Canada’s retirement system jumped one spot to ninth place in Melbourne Mercer’s annual global pension index.
Comparing 37 global retirement systems, the report found the Canadian system showed improvement partly due to the growth in assets under the Canada Pension Plan and the Quebec Pension Plan.
It also demonstrated a link between the increasing household debt in developed and growth economies, as well as the rise in assets held by their government pension funds. This so-called wealth effect suggests that, as pension assets increase, people within these economies feel wealthier and are subsequently more likely to borrow.
“As the wealth of an individual grows, whether it be in home ownership, investment portfolios or their retirement savings, so does their comfort with amassing debt,” said David Knox, a senior partner at Mercer and author of the study, in a press release. “The evidence suggests on a global basis, for every extra dollar a person has in pension assets, their net household debt rises by just under 50 cents.”
Broadly, the report found global pension systems are experiencing certain common challenges. “Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens,” said Knox. “It’s imperative that policy-makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future.”
It used 40 indicators to measure the adequacy, sustainability and integrity of each retirement system, which it measures distinctly using sub-indexes. Canada maintained its B rating, with an overall index value increase to 69.2 for 2019 from 68 in 2018. The Netherlands came out as the highest on the index with a score of 81, while Thailand had the lowest at 39.4.
“While Canada’s retirement system continues to hold steady, large risks are on the horizon,” said Jean-Philippe Provost, a senior partner in Mercer Canada’s wealth business.
Specifically, the report noted Canada currently has a US$2.5 trillion gap between current retirement savings and future needs. This is exacerbated by the limited access to corporate pension funds, as well as turbulent outlook for long-term investing.
The sustainability sub-index highlighted the potential weakening of many retirement systems as defined contribution pension plans become more popular. The report recommended encouraging or requiring an increased level of savings, raising state pension ages gradually and enabling people to stay in the workforce longer as possible ways to make improvements to sustainability.
“Although some systems are still anchored by defined benefit schemes that may practice liability-driven investment strategies, defined contribution plans are playing increasingly important roles in the accumulation of individuals’ retirement savings,” said Deep Kapur, a collaborator on the research and director of the Monash Center for Financial Studies at Monash University in Australia. “Maximizing risk-adjusted investment returns for defined contribution plans by diversifying the assets held by a pension fund is critical.
“It’s essential the state pension or retirement age is reconsidered in line with increasing longevity — a step some governments have already taken — to reduce the costs of publicly financed pension benefits.”