2022 Global Pension Index ranks Ireland in 14th place - Mercer / CFA Institute 

• Ireland’s pension system receives a B grade and ranks 21st for sustainability, 8th for integrity, and 14th for adequacy
• Ireland’s relatively low sustainability score is a key factor in its overall rating
• Iceland tops the list for 2nd year in a row
• Index compares 44 retirement income systems, covering 65 per cent of the world’s population
• As more employers shift from defined benefit to defined contribution plans, retirees will take on greater financial risks

Dublin, October 11, 2022, Ireland’s pension system ranking has dropped one place to 14^th out of 44 countries in the 2022 Mercer CFA Institute Global Pension Index (MCGPI).

Ireland remains ahead of some of the larger European countries such as Germany (17th), France (22nd), and Spain (26th). Iceland’s retirement income system has once again topped the rankings, with the Netherlands and Denmark retaining second and third places respectively.

Ireland’s retirement system received a B grade, with the overall Irish index value increasing from 68.3 in 2021 to 70.0 in 2022, primarily due to increases in net replacement rates (the percentage of pre-retirement earnings covered by the State Pension).

The MCGPI is a comprehensive study of 44 global pension systems, accounting for 65 per cent 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.

Ireland’s overall ranking is primarily affected by its low sustainability rating, ranking in 21^st place for this, compared to 14^th for adequacy and 8^th for integrity. The government’s recent approval of plans to introduce a system of automatic pension enrolment is positive. The new system is still targeted for commencement in early 2024, although a number of implementation steps remain to be completed.

Removing this uncertainty and delivering the proposed system will improve both Ireland’s sustainability and adequacy ratings. It is notable that all other countries that received either an A or B+ ranking in the 2022 index have some form of mandatory pension system in place.

Another factor affecting Ireland’s sustainability rating is the government’s approach to the State Pension age. In its October 2021 report, the Pensions Commission recommended a phased increase in the State Pension age to 68 years by 2039, to help address the cost impacts of an ageing population.

While the government recently announced that the State Pension age will remain at 66, it also announced some additional reforms to the State Pension system. These include introducing rights for employees to remain in employment until their State Pension age, and a new system of flexible retirement, whereby employees can opt to defer payment of the State Pension up to age 70 in return for a higher pension. The government also intends to address the long-term sustainability of the State Pension system through incremental increases in social insurance rates over time. The potential impact of this policy approach on the long-term sustainability of the system is not yet known.

Ireland’s retirement income system comprises a flat-rate basic social security pension and a means-tested benefit for those without sufficient social insurance contributions. Voluntary occupational pension schemes and personal pension schemes provide supplementary income in retirement and cover about 66 per cent of the current working population.

The 2022 MCGPI report also notes that the overall index value for the Irish system could be increased by:

• continuing to increase coverage of employees in occupational pension schemes by introducing the new mandatory enrolment arrangements, thereby increasing the level of contributions and assets
• implementing government plans to introduce a minimum level of mandatory contributions into a retirement savings fund, thereby increasing the level of assets
• increasing the labour force participation rate at older ages as life expectancies rise
• providing greater protection of members’ accrued benefits.

Commenting on this year’s report, John Mercer, CEO of Mercer Ireland said:

“Ireland’s retirement income system continues to compare relatively well with our peers in a global context. While Ireland’s ratings for adequacy and integrity remain strong and improving, once again there are questions to be addressed in relation to the overall cost and sustainability of the Irish retirement savings system.

A system of automatic pensions enrolment in Ireland is expected to have a significantly positive impact on overall supplementary pensions coverage, and we have seen the success of these systems in countries where they have been introduced. Once such a system is introduced here, we can expect Ireland’s index rating to improve significantly. We urge the government to do all it can to ensure that the new system is introduced by 2024 as planned.

The long-term sustainability of the State Pension system also remains a concern, as indicated by Ireland’s low rating in that category. The recent government policy announcements on reforming the State Pension rejected the Pensions Commission’s recommendation of a phased increase in State Pension age. It remains to be seen how this decision will impact the sustainability of Ireland’s retirement savings system, notwithstanding the other reform measures which have been announced.

Overall, government policy should focus on three key areas to improve sustainability into the future; continue to take measures to increase supplementary pension coverage, improve overall benefit security, and incentivise saving.”

As more employers globally have stepped away from defined benefit (DB) pension plans towards defined contribution (DC) plans, the study also investigates the challenges and opportunities of DC plans where individuals bear increased financial responsibility. 

Most occupational schemes in Ireland are now DC. Just over 500 DB plans remain in operation, of which around 65 per cent remain open to accrual of benefits.

The pace at which employers have moved from DB to DC schemes has been steady over the past few years.  The average annual rate of shift from DB to DC has been around 4 per cent since 2014, according to Pensions Authority data. This trend is expected to continue and may even be accelerated by the new IORP II regulatory regime, which has introduced a range of stringent governance and risk management requirements. Employers now have to consider not just the ongoing financial risks associated with funding DB benefits, but also the increasing regulatory compliance risks that scheme trustees face.

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.

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.

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 within DC plans. Unlike DB plans where an individual will receive a regular retirement income for their lifetime based on a salary and service-related formula determined in advance, in a DC plan the amount of any fixed income option available at retirement is more uncertain and will depend on the size of the fund at retirement.

Additionally, while not currently the case in Ireland, 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 maximise 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.

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 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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