Mercer CFA Institute Global Pension Index 2022 highlights key challenges of defined contribution plans for retirees

Rhea-AI Summary

The 14th annual Mercer CFA Institute Global Pension Index (MCGPI) ranks Iceland as the top retirement income system for the second consecutive year, with an index score of 84.7. The Netherlands and Denmark follow closely with scores of 84.6 and 82.0, respectively. The study covers 44 pension systems, affecting 65% of the global population, highlighting a shift from defined benefit to defined contribution plans, increasing financial risks for retirees. Key recommendations for reform include enhancing retirement benefits amidst challenges like inflation and rising interest rates.

Positive

• Iceland ranked first with an index score of 84.7, leading in adequacy and sustainability sub-indices.
• The Netherlands and Denmark retained their positions in the top three, indicating stable retirement systems.
• Mexico showed significant improvement in pension outcomes due to recent reforms.

Negative

• Increased financial uncertainty for retirees due to the shift from defined benefit to defined contribution plans.
• Many governments may reduce financial support during retirement, impacting retirees' income.

• Index compares 44 retirement income systems, covering 65 percent of the world’s population
• Index sees Iceland top the list for second year in a row
• As more employers shift from defined benefit to defined contribution plans, retirees will take on greater financial risks

NEW YORK--(BUSINESS WIRE)-- Today, Mercer and the CFA Institute released its 14^th annual Mercer CFA Institute Global Pension Index (MCGPI). Iceland’s retirement income system has once again topped the list, with The Netherlands and Denmark retaining second and third places respectively in the rankings. As more employers have stepped away from defined benefit (DB) plans, the study also investigates the challenges and opportunities with the global shift towards defined contribution (DC) plans where individuals bear increased financial responsibility.

The MCGPI is a comprehensive study of 44 global pension systems, accounting for 65 percent of the world’s population. It benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would help provide more adequate and sustainable retirement benefits.

Senior Partner at Mercer and lead author of the study, Dr. David Knox, highlighted the importance of strong retirement schemes in light of growing external uncertainty.

“Individuals have been assuming more responsibility for their retirement savings for some time; amidst high levels of inflation, rising interest rates and greater uncertainty about economic conditions, they are doing so in an increasingly complex and volatile environment. Despite differences in social, political, historical or economic influences across geographies, many of these challenges are universal. And while the necessary reforms may take time and careful consideration, policymakers must do all they can to ensure retirement schemes are supported, developed and well-regulated,” said Dr. Knox.

CFA Institute President and CEO, Marg Franklin, CFA, underscored the dynamic environment of the investment industry.

“Since the inception of the Mercer CFA Institute Global Pension Index, the investment management and pension industry at large have faced extraordinary challenges. New financial products and strategies will be required to deliver adequate returns for beneficiaries. This past year, we’ve gone from a ‘lower for longer’ interest-rate environment to significant rates of inflation, quadrupling of interest rates in some global markets and a rise in the cost of living for many, all of which have a significant impact on the fixed income of retirees,” said Ms. Franklin.

“At CFA Institute, we believe financial professionals can serve as a force for good in society to support individuals through this complex time. This report provides insights on how retirement plans need to adapt or are adapting to the changing environment, and also makes recommendations for a range of reforms that can be implemented to improve the long-term outcomes from our retirement income systems,” she added.

The shift to defined contribution (DC) increases uncertainty for retirees

As employers continue to step away from the financial security which has been offered in DB plans, individuals bear the risks and opportunities before and after retirement. Unlike DB plans where an individual receives regular income payments for life upon retiring, typically DC plans provide individuals with a lump sum benefit at retirement. Additionally, many governments are considering reducing their level of financial support during retirement to ensure the country’s financial sustainability over the longer term.

The result is that many individuals will no longer be able to rely on significant financial support from their previous employers and/or government during their retirement years. Therefore, it is essential individuals make the best financial decisions at retirement to maximize the value of their available DC pension assets. Just as diversification is a key part to any investment scheme, individuals may also seek to diversify their retirement savings between regular income, appropriate protection and access to capital, as well as different sources of financial support including government, private pensions and individual savings.

“Households will have to consider what the right balance is between receiving a steady income, access to some capital and protection from future risks, given the many uncertainties faced by retirees,” said Dr. Knox.

“It is critical that we understand whether or not the retirement income systems around the world will be able to meet the needs and expectations of their communities for decades to come,” he continued. “There is no single or perfect answer – the best system is the one that helps individuals maintain their previous lifestyles into retirement. Governments, employers, policymakers, and the pension industry should use the full array of products and policies available so individuals can retire with dignity, confidence, and financial security.”

By the numbers

Iceland had the highest overall index value (84.7), closely followed by the Netherlands (84.6) and Denmark (82.0). Thailand had the lowest index value (41.7).

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 Iceland for adequacy (85.8) and sustainability (83.8), and Finland for integrity (93.3). The systems with the lowest values across the sub-indices were India for adequacy (37.6), Austria for sustainability (22.7), and the Philippines for integrity (30.0).

In comparison to 2021, Mexico showed the most improvement as a result of pension reform, which improved outcomes for individuals and pension regulation.

2022 Mercer CFA Institute Global Pension Index

System	Overall Grade	Overall Score	Adequacy	Sustainability	Integrity
Iceland	A	84.7	85.8	83.8	84.4
Netherlands	A	84.6	84.9	81.9	87.8
Denmark	A	82.0	81.4	82.5	82.1
Israel	B+	79.8	75.7	81.9	83.2
Finland	B+	77.2	77.5	65.3	93.3
Australia	B+	76.8	70.2	77.2	86.8
Norway	B+	75.3	79.0	60.4	90.3
Sweden	B	74.6	70.6	75.7	79.5
Singapore	B	74.1	77.3	65.4	81.0
UK	B	73.7	76.5	63.9	83.0
Switzerland	B	72.3	68.7	70.5	80.7
Uruguay	B	71.5	84.5	50.6	79.8
Canada	B	70.6	70.8	64.7	78.6
Ireland	B	70.0	75.9	53.5	83.7
New Zealand	B	68.8	64.0	64.7	82.1
Chile	B	68.3	60.0	70.3	78.9
Germany	B	67.9	80.5	44.3	80.9
Belgium	B	67.9	80.8	39.1	87.5
Hong Kong SAR	C+	64.7	61.5	52.1	87.6
USA	C+	63.9	67.5	61.2	61.7
Colombia	C+	63.2	65.2	55.3	71.3
France	C+	63.2	84.6	40.9	60.1
Malaysia	C+	63.1	57.2	60.2	76.9
Portugal	C+	62.8	84.9	29.7	73.9
UAE	C+	61.8	63.8	51.9	72.6
Spain	C+	61.8	80.0	28.7	78.9
Saudi Arabia	C	59.2	61.4	54.3	62.5
Poland	C	57.5	59.5	45.4	71.2
Mexico	C	56.1	63.1	57.1	43.6
Peru	C	55.8	54.7	51.5	63.7
Brazil	C	55.8	71.1	27.8	70.5
Italy	C	55.7	72.3	23.1	74.7
Austria	C	55.0	69.8	22.7	76.5
South Africa	C	54.7	44.2	49.7	78.4
Japan	C	54.5	58.0	44.5	63.0
China	C	54.5	64.4	39.3	60.0
Taiwan	C	52.9	42.0	53.2	69.8
Korea	C	51.1	40.1	54.9	63.5
Indonesia	D	49.2	39.3	44.5	71.5
Turkey	D	45.3	45.6	29.8	66.6
India	D	44.4	37.6	40.7	60.4
Argentina	D	43.3	55.6	29.4	42.9
Philippines	D	42.0	40.5	52.3	30.0
Thailand	D	41.7	41.3	36.4	50.0

About the Mercer CFA Institute Global Pension Index (MCGPI)

The MCGPI benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would provide more adequate and sustainable retirement benefits.

This year, the Global Pension Index compares 44 retirement income systems across the globe and covers 65 percent of the world’s population. The 2022 Global Pension index includes one new retirement income system – Portugal.

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 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), part of Monash Business School at Monash University, and Mercer, a global leader in redefining the world of work and reshaping retirement and investment outcomes.

For more information about the Mercer CFA Institute Global Pension Index, click here.

About Mercer

Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s approximately 25,000 employees are based in 43 countries and the firm operates in 130 countries. Mercer is a business of Marsh McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 83,000 colleagues and annual revenue of over $20 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit mercer.com. Follow Mercer on LinkedIn and Twitter.

About CFA Institute

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion of ethical behavior in investment markets and a respected source of knowledge in the global financial community. Our aim is to create an environment where investors’ interests come first, markets function at their best, and economies grow. There are more than 190,000 CFA® charterholders worldwide in more than 160 markets. CFA Institute has nine offices worldwide, and there are 160 local societies. For more information, visit www.cfainstitute.org or follow us on LinkedIn and Twitter at @CFAInstitute.

About the Monash Centre for Financial Studies (MCFS)

A research centre based within Monash University's Monash Business School, Australia, the MCFS aims to bring academic rigour into researching issues of practical relevance to the financial industry. Additionally, through its engagement programs, it facilitates two-way exchange of knowledge between academics and practitioners. The Centre’s developing research agenda is broad but has a current concentration on issues relevant to the asset management industry, including retirement savings, sustainable finance and technological disruption.

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Cassie Lenski

+1 469-841-8999

cassie.lenski@mercer.com

Source: Mercer

FAQ

What is the Mercer CFA Institute Global Pension Index 2022 report about?

The report ranks global pension systems, emphasizing the shift from defined benefit to defined contribution plans and its implications for retirees.

Which country topped the Mercer CFA Institute Global Pension Index 2022?

Iceland topped the index for the second consecutive year, with a score of 84.7.

What challenges do retirees face according to the 2022 Global Pension Index?

Retirees face increased financial risks due to the shift to defined contribution plans and potential reductions in government support.

How did Mexico perform in the 2022 Global Pension Index?

Mexico showed the most improvement in the index due to pension reforms enhancing outcomes and regulation.

What are the key recommendations from the Global Pension Index report?

The report recommends reforms to enhance retirement benefits and address the challenges posed by inflation and rising interest rates.