Global Pension Index 2020: Malaysia’s retirement system ranked third in Asia with “C+” rating

 

  • Mercer CFA Institute Global Pension Index compares 39 retirement income systems, covering almost two-thirds of the world’s population
  • Malaysia ranked third among Asian retirement systems and 19th overall with an overall index value of 60.1
  • 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

Malaysia’s retirement income system has been ranked third in Asia and 19th 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.

 

Malaysia’s overall index value fell slightly, from 60.6 in 2019 to 60.1 in 2020, due to several small movements in the sustainability sub-index. Of the study’s three sub-indexes, Malaysia scored highest for integrity (78), followed by sustainability (58.6), and adequacy (50.1). The global average sits at 71.3 for integrity, 50 for sustainability, and 60.8 for adequacy.

 

The country is ranked 13th for sustainability which measures the likelihood a system will be able to provide benefits into the future; 18th for integrity which considers factors such as regulation, governance, communication and operating costs; and 31st 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.

 

Janet Li, Mercer’s Wealth Business Leader for Asia said: “It’s heartening to see that Malaysia continues to rank above the global average for integrity and sustainability. The overall index value for the Malaysian system could be improved by increasing the minimum level of support for the poorest aged individuals as well as raising the level of household saving and lowering the level of household debt. As life expectancy increases, the pension age should also be raised. A requirement that retirement benefit must be taken as an income stream should also be considered.”

 

Malaysia retained its ‘”C+” grade, connoting a pension system that has some good features, but also major risks or shortcomings that should be addressed. The country was awarded the same grade as a number of developed economies such as Hong Kong, France and the United States. 

 

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 February 2020, the Malaysian government issued an emergency stimulus package worth RM 20 billion (US$4.8 billion) to counter the economic impact of the COVID-19 outbreak, with an additional package worth RM 10 billion (US$2.4 billion) announced in September. The government also reduced the minimum employee contribution rate for the Employees’ Provident Fund (EPF) from 11% to 7%, creating an expected shortfall of about RM 39.2 billion (US$9.4 billion).

 

Godelieve van Dooren, Mercer’s acting CEO for Malaysia said: “COVID-19's impact on economic activity, financial markets, employment practices and possibly life expectancies, will affect the provision of retirement incomes for many years, if not decades. Hence the importance of a sound and robust retirement system is more evident than ever, given the uncertainties in the post-COVID-19 world. Recognizing the ever-changing needs and requirements of its members, especially in this volatile and uncertain world, the Employees' Provident Fund (EPF) has recently invited all members of the public to participate in the EPF 2020 Public Consultation Survey to gather as much input as possible to help develop, improve, and potentially redesign the EPF scheme for the future. This is definitely a great step in the right direction.”

 

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

 

Ms 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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