Global Pension Index uncovers impact of COVID-19 on future pensions

20 October 2020

  • The Mercer CFA Institute Global Pension Index compares 39 retirement income systems, covering almost two-thirds of the world’s population
  • The Netherlands and Denmark retain first and second place respectively and the coveted ‘A-grade’
  • New addition Israel replaces Australia in third place
  • 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.

To go the Mercer CFA Institute Global Pension Index, click here.

Formerly known as the Melbourne Mercer Global Pension Index, 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.

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.

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 said.

For example, Australia enabled individuals whose income had dropped by more than 20% to access up to AUD $20,000 (approximately USD $13,000) from their pension assets, while Chile allowed active contributors to voluntarily withdraw 10% of their individual pension funds up to USD $5,600.

“It is interesting to note that the top two retirement income systems in the Global Pension Index, the Netherlands and Denmark, have not permitted early access to pension assets, even though the assets of each pension system are more than 150% of the country’s GDP,” said Dr Knox.

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.

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

“Even before COVID-19 disrupted economies across the world, many women faced retirement with less savings than men. 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,” says Dr Knox.

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.

By the numbers

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. 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).

SystemOverall 2020 index valueSub-index values
AdequacySustainabilityIntegrity
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 68.9 65.5 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 52.8 43.0 45.7 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
Average59.760.950.071.3

About the Mercer CFA Institute Global Pension Index

This year, the Global Pension Index compares 39 retirement income systems across the globe and covers almost two-thirds of the world’s population. The 2020 Global Pension Index includes two new systems – Belgium and Israel.

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.