The Dutch retirement income system has returned to its top position on the annual Mercer CFA Institute Global Pension Index (MCGPI), with Iceland and Denmark taking second and third places, respectively.
Last year the Netherlands dropped from its prime position to second place as Iceland topped the index.
“The average age of populations around the world continues to rise in many markets, mainly more mature markets,” said Margaret Franklin, president and chief executive officer of the CFA Institute.
“Inflation and rising interest rates have created a new market dynamic that poses significant challenges to pension plans. We also see continued fracturing as it relates to globalisation. These are just a few of the increasingly complex challenges that pension funds face that impact retirees in significant ways,” she said.
The primary objective of the research is to benchmark each retirement system using more than 50 indicators.
“Each year, this index serves as a critical reminder that there is a long way to go in many jurisdictions to make pension plans function at their best and for the long-term financial security of beneficiaries,” Franklin said.
The Netherlands had the highest overall index value (85.0), closely followed by Iceland (83.5) and Denmark (81.3). Argentina had the lowest index value (42.3).
Although the Netherlands is currently undertaking significant pension reform, the system is well-positioned to provide excellent benefits amid the move from a collective benefit structure to a more individual defined contribution approach.
The Index uses the weighted average of the sub-indices of adequacy, sustainability, and integrity. For each sub-index, the systems with the highest values were Portugal for adequacy (86.7), Iceland for sustainability (83.8), and Finland for integrity (90.9).
The systems with the lowest values across the sub-indices were South Korea for adequacy (39.0), Austria for sustainability (22.6), and the Philippines for integrity (25.7).
Falling birth rates have placed pressure on several economies and pension systems over the longer term, negatively affecting the sustainability scores for countries like Italy and Spain.
Several Asian systems, however, including mainland China, Korea, Singapore, and Japan, have undertaken reform to improve their scores in the last five years.
Nordics
Denmark’s pension lobby Insurance & Pension Denmark (Forsikring & Pension, IPD) lauded the fact that Denmark was once again among the top three regarding its pension system in Mercer CFA’s annual assessment, and noted that all Nordic countries were in the top 10.
However, in a statement this morning the association also said changes to the nation’s pension system were needed, noting that Mercer had called in its report for several of the concrete measures recommended by the Pension Commission in 2022 to be adopted politically.
Karina Ransby, deputy director at IPD, said: “The Pension Commission came up with a number of proposals for improvements to our pension system, and they had a special call for more work to be done with flexibility,” adding that as it was today, the system was too rigid.
For example, she said, it was not currently possible to put payments from a “ratepension” (instalment pension) on hold, if, for instance, an individual wanted to return to work after having retired.
“It’s a shame, as we know that if there was that option, more people would be tempted to work even after retirement age – possibly part time,” Ransby said.
The growing impact of AI
The index report also examined the potential of artificial intelligence (AI) to improve pension and social security systems and provide people a better quality of life in retirement.
“The ongoing expansion of AI within the operations and decisions of investment managers could lead to more efficient and better-informed decision-making processes, which could potentially lead to higher real investment returns to pension plan members,” said David Knox, senior partner at Mercer and lead author of the study.
“AI also has the potential to improve member-engagement and help individuals make long-term decisions about their financial decisions. Both advances should improve retirement outcomes,” he added.
The report, however, makes clear that AI is not without risks, including modeling challenges and ethical concerns as well as the need for optimal data privacy and cybersecurity. In developing these systems, it is essential that AI models have strong governance and clear accountability to reduce biases and unjustified responses. Safeguards are critical for pension plans to retain their members’ long-term trust.
“AI by itself is not the complete answer. There will always be a need for human oversight. Despite these risks, AI has the opportunity to deliver a higher standard of living in retirement — a worthwhile objective for all pension systems,” Knox said.
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