The World's Best and Worst Pension Systems in 2021

Matthew Burgess of Bloomberg reports on the world's best and worst pension systems in 2021:

Iceland has the best pension system in the world, according to a global study that shines a light on how nations are preparing their aging populations for retirement.

The country took the top spot in the Mercer CFA Institute Global Pension Index published Tuesday, drawing praise for being well governed and providing strong benefits to retirees, including a generous state pension. The Netherlands and Denmark came in second and third respectively after holding the top spots for the past decade. 

The scores of 11 countries including India and Korea slipped this year as the world battles to limit the economic fallout from the Covid-19 crisis. The current economic environment with reduced wage growth, historically low interest rates and shrinking returns in many asset classes, is placing additional financial pressures on existing retirement income systems, the report said. 

In the survey of 43 nations, Thailand was ranked last, followed closely by Argentina and the Philippines due to their systems having “major weaknesses and/or omissions that need to be addressed.” 

The U.K. and China, ranked 9th and 28th respectively, showed the most improvement on last year as a result of significant pension reform, according to the report. The U.S., at 19th, could increase its score if it raised the minimum pension for low-income retirees, it said.

“Despite the challenges, now is not the time to put the brakes on pension reform –- in fact, it’s time to accelerate it,” said David Knox, senior partner at Mercer and lead author of the report.

Now in its 12th year, the Mercer CFA Institute Global Pension Index benchmarks 39 retirement income systems using more than 50 indicators. The index has expanded to cover almost two-thirds of the world's population. 

You can download the report here. Take the time to download the full report and read it.

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

I honed in on this bullet point:

  • The lack of of any private pension coverage and any saving for retirement by many workers in both developed and developing economies, whether it is due to informal labour market or the growing importance of the "gig economy".

Last night, I was invited to a dinner where Marko Papic, partner and Chief Investment Strategist at the Clocktower Group, presented his geopolitical views.

It was a fascinating presentation and I agreed with a lot of his views but disagreed on other points.

In particular, in 2017, I wrote a comment on whether deflation is headed to the US where I cited seven structural factors that lead me to believe we are headed for a prolonged period of debt deflation:

  1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
  2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
  3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
  4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
  5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
  6. Globalization: Capital is free to move around the world in search of better opportunities but labor isn't. Offshoring manufacturing and service sector jobs to countries with lower wages increases corporate profits but exacerbates inequality.
  7. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.

These are the seven structural factors I keep referring to when I warn investors to temper their growth forecasts and to prepare for global deflation.

Now, Marko doesn't see this as a tug-of-war between inflation and deflation, more between inflation and recession and he doesn't think aging demographics is bad "because older people are consuming more."

On that point, I'm in disagreement. There's definitely a looming pension crisis going on all over the world and countries with a weak retirement system are most vulnerable to such a crisis.

For example, the latest Mercer report on global retirement systems states China showed a marked improvement, placing  28th in the global rankings but I'm highly skeptical and think China's pension system is still on the brink

Marko did cite aging demographics as being a problem in China and that it remains to be seen whether that country can escape secular stagnation.

He also gave a fascinating overview of how China is increasingly dependent on Middle East oil imports and why it's highly unlikely the Chinese will invade Taiwan and risk getting cut off from that oil supply.

He said he is long "Chinese small to medium sized businesses" and sees huge potential there as well as in the green economy. 

But there's no doubt aging demographics will weigh on the country and they risk experiencing a current account deficit which necessarily translates into a capital account surplus. This is why large private equity funds and large global pensions including Canada's large pensions will grow their investments in that country over the next decade. 

Marko also explained how the dynamics in a "multi-polar world" will change but they this isn't necessarily a bad thing, it will provide ample opportunities for many countries to thrive but there will be speed bumps along the way.

The main reason I believe China will not invade Taiwan is because it can't afford to awaken the deflation dragon and incite social unrest. 

After dinner, a few of us had a discussion with Marko's partner at Clocktower, Wei Liu, and he explained to us why Jack Ma's Alibaba presents a threat to the political power structure in China: "It has nothing to do with his wealth, they don't care about that, they care about Baba's ability to incite civil unrest."

Anyway, fascinating discussion, I suggest you read Marko Papic's book, Geopolitical Alpha, and then invite him over to listen to his presentation and views. 

I actually asked Marko and Wei to think about writing a guest comment summarizing their views.

One chart that caught my attention is the rise of inequality in the United States, relative to other developed nations. 

At the end of the evening, I asked Marko how this situation will rectify itself since inequality keeps getting worse under Republican and Democratic administrations. 

Marko replied: "Europe fought its wars against communism and fascism, the US never did, which is why Europe has an ingrained social welfare system. The US is moving toward the left but to get to where Europe is, it will take massive spending and redistribution of income."

He thinks we are heading toward some sort of universal basic income. I agree, all part of MMT economics, but I fear that UBI will be used to allow the elite to keep getting a lot richer (it will become the new opium of the masses).

Think about the pandemic and the response. Unprecedented fiscal and monetary response which helped the masses stave off starvation but it was a boon to America's billionaires. 

I suspect the same thing is going to happen, universal basic income for the masses as long as the power elite can keep increasing their wealth by leaps and bounds. 

By the way, after you read Marko's book, or before you do, make sure you read C. Wright Mills' classic, The Power Elite.  

It is my contention that the world hasn't changed as much as we think over the decades, namely, it's still a handful of elites shaping global policy.

Alright, what does all this geopolitical, power elite, inflation deflation mumbo jumbo have to do with the Mercer CFA Institute Global Pension Index?

People who read me closely know I think macro all the time. Everything is interconnected.

You really need to get the big picture in order to understand where the world is headed and why. 

Now, here is how the Mercer CFA Institute Global Pension Index is calculated or weighted:


As you can se, adequacy represents 40% of the index weight followed by sustainability (35%) and integrity (25%).

And here is a summary of the 2020 results:

You'll notice after Iceland, the Netherlands and Denmark came in second and third respectively after holding the top spots for the past decade. they all scored A in overall grade. 

Canada received a B rating and came in number 9 position overall:

There was a slight improvement from 2019 to 2020 but improvements in the sustainability sub-index were offset by decreases in the adequacy sub-index.

Interestingly, and tellingly, a new survey shows 77% of Canadians aged 55-69 are worried about retirement finances:

More than three quarters of Canadians nearing or in early retirement are worried about their finances, at a time when more and more Canadians plan to age at home for as long as possible, a new survey has revealed.

The survey from Ryerson University’s National Institute on Ageing (NIA),conducted in collaboration with HomeEquity Bank, found that 77 per cent of Canadians within the 55-69 age demographic are worried about their financial health.

Additionally, 79 per cent of respondents aged 55 and older revealed that their retirement income -- through RRSPs, pension plans, and old age security -- will not be enough to be a comfortable retirement.

“Determining where to live and receive care as we age has been an especially neglected part of retirement financial planning,” Dr. Samir Sinha, NIA director of health policy research, said in a news release.

“These are vital considerations that can also be costly. With the vast majority of Canadians expressing their intention to age at home, within their communities, it is essential that we find both financial and health care solutions to make this option comfortable, safe and secure.”

As the COVID-19 pandemic revealed some shortcomings in the long-term care system, 44 per cent of respondents are planning to age at home, but many don’t fully understand the costs involved, the study notes.

Nearly half of respondents aged 45 and older believe that in-home care for themselves or a loved one would cost about $1,100 per month, while 37 per cent think it would cost about $2,000 per month.

In reality, it actually costs about $3,000 per month to provide in-home care comparable to a long-term care facility, according to Ontario’s Ministry of Health.

Bonnie-Jeanne MacDonald, the NIA’s director of financial security research, said it’s important Canadians understand the true costs of aging while they plan for their future.

“Canadians retiring today are likely going to face longer and more expensive retirements than their parents – solving this disconnect will need better planning by people and innovation from industry and government,” she said.

To help with their financial future, the researchers suggest Canadians should delay receiving any Canada Pension Plan or Quebec Pension Plan payments as the monthly payments increase with year of deferral. For example, someone receiving $1,000 per month at age 60 would receive $2,218.75 per month if they wait until age 70 to begin collecting.

The researchers also suggest leveraging home equity and purchasing private long-term care insurance as ways to help with financial stability for the later years.

Great advice on delaying your Canada Pension Plan or Quebec Pension Plan but the problem is many Canadians cannot afford to do this, they rely on that income.

This is why we need to bolster our retirement system to provide well-governed defined benefit plans to all Canadians, not just the lucky few.

In Canada, we have the very best large DB pensions in the world and yet we do not adequately cover enough Canadians. If we did, we would consistently rank at the top spot of the Mercer CFA Institute Global Pension Index.

Take the time to read my recent comments on protecting pensioners of traditional defined benefit plans and on HOOPP's 2021 Canadian Employer Pension Survey

Pension policy is critically important for a lot of reasons and I fear Canadians are too sanguine about the current policy. 

We need to bolster our retirement system, let's be bold, let's bolster what works and focus on preparing for a very uncertain future.

Below, in this episode of Contributors, CAAT Pension Plan's Marnie and Russell sit down with Yung Wu, CEO of MaRS Discovery District to discuss where Canada is thriving in the innovation space – and opportunities for where Canadian leaders might look to flourish further. During their discussion, Marnie, Russell, and Yung focus on the acceleration of Canadian technology before turning to a global perspective, giving a big picture outlook on how Canada is performing on the world stage. 

Update: Joe Nunes, co-founder and executive chairman of Actuarial Solutions and co-author of an insight paper put out by the Canadian Institute of Actuaries, shared this with me after reading this comment:

I get your call for everyone to have a good DB plan – but to me it is less about the type of plan and more the rate of contribution. 

If every private sector DC plan was 9% er + 9% ee we wouldn’t have a pension adequacy problem. 

The problem is that 9% er would make some employers uncompetitive and employees don’t want to sacrifice 9% today to have a comfortable retirement so they are happy when their employer only takes 5% so they have money left to lease a new car.

I thank Joe for his excellent insights but he reinforces my point, we need a government backed defined benefit plan for the private sector where employees and employers are forced to contribute and we can run it at arms length from the government using the same governance model that has led to the success of Canada's large defined benefit pensions. 

Malcolm Hamilton, former SVP at Mercer and now retired actuary, shared this with me:

Tell me, in the government "backed" DB plan for private sector workers will the government bear all (federal) or most (provincial) of the investment risk while guaranteeing a 4% real return on investment, as it does for public sector DB plans? Or will the private sector DB plan be self supporting?

I replied:

If the pandemic taught us anything, it’s that governments can bear all the risk of supporting the population. No doubt, we can improve risk sharing and make it fairer, but my point is over the long run, the government can absorb this risk a lot better than private entities.

To which Malcolm replied:

Governments don't bear risk. They simply transmit it from person to person and from time to time.

In the case of the pandemic, the cost of government support during the pandemic has been passed to future Canadians. It may surface as taxes, inflation, expensive government services, inadequate infrastructure, etc. But it will surface unless, of course, there is a free lunch.

If you really believe that the government can deliver something for nothing, then the government should provide everyone with everything they want or need, and work should be made optional. Let's test the theory!

On the pension issue, if governments are determined to provide a 4% real return to public employees who bear little or no investment risk, I join you in advocating that they do the same for other Canadians.

I thank Malcolm for sharing his views but I ended our dialogue by stating this: "We have seen unprecedented central bank intervention, who bears that risk? Who benefits the most? Why should billionaires benefit the most while the masses scramble to save to retire?"

I fully understand Malcolm's points but my point is we have something that works in Canada and should build on it. Well governed large DB plans backed by the government make sense to me and here I’m speaking with a right of center economic perspective, it just makes good long-term sense to me.