US Retirement System Slips in Global Ranking, According to Mercer CFA Institute Global Pension Index

• Mercer CFA Institute Global Pension Index sees new entrant Iceland top the list
• Index compares 43 retirement income systems, covering two-thirds of world’s population
• US increases index value score, but slips in ranking from 18^th to 19^th place
• Causes of gender pension gap mixed, with all systems carrying weaknesses

Iceland’s retirement income system has been named the world’s best in its debut in the 13^th annual Mercer CFA Institute Global Pension Index (MCGPI). The Netherlands and Denmark have taken second and third places respectively in the rankings, after a decade of competing for the top spot. The study also reveals that there is much that pension systems can do to reduce the gender pension gap – an issue inherent in every system.

The US index value increased from 60.3 in 2020 to 61.4 in 2021, primarily due to an increase in individual’s net replacement rates, higher household savings, and an increase in the value of the assets held in private pension arrangements. While COVID-19-related legislation passed by Congress provided some relief to individuals and employers in 2020 and 2021, the resulting increases in government debt and retirement asset leakage caused by providing individuals access to funds before retirement were negative side effects. These results, coupled with the projected depletion of social security by 2034, will have a significant impact on the ability for the US pension system to adequately provide for its retirees in the future.

The MCGPI is a comprehensive study of global pension systems, accounting for two-thirds (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 provide more adequate and sustainable retirement benefits. The top three systems, all receiving an A-grade, were sustainable and well-governed systems, providing strong benefits to individuals.

President and CEO at CFA Institute, Margaret Franklin, CFA, said it was more important than ever to understand how retirement benefits could be improved.

“The pandemic has exacerbated socio-economic inequality in many parts of the world. And, from a long-term investment perspective, we’re operating in an extremely challenging environment with historically low interest rates and, in some cases, negative yields clearly impacting returns,” Franklin said.

“Compounding the issue, the gender pension gap presents additional and urgent challenges, with women facing their retirement years with fewer benefits. With these concerns in mind, the promise of a secure retirement depends on policymakers and industry stakeholders taking collective action to examine the strengths and weaknesses of pension systems, with the purpose of delivering better retirement benefits to every individual,” she said.

Katie Hockenmaier, US Defined Contribution (DC) Investments Research Director, Mercer, added, “From a US perspective, Congress has acknowledged the retirement hurdles Americans face. In 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE) was passed and focuses on expanding coverage and retirement income which will have a particular impact on DC plans. Since its passage, there have been a number of legislative proposals from Congress commonly dubbed ‘SECURE 2.0’ that span from enhancing retirement savings through mandated auto-enrollment to providing provisions for debt management with student loan matching payments. It is yet to be seen if these proposals will turn into law and whether they’re enough to move the needle.”

Gender differences in pension outcomes

Women are still facing retirement with substantially less saved in their pensions than men and the MCGPI’s analysis highlighted that there was no single cause of the gender pension gap worldwide, despite all regions having significant differences in the level of retirement income across genders.

Pay equity is a major contributing factor to the gender pension gap. Women also tend to have less time in the workforce compared to men, largely due to family leave policies, or lack thereof, and greater expectation for women to manage caregiving and family commitments, which ultimately means less time for accumulation of savings for retirement. As a result, they tend to become self-employed or hold more part-time positions, which aren’t always eligible for retirement program participation, or leave the workforce all together. Women also have longer life expectancies and are more likely to experience poverty in their old age than men; therefore requiring more capital to get them through their retirement years.

“The causes of the gender gap in US retirement savings vary, but this year’s Global Pension Index found that retirement system design flaws were aggravating the issue,” added Hockenmaier. “While legislation like the SECURE Act may help address some factors contributing to the gender gap in the US, with pension savings heavily reliant on employer-sponsored retirement plans, employers in addition to regulators will have a large role to play to bridge the gap.”

There are a number of actions that regulators and employers can take. SECURE Act is paving the way with expanding retirement plan coverage and mandating eligibility for part-time workers, but enacting a federal parental leave program would go a long way for millions of American women.

“Employers should focus on pay equity so that their female employees are not at a disadvantage from the get go. Employers can also reduce eligibility restrictions for individuals to join or qualify for employment-related retirement plans. According to Mercer’s research, paid time off for caregiving grew sharply in 2021, but only roughly 60 per cent of US employers provide this benefit. Women often still have to take time off without pay, or have to rely on state-provided benefits. Caregivers provide an invaluable service to our communities and shouldn’t be penalized in their retirement years for taking time out of the formal workforce,” Hockenmaier said.

By the numbers

Iceland had the highest overall index value (84.2), closely followed by the Netherlands (83.5). Thailand had the lowest index value (40.6). In comparison to 2020, China and the UK showed the most improvement as a result of significant pension reform, which improved outcomes for individuals and pension regulation.

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 (82.7), Iceland for sustainability (84.6) and Finland for integrity (93.1). The systems with the lowest values across the sub-indices were India for adequacy (33.5), Italy for sustainability (21.3) and the Philippines for integrity (35.0).

The US’s index value was 61.4, increasing its score across adequacy and sustainability sub-indexes, but decreased in the integrity sub-index. The US could increase its score by raising the minimum pension for low-income pensioners, improving the vesting of benefits for all retirement plan members and maintaining the real value of retained benefits through to retirement. Another strategy is to introduce a requirement that part of the retirement benefit must be taken as an income stream, which will ultimately reduce pre-retirement leakage by limiting access to funds before retirement.

2021 Mercer CFA Institute Global Pension Index

About the Mercer CFA Institute Global Pension Index

The Global Pension Index 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.

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.

This year, the Global Pension Index compares 43 retirement income systems across the globe and covers two-thirds (65 per cent) of the world’s population. The 2021 Global Pension Index includes four new systems – Iceland, Taiwan, UAE and Uruguay.

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.

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 78,000 colleagues and annual revenue of over $18 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 www.mercer.com. Follow Mercer on Twitter @Mercer.

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 175,000 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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