Global Pension Index identifies opportunities for pension systems in Asia

11 October 2013   Category: News, Australia, China, Global   By Asia Asset Management

Four out of six Asian countries have either improved or maintained their performances in the Melbourne Mercer Global Pension Index in 2013. South Korea’s score fell and Indonesia was included in the index for the first time. The overall results indicate that pension systems in the region are improving. However, five out of six also maintained a ‘D’ grade, which is a system with some desirable features but many opportunities to improve. 
 
Asian countries made up 30% of the index – or six out of 20 countries – with Singapore, China, Japan, South Korea, India, and Indonesia included. All, except South Korea and Indonesia, improved or maintained their scores in 2013. Singapore was the outstanding performer for the region, making the top ten pension systems in the world; it improved its overall score from 54.8 in 2012 to 66.5 in 2013. South Korea’s index value fell primarily due to a significant increase in life expectancy as measured by the United Nations. 
 
David Knox, senior partner at Mercer and author of the research, said: “Pension systems in many Asian countries are in an embryonic phase and we expect them to gradually strengthen in coming years. However, many Asian countries are also facing an ageing population at a rate beyond some Western countries, which makes it particularly challenging, and urgent, to develop a sustainable pension system.”
 
Denmark became the first country to achieve an ‘A’ Grade in 2012, and has held on to the position in 2013 despite its overall score falling to 80.2 from 82.9. Denmark’s well-funded pension system with its high level of assets and contributions, the provision of adequate benefits, and a private pension system with developed regulations are the primary reasons for its top positioning.
 
The Melbourne Mercer Global Pension Index is now in its fifth year and has increased from 11 countries in 2009 to 20 countries in 2013, with Mexico and Indonesia the latest additions. It now covers more than 55% of the world’s population. 
 
The index looks objectively at both the publicly funded and private components of a system as well as personal assets and savings outside the pension system. It measures the adequacy, sustainability and integrity of a country’s pension system and is published by the Australian Centre for Financial Studies (ACFS) in conjunction with Mercer. It is funded by the Victorian State Government. 
 
The research identifies possible areas of reform for each country that would allow for the provision of more adequate retirement benefits, increased sustainability, and greater trust in the pension system. The challenges that are common to many countries include the needs to:
 
  • Increase the state pension age and/or retirement age to reflect increasing life expectancy, both now and in the future, thereby reducing the costs of publicly financed pension benefits;
  • Promote higher labour force participation at older ages, which will increase the savings available for retirement and also limit the continued increases in retirement duration;
  • Encourage or demand higher levels of private saving, both within and beyond the pension system, to reduce future dependence on public pension;
  • Increase coverage rates across employees and/or the self-employed in the private pension system;   Encourage recognition of the fact that many individuals will not save for the future without at least an element of compulsory or automatic enrolment; 
  • Reduce leakage from the retirement savings system prior to retirement thereby ensuring that funds saved, often with associated taxation support, are used for the provision of retirement income;
  • Increase governance of private pension plans to improve the confidence of plan members.
Deborah Ralston, executive director of the ACFS said the global response to the index continues to indicate its value to government, industry and academia as they debate how best to provide for an ageing population.
 
The 2013 index includes a special chapter on post-retirement solutions in a defined contribution (DC) world. 
 
Mr. Knox said that as countries grapple with rising life expectancies, increased government debt, uncertain economic conditions and a global shift to DC plans, there are still many lessons to be learnt and new solutions to be found, particularly for the post-retirement years.
“A DC system is well established in many countries and it is clearly heading this way in many others. However, the conversion of DC benefits into adequate and sustainable retirement incomes remains a largely unresolved problem in many countries. 
 
“Developing effective and sustainable post-retirement solutions has to be one of the most critical challenges for policy makers and retirement industries around the globe,” he said.
 
“Many of the challenges relating to ageing populations are similar, irrespective of each country’s social, political, historical or economic influences. Many of the desirable policy reforms to alleviate these challenges are also similar and the Index aims to highlight the best solutions and share them globally,” said Ms. Ralston.