The World’s Best (and Worst) Pension Systems in 2020

Matthew Burgess of Bloomberg reports on the world's best (and worst) pension systems in 2020:

The Netherlands and Denmark have cemented their positions as having the best pension systems in the world, even as other countries falter during the Covid-19 pandemic, according to an annual global survey.

The countries again took the top two slots in the Mercer CFA Institute Global Pension Index published Tuesday, drawing praise for holding their nerve and not allowing citizens to drain their accounts during the crisis.

The scores of over half of the countries (20) slipped this year as the world battles to limit the economic fallout from the Covid-19 crisis. The global recession has led to reduced pension contributions, lower investment returns and higher government debt in most countries.

“Inevitably, this will impact future pensions, meaning some people will have to work longer while others will have to settle for a lower standard of living in retirement,” said David Knox, the report’s author and senior partner at Mercer. Stretched public finances mean public benefits in particular are under pressure, he said.

“We’re actually going to have to rely on ourselves with private provision more and more.”

Knox said pension systems such as those in Austria and Italy that hadn’t built up substantial private funds are likely to come under increasing pressure. Both were given a C grade, coming in 28th and 29th respectively.

In the survey of 39 nations, Japan came in at No. 32 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 and Argentina were in the bottom two slots and should increase support for the poorest and improve governance in private pensions, the report said.

The rankings, based on more than 50 metrics, 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 United States came in 18th with a C+ grade, a system that has good features “but also has major risks and/or shortcomings that should be addressed,” the report said, suggesting raising the minimum pension for low-income pensioners and increasing social security funding.

In top placed Netherlands, at present most workers enjoy defined benefit plans based on lifetime average earnings and a universal state pension. That means a worker gets about 80% of their pre-retirement earnings after stopping work, according to Organization for Economic Co-operation and Development data.

That’s a world away from the situation in Japan and the United Kingdom, where the so-called replacement rates are about 37% and 28% respectively.

An additional concern this year is the decision by some governments -- including Australia and Chile -- to allow individuals to tap their savings early.

“While these measures alleviate the short-term financial burden on citizens, they compromise savings for the future,” said Janet Li, Mercer’s head of wealth in Asia. “The implications will be huge and may create ripple effects, too, onto social and economic fronts.”

Rachel Fixsen and Venelia Amorim of Investments and Pensions Europe also report that Netherlands keeps crown as world’s best pension system:

The Dutch pension system has won the highest score in the latest Global Pension Index report from Mercer, with the international consultancy using this year’s publication to sound a stern warning on the impact of the pandemic on retirement income systems around the world.

In the 2020 Mercer CFA Institute Global Pension Index report – previously called the Melbourne Mercer Global Pension Index – which awards national pension systems points for adequacy, integrity and sustainability as well as giving them an overall score, the Netherlands came top with 82.6 points, followed by Denmark with 81.4 and Israel with 74.7 points.

The top two countries retained their rankings from last year, with each seeing their score grow, while Israel entered the top three this year, knocking Australia down from its 2019 third place.

Among winners in the sub-indices, the Netherlands came top for adequacy with a score of 81.5, Denmark was ranked the most sustainable system with 82.6, and Finland received the highest score for integrity, at 93.5.

The lowest scores for these three categories were given respectively to Mexico with 36.5, Italy with 18.8 and the Philippines, which scored just 34.8 for integrity.

The index compares 39 retirement income systems, covering almost two thirds of the world’s population, according to Mercer.

Commenting on its the global pensions picture overall in 2020, Mercer said the widespread economic impact of COVID-19 was heightening the financial pressures retirees faced, both now and in the future.

David Knox, senior partner at the firm and the study’s lead author, said: “The economic recession caused by the global health crisis has led to reduced pension contributions, lower investment returns and higher government debt in most countries.

“Inevitably, this will impact future pensions, meaning some people will have to work longer while others will have to settle for a lower standard of living in retirement,” he said.

Knox said it was critical that governments reflected on the strengths and weaknesses of their systems to ensure better long-term outcomes for retirees.

José Meijer, interim chair of the Federation of Dutch Pension Funds (Pensioenfederatie), responded to the ranking, saying the Netherlands had a constant focus on where its pension system could be improved and what needed to be done differently.

“That determines how we talk about pensions, and that makes sense,” he said, adding it was nice to see that progress had been made.

Meanwhile, the Danish pensions sector expressed satisfaction with its score, even though it had hoped for more.

“The Danish pension system has for many years been number one in the rankings, but in the last three years the Dutch have scored a few more points,” said Karina Ransby, deputy director of industry association Insurance & Pension Denmark (IPD).

“We had hoped to regain first place, as we have moved forward in several of the parameters on which the measurement is based, but the Netherlands also improved in several areas,” she said, adding that no matter what, the Danish pension system was “world-class”, and the sector was constantly working to make it even better.

Now in its 12th year, the Mercer CFA Institute Global Pension Index (MCGPI) report benchmarks each retirement income system using more than 50 indicators and covers almost two-thirds of the world's population. 

This year’s Global Pension Index also produces some surprising results, which could influence current policy debates. For the full report, please click here.

No surprise, the top spots for the world's best pension systems once again go to the Netherlands and Denmark, and deservedly so.

Israel edged out Australia this year to come in number 3 which reflects poor policy decisions to open up Australia super funds during the pandemic, leading to a rush of withdrawals under the new coronavirus rules.

Canada came in number 9, holding steady relative to its 2019 rankings.

As shown below, Canada scores moderately high on integrity (77.8) but has to significantly improve sustainability (64.4) and adequacy (68.2).

You can see the full expanded table here

It's clear Canada is doing well on a relative basis but the report frustrates me and let me explain why.

It is common knowledge that the world's best pensions are Canadian and yet our pension system can't crack the top five pension systems in the world.

Why? Because even though we have the best pensions in the world, we aren't covering enough citizens and many are falling through the cracks.

A few years ago, the federal and provincial governments adopted enhancements to the CPP, which will help shore up our pension system, but I'm afraid a lot more needs to be done.

Unfortunately, right now, the combination of low interest rates, a pandemic-ravaged global economy and reduced investment returns are straining pension systems. The average score for pensions’ sustainability dropped by 1.2 in 2020 due to the pandemic’s economic impact.

Canada is not immune to what is going on out there but we need to start thinking long and hard on how we can bolster our pension system to make sure all Canadians retire in dignity and security.

Let me be blunt, if you're ONLY relying on Old Age Security (OAS) and Canada Pension Plan (CPP) to retire, then your retirement years will be miserable. Even if you delay retirement until age 70 to increase the payouts, financial dislocation is still a strong possibility.

I tell all retired Canadians looking to stretch their income to invest in solid dividend stocks like Bell Canada (BCE), Royal Bank (RY), and Enbridge (ENB). You can find a list of great dividend stocks to invest in:

The problem? Dividend stocks are stocks, not safe government bonds, and they can plunge if markets get clobbered.

If your dividend plays are giving you 5% on average, which is excellent but they decline by 15% in any year, you're still down 10% that year in total returns.

But with government bonds yielding next to nothing, there's not much choice but to invest in stocks and deal with the volatility.

In this environment, you need to be alert and raise cash when your stocks are doing well and trim your cash positions when stocks are getting slammed.

Easier said than done, these are very tough markets, and even the best traders and investors can find them tough. 

This is why I'm a huge advocate of expanding well governed defined benefit plans to all Canadians. 

CAAT's DBplus and OPTrust Select are a step in the right direction but we need a massive new push to ensure more Canadians can retire in dignity and security.

What worries me is Canada is piling on the debt and small and medium sized businesses are struggling, so the appetite for further pension reforms won't be there.

It's too bad, and here I am talking from a conservative pro-business angle, if we improve our pension system, we will improve the economy over the long run.

Below, some more food for thought from Conservative MP Pierre Poilevre. I know, he's a bit of a cocky peacock who loves hearing himself speak, but he raises important issues which we need to pay attention to or else we are in big trouble down the road.  

I also posted an interesting clip on the Dutch pension system, the best pension system in the world.

Update: Following this comment, I received this feedback from Michael Ashmore on LinkedIn:

Great share as always, Leo. I contend that Canada does indeed have a global top 3 retirement savings system, save a few systemic issues that should indeed be fixed and would make Canada a clear #1. The combination of best in class public sector and quasi-governmental DB pensions, and the RRSP & TFSA system for those not lucky enough to be a part of a Canadian DB plan has been generally well thought out. I would propose that the most accurate metric to look at for a country’s broader success is the elderly poverty rate rankings, where Canada is in many cases, top 3,

Of course, Michael is right, Canada does score well in terms of mitigating pension poverty because of OAS, GIS and CPP (the three retirement pillars), but this isn't a true measure of success when it comes to a retirement system.

In fact, here is what I replied on LinkedIn:

Great point, Michael, Canada does score well when it comes to elderly poverty but this measure is not what I would use as a measure of success when it comes to comparing global retirement systems. It’s definitely important but having seniors just scrounging by, barely avoiding poverty, shouldn’t be what policy aims for, we can do a lot more to bolster our retirement system.

If you have any other feedback, feel free to share it with me.