- India tops among all countries that have improved ahead of Singapore & Korea (South)
- India’s index value has improved from 40.3 in 2015 to 43.4 in 2016.
- India occupies # 25 among 27 pension systems with Japan & Argentina trailing behind
- Denmark maintains #1 position for fifth year with enviable ‘A Grade’
- Netherlands & Australia hold onto #2 & # 3 with A & B+ rating respectively but drops in overall index value
- Nations face significant pressure to cope with impact of ageing populations
Dramatically ageing populations, declining birth rates and a lack of robust retirement systems will see many countries struggle under the burden of providing adequate pensions to their senior citizens without drastic action.
The Indian index value has improved from 40.3 in 2015 to 43.4 in 2016 primarily due to an increase in the net replacement rate.
Now in its eighth year, the Melbourne Mercer Global Pension Index (MMGPI) highlights significant improvement made by India meriting popularity of tax incentives under National Pension scheme, introduction of Universal Account Number (UAN) for Provident Fund by EPFO and increasing the pension age from 58 years to 60 years Under statutory pension plan EPS 95 which offers regular stream of income on retirement.
Anil Lobo, India Business Leader – Retirement, Mercer adds, “New initiatives by Government of India in providing tax incentives under National Pension system both during accumulation stage and withdrawal at retirement are increasing its popularity among employees in corporate sector. Further Atal Pension Yojana (APY) which was launched by Government of India in the year 2015 has also contributed to increase in coverage for pension among workers in the unorganised sector. As APY is a guaranteed pension scheme of Govt. of India, it paves the way for securing old age income by facilitating regular savings of small amounts during the earning phase of life.”
Mercer believes continued and persistent efforts in increasing financial literacy through various programmes driven by Government of India, Pension Fund Regulator and also involving various financial institutions including banks have helped increase subscribers under both these schemes. However, there is work to be done to achieve the coveted ‘A Grade’, only ever held by Denmark and Netherlands.
“Additionally, UAN has eased transfer and traceability of transfer of Provident Fund under statutory Pension plan. Moreover implementation of UAN ensures avoiding unnecessary leakage from the pension fund and allows withdrawal of pension accumulation under statutory plan only on certain specified compelling grounds. Also, the Government has increased the pension age from 58 years to 60 years Under statutory pension plan EPS 95 which offers regular stream of income on retirement (Administered through EPFO (Employees’ Provident Fund Organization)). This move has been largely welcomed by the members as most of them continue to remain employed till the age of 60 years,” cited Lobo.
The MMGPI acknowledges that there are areas for improvement in all countries’ retirement income systems. Possible measures to further enhance India’s system include:
- Increasing coverage of pension arrangements for the unorganised working class
- Introducing minimum access age so that it is clear that benefits are preserved for retirement purposes
- Improving the regulatory requirements for the private pension system
- Continuing to improve the required level of communication to members from pension arrangements
- Increasing level of contributions in statutory pension schemes will help India to increase its index value
The 2016 MMGPI – A closer look at the impact of ageing populations
This year, the MMGPI has 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.
The MMGPI presents the evidence, and recommends the urgent changes that governments need to make to ensure that current retirement systems are sustainable and able to provide adequate benefits for decades to come.
Dr Knox issued a stern warning: “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.”
The mitigating factors that determine each country’s old age dependency ratio
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 55-64
- The labour force participation of older workers aged 65 and over
- The increase in the labour force participation rate of 55-64 year olds from 2000-2015 which determines whether the country is actually experiencing more people working at older ages
- The projected increase in the retirement period from 2015-2035 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 together with a comparatively high labour force at older ages and a significant increase in the retirement age,” said Dr Knox.
The true impact of globally increasing life expectancies
Life expectancies at birth have increased by seven to 14 years in most countries during the last 40 years, equating to an average of one additional year for every four years – a significant result that cannot be ignored in the ongoing reform of the pension system. 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.
“Whatever actual figure emerges in the next 40 years, there is little doubt that people are living longer in their older years,” said Dr Knox.“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,” added Dr Knox.
The MMGPI is the world’s most comprehensive comparison of global pension systems, and this year it covered close to 60 per cent 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.
The Index is the premier research tool available to guide governments to develop policies that provide adequate and sustainable benefits for all their citizens in retirement.
Melbourne Mercer Global Pension Index – overall index value results
The overall index value for each country’s system represents the weighted average of all three sub-indices.
About the Australian Centre for Financial Studies
The Australian Centre for Financial Studies (ACFS) is a not-for-profit research centre of Monash Business School. ACFS specialises in leading-edge finance and investment research. It aims to boost the global credentials of Australia’s financial industry, bridge the gap between academia and industry, and support Australia as an international centre for finance practice, research and education.
ACFS facilitates linkages between academics, industry practitioners and government, and draw on the expertise and experience of each of these groups to promote the transmission of knowledge throughout the greater finance community. ACFS has developed a strong reputation as an independent voice on industry-relevant matters. ACFS contributes to public debate on financial sector issues; conduct detailed, expert analysis; deliver unbiased contracted research to industry partners; host a wide range of knowledge-sharing activities including conferences, lecture series, lunchtime briefings, twilight seminars and roundtable discussions; and facilitate three Research Program Committees that link senior industry and academic leaders in the fields of banking, funds management and insurance. ACFS also engages with major government reviews such as the Financial System Inquiry, Tax White Paper and Productivity Commission inquiries.
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