A report released earlier this month that rates and compares the world’s most prominent pension systems offers a grim overall conclusion: most pension systems are facing unprecedented challenges as government debts balloon and populations grow disproportionately older, with some of the most advanced retirement systems showing the worst signs of strain. Reforms will be necessary, warns the report, to ensure pension systems’ stability.
Mercer, the New York-based global consulting and investment firm, collaborated with the Australian Centre for Financial Studies on the report – called the Melbourne Mercer Global Pension Index – which rated 16 pension systems on 40 indicators to judge each system’s sustainability (staying power), adequacy (ability to provide for its retirees), and integrity (trustworthiness). Each system received a score between 1 and 100; the highest score granted was 77.9, and it went to the Netherlands.
With a score of 58.1, the U.S. finished tenth out of the 16 ranked countries, finding itself sandwiched between Brazil and Singapore. According to Dr. David Knox, a senior partner at Mercer and lead author of the report, the most significant dampeners on the U.S. retirement system’s score are its rapidly aging workforce, an over-reliance on Social Security (less than half the U.S. private-sector workforce is enrolled in a retirement plan, he points out), and poor prevention of “leakage” from retirement plans (he believes the best pension systems impose rules that prohibit individuals from borrowing from their plan, and require that the pension be delivered as an income stream in retirement, rather than offering the option of a lump sum).
“In the U.S., since less than half of private sector employees are enrolled in a pension system, Social Security is obviously shouldering a big part of the burden,” Knox says. “One of the longer-term goals, we believe, should be to gradually reduce the Social Security burden and to move it into the private sector. Because we really want a system in which all pillars – government, employers and individuals – are contributing.”
The report’s suggested reforms for the U.S. system include raising the retirement age and reducing access to funds to prevent pre-retirement leakage, to promote more individual saving.
For the most part, the report didn’t examine how the systems were investing as it doled out its scores – only one of the 40 indicators addressed this, by noting what proportion of the portfolio’s capital were in growth assets like equities, and giving top marks for 50 percent to 60 percent. But a primary source for pension funds’ recent woes has been directly tied to investments, and the market’s ups and downs: In fact, an early-October report from Mercer said that the aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $134 billion during September – bringing funding levels to a post-World War II low. Mercer attributes the decline in funded status to a 7 percent drop in equities and a fall in yields on high-quality corporate bonds during the month.
Keith Ambachtsheer, who served as an advisor on the Melbourne Mercer Global Pension Index, and is the director of the International Center for Pension Management in Toronto, says that the annual report should eventually look more closely at how pension systems invest. While he agrees with the major conclusions of the report (“The point about working longer, that’s just one of the realities,” he says. “When the demographics change, you have to change with them”), he says that pension funds have even bigger, more systemic issues to address as they look to improve the sustainability, adequacy and integrity not only of their own programs, but of the wider economic system they exist within.
“The pension fund sector can actually play a much more proactive role in redesigning and refocusing capitalism than they have to date,” Ambachtsheer says. In other words, he explains, long-term investment priorities should supplant short-term ones, pension systems could think about how to use retirement savings to fill the country’s infrastructure deficits, managers of retirement systems could take a harder line on corporations when it comes to controversial areas like share buyback programs that ultimately lose money. “There are a whole lot of longer-term questions that the pension fund sector could address in rethinking what investment means.”
