Global Pension Index 2020: Indonesia ranked fourth among Asian retirement income systems with “C” rating

 

  • Mercer CFA Institute Global Pension Index compares 39 retirement income systems, covering almost two-thirds of the world’s population
  • The “C” grade Indonesia retirement income system is ranked fourth in Asia and 30th overall with an overall index value of 51.4 
  • 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 around the world will be negative due to reduced contributions, lower investment returns and higher government debt

Indonesia’s retirement income system has been ranked fourth in Asia and 30th overall by the 12th annual Mercer CFA Institute Global Pension Index, a study of 39 retirement income systems across the globe which covers almost two-thirds of the world’s population. The 2020 Global Pension Index, which measures each retirement system through three sub-indices (sustainability, adequacy and integrity) includes two new systems – Belgium and Israel. 

 

Indonesia’s overall index value fell slightly from 52.2 in 2019 to 51.4 in 2020 primarily due to a reduction in the net replacement rates published by the OECD and life expectancy changes. For each sub-index, Indonesia scored highest for integrity (68.7), followed by adequacy (45.7) and sustainability (45.6).

 

The country is ranked 23rd for sustainability, which measures the likelihood a system will be able to provide benefits into the future; 25th for integrity, which considers factors such as regulation, governance, communication and operating costs; and 33rd for adequacy, which looks at benefits, system design, levels of savings, and home ownership among others to determine its ability to provide adequate retirement income.

 

Bill Johnston, Mercer Indonesia President Director, said: ““Indonesia falls below the global average across all three indices which are 60.8 for adequacy, 50 for sustainability and 71.3 for integrity. To strengthen Indonesia’s score, there’s a need to increase coverage of employees and the self-employed, more support and policy changes to encourage contributions in private pensions and new regulations to reduce the leakage from retirement savings system prior to retirement; for example restricting lump sum access to the BPJS and DPLK plans. Other recommendations include improving the governance of private pension plans and also greater transparency to bolster the confidence of plan members and the community.”

 

Indonesia retained its ‘”C” grade, connoting a pension system that has some good features, but also has major risks or shortcomings that should be addressed. The country is ranked in the same grade as a number of developed economies such as South Korea, Italy and Spain.

 

Meanwhile, the Netherlands had the highest index value (82.6) and has retained its top position and “A” grade in the overall rankings, notwithstanding the significant pension reforms occurring in that country. Thailand had the lowest index value (40.8).

 

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 study found. 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. 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.”

 

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.

 

In June, the government announced a stimulus package worth Rp 677.2 trillion (US$47.6 billion) to strengthen the economy and safeguard businesses and workers. This includes Rp 37.7 trillion (US$2.57 billion) for a wage subsidy program for active members of the Workers Social Security Agency (BPJS) who earn less than Rp 5 million per month. Recipients are entitled to the Rp 2.4 million subsidy, delivered in two installments of Rp 1.2 million once every two months.

 

Jovita Sadrach, Mercer’s Retirement Business Leader for Indonesia, said: “The government has focused its efforts on protecting jobs and businesses to mitigate the financial and economic impact of the COVID19 crisis. An impending economic downturn will inevitably impact the ability of employers and employees to support pension contributions, while market uncertainty may weigh on the performance of pension funds. It’s paramount for funds to take a hard look at their strategy and portfolios for resiliency and sustainability in the long run.”

 

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

 

Janet Li, Mercer’s Wealth Business Leader for Asia said: “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.” 

 

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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