Australia came in at fourth on the Mercer CFA Institute Global Pension Index this year, overtaken by Israel in the third spot.
The index report noted the decision by some countries, including Australia, to allow temporary access to pension savings in response to the pandemic has materially impacted the adequacy, sustainability and integrity of those pension systems.
Australia had achieved an index value of 74.2 overall, slipping from its score for the year before of 75.3. The nation also ranked 14th for retirement income adequacy.
The top retirement systems in the index, the Netherlands and Denmark, have not permitted early access to pension assets, Deep Kapur, director of the Monash Centre for Financial Studies commented. The Netherlands retained its top position, with its value of 86.2, while Thailand had the lowest score (40.8).
Dr David Knox, senior partner at Mercer and lead author of the study commented: “Each of the three countries ranked above Australia – The Netherlands, Denmark and Israel – has a contribution rate into their funded pension arrangements of 12 per cent or higher, which sets aside more money for the future.
“Unlike the means-tested age pension in Australia they all have a universal state pension, which means, together with higher contribution rates, their replacement rates, as calculated by the OECD are higher than Australia’s.”
Meanwhile CFA Institute vice chair Maria Wilton said while Australia ranks highly for system integrity and sustainability, it has room to improve for adequacy.
“With COVID-19 impacting the government fiscal position for many years to come, it is logical to consider addressing this through private provision and increasing the superannuation guarantee (SG) contributions rate – as is already legislated – rather than hoping for increases in the government funded age pension,” Ms Wilton said.
The Australian Institution of Superannuation Trustees (AIST) raised the alarm at Australia’s fall, with chief executive Eva Scheerlinck calling on the government to address the gap in retirement savings created by the COVID pandemic and the early release scheme.
“Previous analysis by Mercer and AIST has shown that low paid, young Australians will bear the brunt of an estimated $100 billion shortfall in retirement savings due to the COVID pandemic,” Ms Scheerlinck said.
“The COVID early release scheme unfortunately forced many people to choose between poverty now or poverty in retirement. Today’s release from Mercer confirms that poverty in retirement is a real possibility for millions of Australians.”
Dr Knox also noted the COVID crisis had led to reduced pension contributions, lower investment returns and higher government debt in most countries.
“Inevitably, this will impact future pensions, meaning some people will have to work longer while others will have to settle for a lower standard of living in retirement,” Dr Knox said.
“It is critical that governments reflect on the strengths and weaknesses of their systems to ensure better long-term outcomes for retirees.”
But even before COVID, many public and private pension systems around the world were under pressure to maintain benefits, Margaret Franklin, president and CEO at the CFA institute commented.
The report also found that COVID has increased gender inequality in pension provision.
“That gap is expected to widen further in many pension systems, particularly in the hardest hit sectors where women represent more than half of the workforce, such as hospitality and food services,” Dr Knox said.
Measuring the likelihood that a current system will be able to provide benefits into the future, the average sustainability sub-index score dropped by 1.2 in 2020, due to the negative economic growth across most economies.
