Retirement adequacy and sustainability suffer in coronavirus pandemic - report

Many retirement systems sagged under the weight of the coronavirus pandemic in areas such as adequacy and sustainability, shows Mercer's latest annual ranking, although governance improved.

The 2020 Mercer CFA Institute Global Pension Index rankings — which award up to 40 points for adequacy, 35 points for sustainability and 25 points for governance — were little changed from the year before, even as over half of the 37 retirement systems Mercer surveyed scored lower.

But if the year-on-year changes were fairly subtle — the U.S., for example, edged down to 60.3 from 60.6 the year before while Japan rose slightly to 48.5 from 48.3 — the ripple effects from the COVID-19 crisis promise to be more far-reaching, Mercer executives warned in a report of the rankings.

"We are now living in a very different, and more uncertain, world," where challenges previously outlined will become more difficult to address, David Knox, a Melbourne-based senior partner with Mercer, said in the report.

Significant growth in government debt will undermine social protection systems while the growing importance of the "gig" economy will threaten coverage levels, he noted.

Meanwhile, "changes in capital markets with near-zero or negative interest rates raise significant questions about the most appropriate investment strategies for pension funds," he said.

The Netherlands extended its lead at the top of the latest rankings, with its score rising to 82.6 from 81 the year before, due — the Mercer report said — to an increase in that country's minimum pension and an improvement in the Organization for Economic Cooperation and Development's tally of the system's net replacement rate.

Denmark likewise held onto its position, remaining in second place with its score rising to 81.4 from 80.3.

The retirement system of Israel – included in the survey for the first time – debuted in third place with a score of 74.7. That pushed Australia into fourth place with 74.2 points, down from 75.3 the year before.

The average overall index value for all 37 retirement systems covered by the survey came in at 59.2, down marginally from 59.3 the year before.

Of the three main criteria covered, adequacy — which takes things like benefit levels, government support and system design into account — slipped to 60.2 from 60.6 the year before.

Sustainability — which takes pension coverage, demography, public expenditures, government debt and economic growth into account — likewise dropped to 49.9 from 50.4.