Mercer index highlights challenges facing pensions
Pensions in Asia and globally have improvements to be made, particularly as pensions systems shift from a defined benefits to defined contributions scheme and withdrawals during the pandemic are likely to have long-term effects, Mercer representatives said.
Several challenges stand in the way of ensuring the adequacy of retirement incomes, said Mathias Cormann, secretary general of the Organisation for Economic Co-operation and Development (OECD) during the Mercer webinar on Tuesday (October 18).
These include disparities, for instance between women and men, and leakages from pension savings, he said during the webinar that discussed the Mercer CFA Institute Global Pension Index (MCGPI).
“Early access to retirement savings should only be permitted as a last resort,” he said. Early withdrawals allowed during the pandemic helped individuals relieve temporary financial difficulties, but also resulted in people bleeding part of their retirement savings, he said.
“The lesson we can draw from this experience is that clear conditions on these withdrawals are crucial to prevent them from compromising future financial security,” Cormann added.
Pensions liquidated part of their investment portfolios during the pandemic to cater to these withdrawals, and any liquidity strain they faced has now passed. However, these will likely have a long-term impact on the potential growth of retirement sums, said Janet Li, Asia Wealth Business Leader at Mercer.
“This will also have adverse effects on adequacy, which, in the context of the MCGPI, considers the benefits provided to the poor and a range of income earners as well as several design features and characteristics which enhance the efficacy of the overall retirement income system,” she told AsianInvestor.
“Additional amounts may need to be injected into the system to bring the coverage up to its original level. This can be achieved by methods like additional voluntary contributions,” she added. “That said, if further withdrawals are allowed post-Covid, this is going to impose further stress on the adequacy and sustainability of the retirement funds.”
The trending shift of pension systems moving from a defined benefits to defined contributions (DC) scheme has also increased uncertainty for retirees, as they are now more responsible for the performance of their investment strategies.
“With greater individual responsibility required for DC schemes, people can no longer expect their retirement to be fully funded by the state or their employer. This may promote a higher degree of engagement from individuals, who now have greater visibility over their own money. But it also highlights a need for more education within this space,” Li said.
The OECD’s Cormann also noted that retirement income disparities existed between full-time and gig or freelance workers. In response to a question about whether Singapore’s Central Provident Fund scheme should open to gig economy workers and non-residents, Joelle Fong, assistant professor of the LKY School of Public Policy at the National University of Singapore said: “Our system and most systems around the world already caters to some of these self-employed workers and freelance workers, for example, piano teachers and part-time basketball coaches.”
“The question is “How can we nudge them to contribute a more substantial percentage of their monthly wages into the system and trust the system?’,” she said during the same webinar. “So I think going forward, in order to encourage these people to enrol in these formal systems, which can help protect them in their old age, that needs to be greater efforts to foster trust and community trust in these pension systems.”
The index, released on October 11, used the weighted averages of adequacy, sustainability, and integrity. Australia and Singapore’s pension systems ranked top in Asia Pacific, with B+ and B grades respectively. Hong Kong and Malaysia came next with C+ ratings.