COVID-19 casts shadow on Asia’s retirement security

 

  • Mercer CFA Institute Global Pension Index compares 39 retirement income systems, covering almost two-thirds of the world’s population
  • Singapore’s “B” grade makes it top Asian retirement income system, followed by Hong Kong SAR and Malaysia
  • South Korea improves from “D” to “C” grade
  • Asia’s overall index value average was 52, against a global average of 59.7
  • The Netherlands and Denmark retain first and second place respectively and the coveted “A” grade
  • The impact of COVID-19 on the provision of future pensions will be negative due to reduced contributions, lower investment returns and higher government debt

Singapore’s retirement system retains its top spot in Asia, ranking seventh out of 39 retirement systems, according to the 12th annual Mercer CFA Institute Global Pension Index, a study of retirement income systems across the globe, covering almost two-thirds of the world’s population. The 2020 Global Pension Index includes two new systems – Belgium and Israel. 

 

South Korea improved from its previous “D” grade to a “C” (50.5). In Asia, “D” grade systems were China (47.3), India (45.7), Japan (48.5), Philippines (43) and Thailand (40.8), with Thailand having the lowest index value of all 39 systems. Indonesia achieved a “C” grade (51.4), Hong Kong SAR and Malaysia were graded “C+” (61.1 and 60.1 respectively), and Singapore achieved a “B” grade (71.2). 

 

Using the weighted average of the sub-indices of adequacy, sustainability and integrity, the Index measures each retirement system against more than 50 indicators. Against a global average of 59.7, Asia’s overall index value average was 52. Asia’s average adequacy value was more than 10 points short of the global adequacy average at 49.7, and the region’s integrity average fell nine points below the global integrity average. Systems around the world struggled with sustainability, with Asia’s average falling just 2.3 points shy of the global sustainability average of 50. 

 

Ms Janet Li, Mercer’s Wealth Business Leader for Asia said, “Asia’s retirement systems average index value continues to lag the world, particularly in adequacy and integrity. Nonetheless, individual systems’ index values vary, and the top 3 ranked systems in Asia scored above the global average. As the region continues to see rapid shifts in demographics, with longer life expectancies and declining birth rates, retirement systems need to adapt or face growing pressure. Changes in the world of work, including the growth of the gig economy where Asia is a frontrunner, will also require more inclusive pensions.” 

 

Globally, the Netherlands had the highest index value (82.6) and has retained its top position in the overall rankings, notwithstanding the significant pension reforms occurring in that country. 

 

For each sub-index, the highest scores were: the Netherlands for adequacy (81.5); Denmark for sustainability (82.6); and, Finland for integrity (93.5). The lowest scores were: Mexico for adequacy (36.5); Italy for sustainability (18.8); and, the Philippines for integrity (34.8). 

 

Current Economic Environment Puts Additional Stress on Retirement Systems 

 

The widespread economic impact of COVID-19 is heightening the financial pressures which retirees face, both now and in the future the future. Coupled with increasing life expectancies and the rising pressure on public resources to support the health and welfare of ageing populations, COVID-19 is exacerbating retirement insecurity. 

 

Measuring the likelihood that a current system will be able to provide benefits into the future, the sustainability sub-index continues to highlight weaknesses in many systems. The average sustainability score dropped by 1.2 in 2020 due to the negative economic growth experienced in most economies due to COVID-19.

 

Dr David Knox, Senior Partner at Mercer and lead author of the study, 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. 

 

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

 

“Even before COVID-19, many public and private pension systems around the world were under increasing pressure to maintain benefits,” said Margaret Franklin, CFA, President and CEO at CFA Institute. 

 

“We have learned a lot about the effectiveness of pension systems over the years, and while there is no single pension system model that will work for every country, the Global Pension Index provides comparative information to differentiate what is possible and practical in each market. CFA Institute is thrilled to be sponsoring this year’s Global Pension Index and we look forward to expanding its impact even further through this collaborative effort.” 

 

COVID-19’s impact to the future of pension systems 

 

The impact of COVID-19 is much broader than solely the health implications; there are long term economic effects impacting industries, interest rates, investment returns and community confidence in the future. As a result, the provision of adequate and sustainable retirement incomes over the longer term has also changed.

 

The level of government debt has increased in many countries following COVID-19. This increased debt is likely to restrict the ability of future governments to support their older populations, either through pensions or through the provision of other services such as health or aged care. 

 

To help alleviate the impact of COVID-19, governments deployed a diverse range of responses to support their citizens and pension systems. 

 

Professor Deep Kapur, Director of the Monash Centre for Financial Studies (MCFS), said that many governments around the world have responded to COVID-19 with substantial fiscal stimulus, and central banks have adopted unconventional monetary policy. “The outlook for investment returns is muted while volatility may be elevated, adding to the normal challenges of risk management in a pension portfolio. 

 

“Additionally, some governments have allowed temporary access to saved pensions or reduced the level of compulsory contribution rates to improve liquidity positions of households. These developments will likely have a material impact on the adequacy, sustainability and integrity of pension systems, thereby influencing the evolution of the Global Pension Index in the coming years,” Kapur added. 

 

For example, in Malaysia, employee contributions to the Employees’ Provident Fund have been cut from 11 per cent to 7 per cent of salaries, creating an expected shortfall of about US$9.4 billion. Likewise in Thailand, social security contribution rates were temporarily reduced from 5% to 2% for both employees and employers from September through November. In Singapore, a planned increase in the Central Provident Fund (CPF) contribution rates for senior workers was deferred by a year to 1 January 2022. 

 

Ms Li said, “While these measures alleviate the short-term financial burden on citizens, they compromise savings for the future. Deferred contributions or drawdowns result in the loss of annual and compounded growth in the long term, and deplete members’ long-term savings. The pension systems are designed with purpose and COVID-related emergency measures risk further deteriorating the systems in meeting their intended purpose. The implications will be huge and may create ripple effects, too, onto social and economic fronts.” 

 

COVID-19 has also increased gender inequality in pension provision. 

 

“Even before the pandemic, the gender retirement savings gap in Asia was exacerbated by the longer life expectancies of women, lower participation of women in the workforce and gender pay inequity. Now, that gap is expected to widen further in many pension systems, particularly in the hardest hit sectors where women represent more than half of the workforce, such as hospitality and food services,” added Ms. Li. 

 

No Easy Solution 

 

To address Asia’s growing retirement savings gap will require a concerted effort from various stakeholders including employers, financial service providers and individuals, said Renee McGowan, Mercer’s CEO for Asia. 

 

“Governments need to raise awareness of the financial implications of the pandemic for retirement savings and ensure that the employment and pension regulatory frameworks helping people save for retirement stay the course. Employers need to create flexible work and retirement models so people can work, earn and save into later life to plug their retirement savings gap.” 

 

Financial service providers need to redesign products and tools and make it easier for people to understand their financial position. Individuals, too, need to play their part by improving their financial literacy, health and skills which will allow them to work longer so they can save more,” Ms McGowan said.

 

About the Mercer CFA Institute Global Pension Index

 

Formerly known as the Melbourne Mercer Global Pension Index, the Global Pension Index benchmarks retirement income systems around the world.

 

The Global Pension Index is a collaborative research project sponsored by CFA Institute, the global association of investment professionals, in collaboration with the Monash Centre for Financial Studies (MCFS), and Mercer, a global leader in redefining the world of work and reshaping retirement and investment outcomes.

 

The Global Pension Index uses the weighted average of the sub-indices of adequacy, sustainability and integrity to measure each retirement system against more than 50 indicators. The 2020 Global Pension Index introduces new questions relating to public expenditure on pensions, ESG (environmental, social and governance) investing and support for caregivers.

 

For more information about the Mercer CFA Institute Global Pension Index, click here.

 

-ENDS-

 

2020 Mercer CFA Institute Global Pension Index

 System

Overall 2020 index value

Sub-index values

Adequacy

Sustainability

Integrity

 Argentina

42.5

54.5

27.6

44.4

 Australia

74.2

66.8

74.6

85.5

 Austria

52.1

64.4

22.1

74.6

 Belgium

63.4

74.6

32.4

88.9

 Brazil

54.5

72.6

22.3

70.7

 Canada

69.3

68.2

64.4

77.8

 Chile

67.0

56.5

70.0

79.6

 China (mainland)

47.3

57.4

36.2

46.7

 Colombia

58.5

62.5

45.5

70.5

 Denmark

81.4

79.8

82.6

82.4

 Finland

72.9

71.0

60.5

93.5

 France

60.0

78.7

40.9

57.0

 Germany

67.3

78.8

44.1

81.4

 Hong Kong SAR

61.1

54.5

50.0

87.1

 India

45.7

38.8

43.1

60.3

 Indonesia

51.4

45.7

45.6

68.7

 Ireland

65.0

74.7

45.6

76.5

 Israel

74.7

70.7

72.4

84.2

 Italy

51.9

66.7

18.8

74.4

 Japan

48.5

52.9

35.9

59.2

 Korea

50.5

48.0

53.4

50.3

 Malaysia

60.1

50.1

58.6

78.0

 Mexico

44.7

36.5

55.8

42.2

 Netherlands

82.6

81.5

79.3

88.9

 New Zealand

68.3

63.8

62.9

82.9

 Norway

71.2

73.4

55.1

90.3

 Peru

57.2

59.5

49.2

64.6

 Philippines

43.0

38.9

53.4

34.8

 Poland

54.7

59.9

40.7

65.9

 Saudi Arabia

57.5

59.6

51.6

62.4

 Singapore

71.2

74.1

59.9

82.5

 South Africa

53.2

43.0

46.7

78.3

 Spain

57.7

71.0

27.5

78.5

 Sweden

71.2

65.2

72.0

79.8

 Switzerland

67.0

59.5

64.2

83.1

 Thailand

40.8

36.8

40.8

47.3

 Turkey

42.7

44.2

24.9

65.3

 UK

64.9

59.2

58.0

83.7

 USA

60.3

58.9

62.1

59.9

Average

59.7

60.9

50.0

71.3

 

 

About Mercer

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s more than 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of $17 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.

 

About CFA Institute

 

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion of ethical behaviour in investment markets and a respected source of knowledge in the global financial community. Our aim is to create an environment where investors’ interests come first, markets function at their best, and economies grow. There are more than 178,000 CFA charterholders worldwide in 162 markets. CFA Institute has nine offices worldwide and there are 159 local member societies. For more information, visit www.cfainstitute.org or follow us on Twitter at @CFAInstitute and on Facebook.com/CFAInstitute.

 

About the Monash Centre for Financial Studies (MCFS)

 

A research centre based within Monash University's Monash Business School, Australia, the MCFS aims to bring academic rigour into researching issues of practical relevance to the financial industry. Additionally, through its engagement programs, it facilitates two-way exchange of knowledge between academics and practitioners. The Centre’s developing research agenda is broad but has a current concentration on issues relevant to the asset management industry, including retirement savings, sustainable finance and technological disruption.

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