COVID-19 exacerbates retirement insecurity in Asia

| 12 Nov 2020

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.

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. 

Asia’s retirement systems average index value continues to lag the world

Janet Li, Mercer’s Wealth Business Leader for Asia, said, “Asia’s retirement systems average index value continues to lag the world, particularly inadequacy 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). 

COVID-19 exacerbates retirement insecurity

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. 

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,” he said.

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

“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,” she noted.

Impact on 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. 

Governments to deploy a diverse range of support

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,” he added. 

For example, in Malaysia, employee contributions to the Employees’ Provident Fund have been cut from 11% to 7% 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 continued, “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.” 

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. 

Concerted efforts to plug retirement savings gap

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.

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