Saudi Arabia’s pension system improves on back of increased labor participation - Mercer CFA Institute Global Pension Index 2023 

• Index compares 47 retirement income systems, covering 64 per cent of the world’s population
• Saudi Arabia improves score to 59.5  

RIYADH, October 17, 2023 — Mercer and CFA Institute have released the 15^th annual Mercer CFA Institute Global Pension Index (MCGPI). The pension system of the Kingdom of Saudi Arabia improved its score, ranking 28th out of 47 retirement systems in the annual Mercer CFA Institute Global Pension Index (MCGPI). Globally, The Netherlands’ retirement income system has regained the top spot on the list, with Iceland and Denmark taking second and third places respectively.

The Saudi retirement income system was benchmarked against global peers across three key areas of focus: adequacy, sustainability, and integrity. Saudi Arabia’s overall index value improved from 59.2 in 2022 to 59.5 in 2023, primarily due to an increase in its sustainability score which went from 54.3 to 54.9. The sustainability of the Kingdom’s pension system has been bolstered in recent years due to an increased labor force participation rate, with the number of women with jobs nearly doubling in the last five years, and by the mandatory contributions set aside for retirement benefits as a percentage of annual compensation by both employee and employer. Despite the improvement, the study suggests further increasing the state pension age over time to strengthen its sustainability.

Robert Ansari, Mercer's Head of Investment and Retirement for IMEA, stated: “Included in the index for a sixth year, Saudi Arabia’s index score has increased for 2023 once again faring better than a number of more established global peers. With two thirds of its population under the age of 30 and continued population growth, the introduction of private pension plans as a complementary retirement program in the Kingdom will reduce the pressure on the existing social security programmes and enhance the overall retirement income. It will also serve as a further mechanism to attract and retain talent in a buoyant job market and deliver overall financial well-being for its citizens.”

The study revealed a few key areas that require development in the country’s pension system including, increasing the minimum level of support provided to the poorest aged individuals, along with increasing the state pension age over time. The study called for increasing the labor force participation rate at older ages as life expectancies rise and improving the required level of communication to members from private pension arrangements.

“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 globalization. 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.” 

In addition to identifying the world’s top pension systems, the report examines the potential of 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 Senior Partner at Mercer and lead author of the study, Dr. David 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). Although the Netherlands is currently undertaking significant pension reform, the system is well-positioned to provide excellent benefits amid the move from a collective benefit structure to a more individual defined contribution approach.

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 Portugal for adequacy (86.7), Iceland for sustainability (83.8), and Finland for integrity (90.9). The systems with the lowest values across the sub-indices were South Korea for adequacy (39.0), Austria for sustainability (22.6), and the Philippines for integrity (25.7).

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.