24 October 2016

Singapore sees improved score in Global Pension Index

Source: Mercer. Where various countries stand on the MMGPI.
Source: Mercer. Where various countries stand on the MMGPI.

Now in its eighth year, the Melbourne Mercer Global Pension Index (MMGPI) is a warning to governments across the globe to take immediate action, or be overwhelmed by ageing populations, declining birth rates and a lack of robust retirement systems. This year, the MMGPI looked at the impact of rapidly ageing populations, and the preparedness of countries’ retirement systems to deal with the significant financial pressures this presents.

Author of the report and Senior Partner at Mercer, Dr David Knox said the impact of longer life expectancies, combined by global declining birth rates, is much more significant than has been recognised by many governments and communities.

“This year’s report includes a projected old age dependency ratio which will raise alarm in many regions. The range of the ratio is stark – predicting that in South Africa there will be one retiree for every seven people of working age while in Japan the number drops to one retiree for every 1.44 people of working age by 2040,” he said.

Dr Knox said: “It is a political imperative that all countries, regardless of their size, and current standing on the MMGPI, implement the necessary policy changes to withstand future challenges presented by the globally ageing population.”

According to Professor Rodney Maddock, of the Australian Centre for Financial Studies, “We are living longer, living larger portions of their life in retirement and spending more in retirement, so we need to be well-placed to ensure fulfilling, adequately-funded retirements.”

The MMGPI shows the relative position of each country’s old age dependency ratio in respect to five key factors:

• The labour force participation of older workers aged 55 to 64

• The labour force participation of older workers aged 65 and over

• The increase in the labour force participation rate of 55 to 64 year olds from 2000 to 2015, which determines whether the country is actually experiencing more people working at older ages

• The projected increase in the retirement period from 2015 to 2035, allowing for the expected increases in life expectancy and the projected increase in the normal eligibility age for social security or the publicly funded pension

• The level of pension fund assets expressed as a percentage of GDP in each country.

Dr Knox said although these indicators are not foolproof, they are indicative of developments which impact sustainability and community confidence in the provision of future retirement benefits.

The graph below plots the relative position of each country in respect of both the projected old age dependency ratio and the impact of the five mitigating factors.

“Indonesia is an interesting example, with its relatively low old age dependency offset by a comparatively high labour force at older ages and a significant increase in the retirement age,” said Dr Knox.

Life expectancies at birth have increased by seven to 14 years in most countries during the last 40 years. Even more significantly, the increased life expectancy of a 65-year-old over the last 40 years ranges from 1.7 years in Indonesia to 8.1 years in Singapore.

“Without changes to retirement ages and ages for eligibility to access social security and private pensions, there will be increasing pressure on global retirement systems to the detriment of the financial security provided to older members of our society,” Dr Knox said.

Ranking seventh globally, Singapore retains its highest ranking in Asia for the fourth consecutive year, and sees a healthy increase in both adequacy and sustainability scores. The increase in Singapore’s score is attributable to an increased level of financial support provided by the government to the poor, and an increased level of pension assets and labour force participation at older ages, Mercer said.

Singapore’s overall score increased from 64.7 in 2015 to 67.0 in 2016, moving it closer to the ‘A’ grade, which is given to pension systems that score above 80. “While Singapore’s retirement income system remains amongst the best in Asia and saw a significant improvement in score from 2015, we are not yet the best globally. Creating incentives for corporate retirement plans, opening CPF* to non-residents and continuing to increase the labour force participation rate as life expectancies rise, will improve Singapore’s score in the future.” said Neil Narale, Singapore Mercer Marsh Benefits Leader for Mercer.

“However, Singapore is on the right track, having implemented enhanced guaranteed investment returns for older members and the introduction of the Silver Support Scheme to help low income retirees in 2016.”

The MMGPI acknowledges that there are areas for improvement in all countries’ retirement income systems. Possible measures to further enhance Singapore’s system include:
  • Reducing the barriers to establishing tax-approved group corporate retirement plans 
  • Opening CPF to non-residents (who comprise more than one-third of the labour force) 
  • Increasing the labour force participation rate at older ages as life expectancies rise 
  • Increasing exposure to growth assets

“Employers continue to be interested in sponsoring a corporate retirement plan. Policies that create incentives to promote employer participation would further increase Singapore’s grade in the future,” said Narale. “In addition, the recently announced CPF Lifetime Retirement Investment Scheme is welcome addition to CPF, which should improve exposure to growth assets in the future.”

The MMGPI is the world’s most comprehensive comparison of global pension systems, and this year it covered close to 60% of the world’s population, measuring 27 systems against more than 40 indicators to gauge their adequacy, sustainability and integrity. It included diverse countries across the Americas, Europe and Asia-Pacific regions, this year examining Malaysia and Argentina for the first time.

Supported by the Victorian Government and bringing together the best minds in Australia’s financial services and research expertise fields, the Index is testament to Victoria’s dominant position in the superannuation* and financial services sectors.

"With a strong financial services sector and deep talent pool, Victoria continues to lead the way in funds management, a central part of any superannuation and annuities system,” said Victorian State Minister for Industry and Employment, Wade Noonan.

"Through our Future Industries Fund, the Victorian Government is working closely with the financial services sector to deliver continued expansion, investment and jobs growth." 

*Central Provident Fund (CPF) refers to the pension fund system used in Singapore. Supernnuation is the pension fund system used in Australia.