Australia is one of the few countries that has dropped down in rankings in the annual Mercer CFA Institute Global Pension index over the years, a slide that has continued this year, the latest survey has revealed.

The index is a measurement of adequacy, sustainability and integrity of 39 retirement systems around the world using more than 50 indicators, and the most recent study shows that the COVID-19 pandemic has had a profound impact on the provision of adequate and sustainable retirement incomes over the long term.

In 2014, Australia’s ranking peaked with a score of 79.9 per cent. This year it moved from third place (an overall score of 75.3 in 2019) to fourth place (74.2) due primarily to a reduction in the net replacement rates published by the OECD. It was replaced in third place by Israel, a newcomer this year to the index.

While the debate about the level of superannuation contribution rates continues in Australia, each of the three countries ranked above Australia – The Netherlands, Denmark and Israel – have contribution rates into their funded pension arrangements of 12 per cent or higher.

“Unlike the means-tested Age Pension in Australia they all have a universal state pension, which means, together higher contribution rates, their replacement rates, as calculated by the OECD are higher than Australia’s,” David Knox, partner at Mercer and author of the annual Mercer CFA Institute Global Pension index, said.

Over all, COVID-19 has exacerbated retirement insecurity and governments need to use this as an opportunity to examine their system inadequacies and make improvements, Knox said.

The impact of COVID-19 has much broader health implications and there are long term economic effects impacting industries, interest rates, investment returns and community confidence in the future which means the ability to provide adequate and sustainable retirement incomes over the longer term has also changed, he 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,” Knox said.

“It is critical that governments reflect on the strengths and weaknesses of their systems to ensure better long-term outcomes for retirees.”

Crisis measures globally

In addition some governments around the world have allowed temporary access to saved pensions or reduced the level of compulsory contribution rates to improve consumers’ liquidity positions.

Australia for example enabled individuals whose income had dropped by more than 20 per cent to access up to A$20,000 from their pension assets; India allowed partial withdrawals for COVID-19 treatment and a payment from the pension fund account not exceeding three months’ wages and allowances; in Peru workers were permitted to withdraw up to 25 per cent of their savings from their individual accounts, with a limit of 12,900 soles ($3,685); while Chile allowed active contributors to voluntarily withdraw 10 per cent of their individual pension funds up to $5,600. In other countries including Indonesia, Thailand, Colombia and Peru the level of contributions were reduced, but Mercer predicts the short-term halting of contributions will have less impact on long-term retirement savings than the withdrawal of accrued benefits.

Whether pension assets should be used in extreme circumstances for something other than retirement income is an issue of debate. The OECD noted: “Access to retirement savings should remain an exceptional measure based on individual specific circumstances and based on regulations already in place for that purpose”.

“It is interesting to note that the top two retirement income systems in the Global Pension Index, the Netherlands and Denmark, have not permitted early access to pension assets, even though the assets of each pension system are more than 150 per cent of the country’s GDP,” Knox said.

The Netherlands had the highest index value (82.6) and has retained its top position in the overall rankings. Thailand had the lowest index value (40.8).

Maria Wilton (pictured) who is vice chair at CFA Institute said that a key objective of the index is to highlight areas for improvement for government to consider.

“From an Australian perspective, we rank highly in terms of integrity and sustainability. By the numbers, pension fund members can trust the system given the strong governance and regulatory frameworks in place,” she said.

“The clear opportunity for improvement is with respect to adequacy – does the whole retirement system deliver enough to retirees? With COVID-19 impacting the government fiscal position for many years to come, it is logical to consider addressing this through private provision and increasing the Superannuation Guarantee Charge (SGC) contributions rate – as is already legislated – rather than hoping for increases in the government funded Age Pension.”

According to Professor Deep Kapur, director of the Monash Centre for Financial Studies these developments will likely have a material impact on the adequacy, sustainability and integrity of pension systems, and influence the evolution of the Global Pension Index in the coming years.

Top five ranked pension systems

Overall score
Netherlands 82.6
Denmark 81.4
Israel 74.7
Australia 74.2
Finland 72.9

 

White is responsible for the content across all Conexus Financial’s institutional media and events. In addition to being the editor of top1000funds.com, she is responsible for directing the bi-annual Fiduciary Investors Symposium.
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