liabilities.

Now, the Melbourne Mercer Global Pension Index uses three sub-indices – adequacy, sustainability and integrity – to measure each retirement income system against more than 40 indicators. The following diagram highlights some of the topics covered in each sub-index:

The report states:

The overall index value for each system represents the weighted average of the three sub-indices. The weightings used are 40 per cent for the adequacy sub-index, 35 per cent for the sustainability sub-index and 25 per cent for the integrity sub-index which have remained unchanged since the first Index in 2009.

The different weightings are used to reflect the primary importance of the adequacy sub-index which represents the benefits that are currently being provided together with some important system design features. The sustainability sub-index has a focus on the future and measures various indicators which will influence the likelihood that the current system will be able to provide benefits into the future. The integrity sub-index includes several items that influence the overall governance and operations of the system which affects the level of confidence that the citizens of each country have in their system.

Keep this in mind as it's important to understand how this index is constructed and what are the relative weights.

The table below shows a summary of 2019 results:

As you can read, according to the report, he Netherlands and Denmark have "a first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity."

Australia’s pension system came in third receiving a B+ score. Canada, Sweden, Finland, Singapore, Norway, New Zealand, Chile, Ireland, Switzerland, and Germany are ranked "B" pension systems and "have a system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system."

The following table shows the overall index value for each system, including the sub-indices:

I honed in on Canada which scored 69.2 in the overall index -- 70 for Adequacy, 69.8 for Sustainability and 78.2 for Integrity.

By comparison, The Netherlands which I highlighted got top spot, scoring 81 in the overall index -- 78.5 for Adequacy, 75.3 for Sustainability and 78.2 for Integrity. This top score was given despite concerns within the country about reducing the pension.

Clearly Canada lacks in the Sustainability sub-index of this report, receiving an overall C+ grade for that sub-index and a B grade for Adequacy and Integrity.

As shown below, compared to last year, however, Canada improved its Sustainability score (from 56 to 61.8) but saw its Adequacy score decline from 72.1 to 70 while the score for Integrity stayed unchanged at 78.2. This helped push its overall index score up from 68 in 2018 to 69.2 in 2019.

In Chapter 4 of the report, the authors provide a brief review of each system. Here is the one for Canada:

It is worth going over this:

Canada’s retirement income system comprises a universal flat-rate pension, supported by a means-tested income supplement; an earnings-related pension based on revalued lifetime earnings; voluntary occupational pension schemes (many of which are defined benefit schemes); and voluntary individual retirement savings plans.

The overall index value for the Canadian system could be increased by:

• increasing the coverage of employees in occupational pension schemes through the development of an attractive product for those without an employer-sponsored scheme
• increasing the level of household savings and reducing the level of household debt ƒ
• reducing government debt as a percentage of GDP
• increasing the labour force participation rate at older ages as life expectancies rise

The Canadian index value increased from 68.0 in 2018 to 69.2 in 2019 primarily due to an allowance for the Canada Pension Plan in calculating the coverage percentage, as discussed in Chapter 3.

From the recommendations, I don't see household savings increasing or debt reducing, or government debt as a percentage of GDP being reduced (especially if we get a Liberal-NDP minority government later tonight).

That leaves two options, increasing the labour force participation rate at older ages as life expectancies rise, no easy feat, and increasing the coverage of employees in occupational pension schemes, which I believe is a must and would prefer seeing the expansion of initiatives at CAAT Pension and OPTrust to provide a defined-benefit solution for more Canadians looking to retire in dignity and security.

Let me end on this note, there's no reason why Canada's pension system can't be at the top of this Melbourne Mercer Global Pensions Index.

Canada's large, well-governed defined-benefit plans are the envy of the world, investing across public and private markets all over the world and they are fully funded. The problem is we need to bolster them and figure out a way to cover more Canadians in the private sector looking to retire in dignity and security, just like their public-sector counterparts.

Below, Ron Mock, outgoing president and CEO of Ontario Teachers' Pension Plan, discusses the global growth drivers for markets now and over the next decade. Ron goes over Asia's growth, climate, and the 'war on talent' among key trends for next decade. "All we think about is tomorrow." (click here if clip doesn't load below)