MMGPI 2016 Outcomes. Dr David Knox Senior Partner, Mercer

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2 Editions

3 2016 Top 3 Rankings

4 MMGPI 2016 Outcomes Dr David Knox Senior Partner, Mercer

5 Every retirement system is different! Insurance Private Public Pensions DC Indexation Assets RETIREMENT INCOME SYSTEMS Lump sums Employers All systems have many features How could we even begin to compare them? Governance DB Members

6 There is no perfect pension system Private Insurance Pensions DC Assets RETIREMENT INCOME SYSTEMS Pension systems face considerable social and economic challenges in the wake of the economic crisis and given the ongoing population ageing. Public Governance Indexation DB Lump sums Members Employers - OECD Too important to be ignored.

7 What is the ideal retirement system? WORLD BANK MULTI-PILLAR APPROACH Basic public pension Public mandatory contributory system linked to earnings Private, mandatory, fully-funded system Voluntary fully-funded system Support outside formal pensions

8 What is the ideal retirement system? WORLD BANK MULTI-PILLAR APPROACH Basic public pension Public mandatory contributory system linked to earnings Private, mandatory, fully-funded system Voluntary fully-funded system Support outside formal pensions Age pension N.A. SG Other super Varied

9 We begin by asking the fundamental questions ADEQUACY What do you get? SUSTAINABILITY Can it keep delivering? INTEGRITY Can it be trusted?

10 Calculating the Melbourne Mercer Global Pension Index Benefits Savings Tax support Benefit design Growth assets Coverage Total assets Contributions Demography Government debt Regulation Governance Protection Communication Costs

11 Adequacy ADEQUACY 1 Netherlands 78.2 Minimum (or base) pension Net replacement rate Benefit design Non-super savings Level of growth assets 2 3 Ireland 76.2 Australia 76.0

12 Sustainability SUSTAINABILITY 1 Denmark 85.3 Coverage of private pension plans Level of pension assets as % of GDP Demographic issues Mandatory contributions with funding Labour force participation rate Net government debt 2 3 Netherlands 77.0 Australia 74.1

13 Integrity INTEGRITY 1 Finland 91.5 Regulation of private pension plans Governance requirements national and pension plans Protection of members benefits Communication to members Costs of the system 2 3 Netherlands 87.7 Australia 86.1

14 Changes from 2015 to 2016 Two new countries Argentina and Malaysia now 27 countries OECD Net replacement rates Introduction of a 15% annuity cost for DC countries Pension indexation changes New governance questions Independent trustees or employee representation? Extended use of World Bank s Worldwide Governance Indicators Several other tweaks and revisions

15 ARG JPN IND MEX CHN KOR IDN ZAF ITA AUT POL BRA MYS FRA USA DEU GBR IRL CHL CAN SGP CHE SWE FIN AUS NLD DNK Overall 2016 results 100 A Grade 80 B Grade B+ 60 D Grade C Grade C+ C

16 The big improvers are in Asia

17 Australia s results and the future Overall index value: 79.6 to 77.9 Reduction in net replacement rate, offset by higher assets No impact yet of tougher assets test Recommendations Introduce requirement for an income stream Adjust pension age with life expectancy Increase preservation age Continue to increase labour participation rate at older ages

18 Global themes for improvement Increase relevant retirement/pension ages Promote higher labour force participation rates at older ages Encourage/require additional savings Increase coverage of employees and/or the self-employed Reduce leakage from the system before retirement Review the indexation of the public pension Improve the governance and transparency of private pensions

19 2016 special chapter T H E V E R Y S I G N I F I C A N T I M P A C T O F A G E I N G P O P U L AT I O N S

20 South Africa Denmark Poland Sweden Netherlands USA United Kingdom Argentina Canada Switzerland Malaysia Ireland Germany France Finland Japan Austria Australia Italy Indonesia Singapore Mexico Brazil China Chile India Korea We are ageing fast! Improvements in life expectancy at birth over 40 years

21 Indonesia South Africa India Malaysia Denmark China Argentina Poland Mexico USA Netherlands Sweden Brazil Canada United Kingdom Ireland Switzerland Germany Austria France Italy Finland Australia Chile Japan Korea Singapore We are ageing fast! Improvements in life expectancy at age 65 over 40 years

22 And not having many kids Countries with a current total fertility rate above Indonesia India 3.0 South Africa Argentina Mexico 2.0 Ireland France

23 and there are implications! 75.0 Some projected old age dependency ratios Netherlands UK Switzerland Denmark Finland Austria France Sweden Italy Germany Japan

24 Increasing old age dependency ratios* over 27 countries * Measured as the population aged 65 and over, divided by the population aged 20 to 64, multiplied by 100.

25 Some possible offsets for retirement systems Labour force participation rate for Labour force participation rate for 65+ Increase in the participation rate for Projected increase in the retirement period over 20 years Pension fund assets as a % of GDP

26 LOW Current impact of mitigating factors HIGH How is each country going? LOW Projected old age dependency ratio in 2040 HIGH

27 Conclusion Prof Rod Maddock Interim Director Australian Centre for Financial Studies

28 Handouts