COVID-19 negatively impacts future pensions provision

| 02 Nov 2020

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.

The widespread economic impact of COVID-19 is heightening the financial pressures which retirees face both now and in 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, according to the 12th annual Mercer CFA Institute Global Pension Index.

Mercer senior partner and lead author of the study Dr David Knox 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.”

CFA Institute president and CEO Margaret Franklin added that even before COVID-19, many public and private pension systems around the world were under increasing pressure to maintain benefits.

Mercer wealth business leader for Asia Janet Li told Nikkei Asia, "In many of the Asian countries, the (pension) systems are young, not mandatory, or the post-retirement income stream may not even exist.”

She said, “Western systems often have broader coverage of social benefits, and they are generally more mature, typically with a long head start on most Asian markets."

The impact of COVID-19 is much broader than solely the health implications and as a result, the provision of adequate and sustainable retirement incomes over the longer term has also changed.

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

Monash Centre for Financial Studies director Professor Deep Kapur said that many governments around the world have responded to COVID-19 with substantial fiscal stimulus and central banks have adopted unconventional monetary policy.

“Some governments have also 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,” said Professor Kapur.

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