Mercer CFA Institute Global Pension Index 2023 sees Australia in fifth place 

Lack of retirement income policy holds Australia back from A grade

 

• Index compares 47 retirement income systems, covering 64 per cent of the world’s population
• Australia’s retirement income system ranks fifth in 2023 Index, achieves B+ grade
• Compulsory retirement income stream could advance Australia’s result

Mercer and CFA Institute have released the 15^th annual Mercer CFA Institute Global Pension Index (MCGPI), with Australia’s retirement income system ranking fifth among systems around the globe – up from sixth place in 2022.

Australia’s retirement income system again received a B+ grade, while the top systems – Netherlands, Iceland, Israel and Denmark – were found to be first-class systems, earning them an A grade.

“The average age of populations around the world continues to rise in many markets, mainly more mature markets,” said Margaret Franklin, CFA, President and CEO, 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.

“More and more often, individuals will have an increasingly important role to play as it relates to their own retirement. As investment professionals, we need to help them prepare for that. 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.”

Australian superannuation balances are forecast to increase from 116 per cent of Australia’s gross domestic product (GDP) during 2022–23 to approximately 218 per cent of GDP by 2062–63¹, and superannuation will become the primary source of retirement income for many future retirees.

Senior Partner at Mercer and lead author of the MCGPI, Dr. David Knox said: “Australia is being held back from achieving an A grade status because there is no requirement that a portion of super savings be taken as an income stream.

“From the Retirement Income Review to the Retirement Income Covenant, and the work to define an objective of superannuation, there have been some excellent developments in the retirement income space.

“But, we still don’t compel Australians to take some of their super as an income stream. Retirees in A grade systems receive regular income in retirement and are therefore encouraged to spend knowing that their income will never run out. This is not yet the mindset in Australia, where we know that many retirees are underspending.

“If we are to be among the best retirement income systems in the world and better support ageing Australians to live a life of dignity and confidence, we must introduce a compulsory income stream for all retirees with a reasonable super balance,” Dr. Knox said.

In addition to identifying the world’s top pension systems, the report examines the potential for 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,” commented Dr. Knox. “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.”

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,” Dr. Knox continued.

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).

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.

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 47 retirement income systems across the globe and covers 64 per cent of the world’s population. The 2023 Global Pension index includes three new retirement income systems – Botswana, Croatia, and Kazakhstan.

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.

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 nearly 200,000 CFA® charterholders worldwide in more than 160 markets. CFA Institute has ten offices worldwide, and there are 160 local societies. For more information, visit www.cfainstitute.org or follow us on LinkedIn and Twitter at @CFAInstitute.

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.

¹ Source: 2023 Intergenerational Report