Organisational Design

COVID-19 hits retirement system adequacy

Life Journey of a Man, drawn with Chalk on Blackboard

COVID-19 has exacerbated retirement insecurity and governments need to use this as an opportunity to examine their system inadequacies and make improvements according to David Knox, partner at Mercer and author of the annual Mercer CFA Institute Global Pension index.

The index measures adequacy, sustainability and integrity of 39 retirement systems around the world using more than 50 indicators, and the most recent study shows that the COVID-19 pandemic has had a profound impact on the provision of adequate and sustainable retirement incomes over the long term.

According to Knox the impact of COVID-19 is much broader health implications and there are long term economic effects impacting industries, interest rates, investment returns and community confidence in the future which means the ability to provide adequate and sustainable retirement incomes over the longer term has also changed.

“The economic recession caused by the global health crisis has led to reduced pension contributions, lower investment returns and higher government debt in most countries. Inevitably, this will impact future pensions, meaning some people will have to work longer while others will have to settle for a lower standard of living in retirement,” Knox said.  “It is critical that governments reflect on the strengths and weaknesses of their systems to ensure better long-term outcomes for retirees.”

In addition some governments around the world have allowed temporary access to saved pensions or reduced the level of compulsory contribution rates to improve consumers’ liquidity positions. But according to Professor Deep Kapur, director of the Monash Centre for Financial Studies these developments will likely have a material impact on the adequacy, sustainability and integrity of pension systems, and influence the evolution of the Global Pension Index in the coming years.

Australia for example enabled individuals whose income had dropped by more than 20 per cent to access up to A$20,000 from their pension assets; India allowed partial withdrawals for COVID-19 treatment and a payment from the pension fund account not exceeding three months’ wages and allowances; in Peru workers were permitted to withdraw up to 25 per cent of their savings from their individual accounts, with a limit of 12,900 soles ($3,685); while Chile allowed active contributors to voluntarily withdraw 10 per cent of their individual pension funds up to $5,600. In other countries including Indonesia, Thailand, Colombia and Peru the level of contributions were reduced, but Mercer predicts the short-term halting of contributions will have less impact on long-term retirement savings than the withdrawal of accrued benefits.

Whether pension assets should be used in extreme circumstances for something other than retirement income is an issue of debate. The OECD says: “Access to retirement savings should remain an exceptional measure based on individual specific circumstances and based on regulations already in place for that purpose”.

“It is interesting to note that the top two retirement income systems in the Global Pension Index, the Netherlands and Denmark, have not permitted early access to pension assets, even though the assets of each pension system are more than 150 per cent of the country’s GDP,” Knox said.

The Netherlands had the highest index value (82.6) and has retained its top position in the overall rankings. Thailand had the lowest index value (40.8).


Top five ranked pension systems

Overall score
Netherlands 82.6
Denmark 81.4
Israel 74.7
Australia 74.2
Finland 72.9


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