NZ has nudged up slightly in the latest Melbourne Mercer Global Pension Index (MGPI) released today but the country’s retirement system remains hamstrung by “sustainability” issues, according local chief, Martin Lewington.
The 11th edition of the MGPI (summarised here) sees the NZ total score rising from 68.5 in 2018 to 70.1 in the latest study as the country held its spot as eighth out of the 37 retirement regimes examined.
However, the minor uptick for NZ in the 2019 analysis was “primarily due to the change in the methodology used to calculate the net replacement rate”, the report says.
The MGPI compiles the total score based on a multi-factor analysis across three ‘sub-indexes’ encompassing adequacy, sustainability and integrity.
NZ earned an overall B mark, which the MGPI defines as a “system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system”.
Just two countries – Netherland and Denmark – were rated A-grade while Australia garnered a B+ in the study.
Despite the above-average overall ranking for NZ, the country scored poorly (C+) on the MGPI sustainability gauge while earning a B for adequacy and an A for integrity.
“Clearly more needs to be done to address [sustainability] so that we can have a retirement system that is fit for the future,” Lewington said in a release. “Our index value can be improved by raising the level of KiwiSaver contributions, placing more focus on income streams in the place of lump sums, and continuing to expand KiwiSaver’s coverage.”
Mercer included these suggestions in its submission on the KiwiSaver default scheme review, which closed off for comment last month.
The MGPI study – a collaboration between Mercer and the Melbourne-based Monash Centre for Financial Studies – also found a link for the first time between pension fund size and household debt.
According to the report, the research “suggests that for every extra dollar in pension assets, net household debt increases by less than half that amount on average”.
David Knox, Mercer Australia senior partner and author of the MGPI report, said in a statement that as retirement savings grow individuals feel more comfortable borrowing “to improve their current and future living standards”.
As per previous years, though, the MGPI report recommends all countries – some more than others – need to introduce a range of reforms to shore up retirement systems, including:
- increasing the pension age in line with longevity trends;
- encouraging people to stay in the workforce for longer;
- boosting private savings with incentives and/or compulsion;
- expanding retirement savings coverage to include self-employed workers; and,
- reducing “leakage” from locked-in savings systems before retirement.
Emily Barlow, Mercer Australia senior associate, told an audience at the firm’s annual NZ conference in Wellington last week that the country’s KiwiSaver system could benefit from plugging leaks such as the first home purchase rules.
Almost 40,000 members withdrew a collective $953 million from KiwiSaver under the first home purchase provisions over the 12 months to March 31 this year, according to the Financial Markets Authority (FMA).
Earlier in October, the acting Retirement Commissioner, Peter Cordtz, floated the idea of extending the first home loophole to include investment properties.
But Barlow said the government should consider tighter restrictions on the first home release rules rather than opening the spigot further.
She said while the trade-off between property ownership and security in retirement was complex, “a home is not a source of income”.
As well as reducing access to first home withdrawals, Barlow said KiwiSaver could be improved by: introducing compulsion; raising contribution rates; and, boosting the growth component of default funds.
The NZ government has flagged a higher allocation to growth assets, or moving to a life-stages model, in the KiwiSaver default review due to report back early next year.
Barlow said NZ retirees would also likely need some kind of longevity protection products as they moved into evermore-lengthy retirement periods.
Australia introduced a new incentive scheme this year to encourage retirees to convert at least part of their superannuation savings to a guaranteed income product. Under the new rules, 60 per cent of funds in ‘qualifying longevity products’ are exempted from the Australian government pension assets-test.
She said most people find it difficult to accurately judge longevity risk.
For instance, Barlow said a recent Mercer survey in Australia found younger cohorts tended to underestimate how long they would be in retirement while older groups overestimated the period.
“Those life expectancy mis-judgments are a cause for concern,” she said, potentially resulting in younger generations under-saving and older people over-saving.
There was a growing need to develop retirement products that provided stable income for life, assurance the assets were well-managed and provided access to funds when needed, Barlow said.