Ranking seventh globally, Singapore retains its highest ranking in Asia for the fourth consecutive year, and saw a healthy increase in both the adequacy and sustainability scores. Dramatically ageing populations, declining birth rates and a lack of robust retirement systems will see many countries struggle under the burden of providing adequate pensions to their senior citizens without drastic action.
Now in its eighth year, the Melbourne Mercer Global Pension Index (MMGPI) fires a stern warning to governments across the globe to take immediate action. India’s total score in 2016 went up the most year-on-year, while South Korea’s improvements are also noticeable. However, there is work to be done to achieve the coveted ‘A Grade’, only ever held by Denmark and Netherlands.
This year, China and Japan both saw a decrease in their total scores, from 48 to 45.2 and 44.1 to 43.2 respectively. The decline in China’s score was primarily due to a reduction in the assumed level of support provided to the poor, while that in Japan’s score was mainly due to mild changes in all three sub-indexes.
The MMGPI is the world’s most comprehensive comparison of global pension systems, and this year it covered close to 60 per cent of the world’s population, measuring 27 systems against more than 40 indicators to gauge their adequacy, sustainability and integrity. It included diverse countries across the Americas, Europe and Asia-Pacific regions, this year examining Malaysia and Argentina for the first time.
Supported by the Victorian Government and bringing together the best minds in Australia’s financial services and research expertise fields, the Index is testament to Victoria’s dominant position in the superannuation and financial services sectors. The Index is the premier research tool available to guide governments to develop policies that provide adequate and sustainable benefits for all their citizens in retirement.
“With a strong financial services sector and deep talent pool, Victoria continues to lead the way in funds management, a central part of any superannuation and annuities system,” said Victorian State Minister for Industry and Employment, Wade Noonan.
“Through our Future Industries Fund, the Victorian Government is working closely with the financial services sector to deliver continued expansion, investment and jobs growth.”
A Closer Look at the Impact on Ageing Populations
This year, the MMGPI has looked at the impact of rapidly ageing populations, and the preparedness of countries’ retirement systems to deal with the significant financial pressures this presents.
Author of the report and Senior Partner at Mercer, Dr David Knox said the impact of longer life expectancies, combined by global declining birth rates, is much more significant than has been recognised by many governments and communities.
“This year’s report includes a projected old age dependency ratio which will raise alarm in many regions. The range of the ratio is stark – predicting that in South Africa there will be one retiree for every 7 people of working age while in Japan the number drops to one retiree for every 1.44 people of working age by 2040.”
The MMGPI presents the evidence, and recommends the urgent changes that governments need to make to ensure that current retirement systems are sustainable and able to provide adequate benefits for decades to come.
Dr Knox issued a stern warning: “It is a political imperative that all countries, regardless of their size, and current standing on the MMGPI, implement the necessary policy changes to withstand future challenges presented by the globally ageing population.”
Mitigating Factors that Determine Each Country’s Old Age Dependency Ratio
The MMGPI shows the relative position of each country’s old age dependency ratio in respect to five key factors:
Dr Knox said although these indicators are not foolproof, they are indicative of developments which impact sustainability and community confidence in the provision of future retirement benefits.
The graph below plots the relative position of each country in respect of both the projected old age dependency ratio and the impact of the five mitigating factors.
“Indonesia is an interesting example, with its relatively low old age dependency together with a comparatively high labour force at older ages and a significant increase in the retirement age” said Dr Knox.
The True Impact of Globally Increasing Life Expectancies
Life expectancies at birth have increased by seven to 14 years in most countries during the last 40 years, equating to an average of one additional year for every four years – a significant result that cannot be ignored in the ongoing reform of the pension system.
Even more significantly, the increased life expectancy of a 65-year-old over the last 40 years ranges from 1.7 years in Indonesia to 8.1 years in Singapore. “Whatever actual figure emerges in the next 40 years, there is little doubt that people are living longer in their older years,” said Dr Knox.
“Without changes to retirement ages and ages for eligibility to access social security and private pensions, there will be increasing pressure on global retirement systems to the detriment of the financial security provided to older members of our society.”
“The declining birth rates, increasing longevity, economic development and many other factors will continue to affect the pension systems across Asia, but we are pleased to see that Asian countries are proactively addressing these challenges based on their unique situation. The efforts of some are clearly reflected in their total score in this index,” said Dr Knox.
“There is, of course, always room for improvement and we are confident that Asian governments will closely monitor their people’s needs and address them effectively.”
According to Professor Rodney Maddock, of the Australian Centre for Financial Studies “We are living longer, living larger portions of their life in retirement and spending more in retirement, so we need to be well-placed to ensure fulfilling, adequately-funded retirements.”
For more details on the 2016 MMGPI, please refer to the infographic.
