The U.S. retirement income system ranks 10th out of 14 evaluated countries, and just ahead of France, in the 2010 Melbourne Mercer Global Pension Index. This compares to a U.S. ranking of 6th among 11 countries in 2009.
The annual ranking, produced by HR consultancy Mercer and the Australian Center for Financial Studies, is designed to compare objectively the private- and public-sector pension systems of countries across five continents. The index looks at retirement income systems in their entirety, including the publicly funded and private components of a system as well as personal assets and savings outside the pension system.
“The global financial crisis has had a significant and immediate impact, as the sustainability of pension plans is threatened in many countries by declining retirement asset values and increasing government debt,” commented Mercer Senior Partner David Knox, who oversaw the study. “The nations in the index most severely affected were Canada, the United Kingdom and the United States as a result of declines in asset values since 2008 and increases in government debt."
Longer Lives, Less Security
Increased life expectancy is a theme that is common to the countries in the index, Knox observed. “As the gap between the age to qualify for a full pension and life expectancy widens, pressure on public pension systems will increase as well as costs for private-sector defined benefit plans. This highlights the need for governments to continue to review their state pension retirement age and focus on increasing the adequacy of the private system.”
“This year, as never before, U.S. policymakers and the private sector are challenged to fund retirement plans in a difficult economic and financial environment,” added Mercer Senior Consultant Arthur Noonan. The policy debate over the size of the federal deficit and the funding of Social Security at a time of an aging population are among the public sector concerns, he noted.
The deficit in pension plans sponsored by S&P 1500 companies was $428 billion at the end of September 2010, according to a separate Mercer analysis. This deficit corresponds to a funded status of 76 percent, compared to a funded status of 84 percent at year-end 2009. (Aon Hewitt found a slightly higher funding level for U.S. pensions at the end of the third quarter 2010, as noted below.)
Challenges were not confined to the U.S., however. According to Mercer, the following common themes emerge as many countries face similar problems in reforming retirement income systems to be robust enough to support a rapidly aging population:
• Increasing the pension age and/or retirement age to reflect increasing life expectancy, now and in the future.
• Promoting higher labor force participation at older ages, particularly as many individuals now remain in good health for longer periods.
• Encouraging (or requiring) higher levels of saving, within the pension system and beyond it.
• Increasing the coverage of employees in the private pension system, where it continues to be voluntary.
• Reducing the leakage from the retirement savings system prior to an individual’s retirement.
• Promoting greater diversity in the provision of retirement income while requiring that at least a portion of the accumulated benefit be taken as income.
Rankings for Retirement System Adequacy, Sustainability and Integrity
1. The Netherlands
6. United Kingdom
10. United States
Source: 2010 Melbourne Mercer Global Pension Index.
Pension Funding Status: Regional Views
Separately, consultancy AON Hewitt provided a snapshot of pension funding status around the world at the end of the third quarter of 2010. Among the findings:
• United States. The funded status for U.S. defined benefit pension plans for companies in the S&P 500 showed a marginal improvement in the third quarter of 2010, increasing from 80 percent to 82 percent, in Aon Hewitt's report. Strong equity markets—up 5 percent to 10 percent for the year—helped pension plans regain the losses they experienced in the second quarter. “Funded status volatility continues to draw attention from senior management and has added to the momentum of pension de-risking strategies,” said Joe McDonald, Aon Hewitt’s global risk services leader in the U.S.
• United Kingdom. Pension accounting deficits declined for U.K. companies in the FTSE 350 index during the third quarter of 2010, although they were significantly higher than at the start of 2010. Despite market volatility during the quarter, the average funded ratio increased from 82 percent at the start of the quarter to around 85 percent. At one point during August 2010, the average funded ratio fell to below 81 percent, which was one of the lowest values Aon Hewitt recorded since it began tracking the data in January 2007.
Said Kevin Wesbroom, Aon Hewitt’s global risk services leader in the U.K., "The continued volatility of funded ratios in the region suggests that many U.K. companies will be looking more actively at investment strategies that minimize exposure to asset market fluctuations. An increasing number of companies are taking steps to manage their pension risk," such as amending benefits by freezing plans to existing members, engaging in liability management exercises and hedging investment risk.
• Continental Europe. Despite significant volatility, European pension plan sponsors (Euro Stoxx 50 companies) saw little change in pension funding status in the third quarter of 2010, with an average funded ratio of approximately 66 percent, after rising as high as 69 percent at the end of July 2010.
"As a result of revised life expectancy projections in the region and an expected rise in liabilities in certain European countries over the coming months, we expect to see further action among companies to reduce pension plan benefits and manage existing liabilities," said Matt Wilmington, Aon Hewitt's global risk services leader in Europe.
• Canada. Like Continental Europe, accounting deficits for companies in Canada's S&P/TSX index remained relatively unchanged during the third quarter of 2010. Average funded ratios increased only incrementally, from 87 percent at the start of the quarter to 88 percent at the quarter’s end. "Many organizations have been holding off on implementing liability-driven investments or risk management strategies, thinking that interest rates were due to increase,” said Rob Vandersanden, a principal in Aon Hewitt's Calgary office. “However, yields have continued to trend downwards, effectively wiping out the strong investment returns of the past quarter.”
Stephen Miller is an online editor/manager for SHRM.
U.S. Pension Plan Funding Hits Historic Low, SHRM Online Benefits Discipline, September 2010
Market Volatility Leads to Broader View of Pension Risks, SHRM Online Benefits Discipline, March 2010
Pension Plan Deficits Hit Record; Many Revisit Funding Strategies, SHRM Online Benefits Discipline, January 2009
SHRM Online Benefits Discipline