NZ suffered a minor downgrade in the latest Mercer annual review of global pension systems released this morning.
The 12th Mercer Global Pension Index, this year produced in association with new sponsor – the CFA Institute, shows the NZ retirement system slipped almost 2 points overall year-to-year to 68.3 (out of a maximum 100) due to a sizable fall in its adequacy rankings.
According to the Mercer study, the NZ adequacy score – one of three sub-categories – dropped from almost 71 to just under 64 compared to 2019 as new OECD net replacement rate data took the country down a peg along with Australia, Canada, Chile, China, Ireland, Japan and Poland.
Both Australia and NZ improved slightly their scores for sustainability and integrity – the other two sub-categories. But despite suffering a larger total points drop than Australia, NZ retained its 10th spot on the Mercer tables while the latter country dropped from third to fourth while also losing its B+ ranking to join its trans-Tasman cousin in the B-grades.
Australia was replaced in third by Israel, one of the two new entrants this year in the Mercer pension study along with Belgium (16th).
The report says the COVID-19 crisis cost almost all retirement systems during the year, particularly those which allowed early access to savings or relaxed contributions rules.
Professor Deep Kapur of the Monash Centre for Financial Studies – a long-time collaborator in the Mercer study – said those countries that reduced compulsory contributions or temporarily opened up early access to pension pots, such as Australian and Chile, may have caused lasting damage.
“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,” Kapur said.
David Knox, Mercer senior partner and lead author of the study, said the top two systems in the study – the Netherlands and Denmark – had not permitted early access to pension funds despite the two countries overall retirement savings assets representing more than 150 per cent of their respective GDPs.
“Each of the three countries ranked above Australia – The Netherlands, Denmark and Israel – has a contribution rate into their funded pension arrangements of 12 per cent or higher,” Knox said. “… Unlike the means-tested age pension in Australia, they all have a universal state pension, which means, together with higher contribution rates, their replacement rates, as calculated by the OECD, are higher than Australia’s.”
The Mercer report also notes a significant rise in investment switching behaviour – as seen in the KiwiSaver market – among pension scheme members as the pandemic played out.
“Members switching to cash and other conservative investments options was seen in DC [defined contribution] plans in Australia, Indonesia, Ireland, New Zealand and the United States; there was also a switch to gold-based investments in Turkey,” the study says. “Interestingly, as the share market recovered (at least to some extent), the evidence is that some of these members have switched back into equities, probably prompted by the very low interest rates available on cash investments.”
Knox said fallout from COVID-19 would likely further exacerbate the already significant savings gap between men and women as the crisis has hardest-hit sectors where women represented more than half of the workforce, such as hospitality and food services: he could have added healthcare, aged care, early childcare and primary education.
As well as highlighting the differences between pension systems, CFA Institute chief, Margaret Franklin, said the Mercer study also shows all are facing some common challenges.
“Even prior to the pandemic, many public and private pension systems around the world have been under increasing pressure to maintain benefits; aging demographics and the low-growth/low-interest rate economic environment have reduced the ability for some retirement schemes to fund future liabilities,” Franklin said.
She said the Mercer index provides a global overview of how different jurisdictions are responding to those challenges and a guide “to differentiate what is possible and practical in each market”.
“Many of the proposed reforms will take time to implement and may be politically challenging, but without the data we cannot engage in meaningful conversations,” Franklin said. “We owe it to financial market participants to do so.”
With the two new entrants, the total number of systems in the study increased to 39 (China and Greater China, including Hong Kong, counting as two systems). Countries included in the Mercer survey account for 64 per cent of the world’s population. Across all pension regimes in the study, the total average score was down ever-so-slightly, from 59.3 to 59.2.
Both of the top systems – The Netherlands and Denmark – increased their total index score despite COVID, as did Singapore and the UK, from lower bases. A full copy of the report is available here.