Data & Research October 18, 2023

US Retirement System Matches Worldwide Average With C+ Grade

The US scored 63 on an overall index for pension coverage value, 23 points behind the No. 1 spot held by the Netherlands, according to a Mercer and CFA Institute report.

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The U.S. retirement system’s overall index value, measuring the quality of a country’s retirement plan system, came in at about average when ranked against other countries around the globe, according to the Mercer CFA Institute Global Pension Index 2023.

When ranking across three overarching categories for retirement savings success among countries, the U.S. scored 63, or a C+, on a scale of 0 to 100, almost matching the worldwide average value of 62.9, according to the annual study. In 2022 the U.S. ranked 20th out of 44 countries, while this year it ranked 22nd out of 47 countries.

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The overall index value is based on three weighted sub-indices—adequacy (40%), sustainability (35%) and integrity (25%)—to measure each retirement income system. Adequacy looked at areas such as benefits, system design, savings and government support. Sustainability examined pension coverage, total assets, demography and other areas. Integrity encompassed regulation, governance and protection.

The U.S. system scored 66.7 on adequacy, 61.1 on sustainability and 59.5 on integrity. The worldwide average scores were 64.8 on adequacy, 54.2 on sustainability and 71.9 on integrity.

The U.S. retirement income system comprises a Social Security system with a progressive benefit formula based on lifetime earnings, adjusted to a current dollar basis, together with a means-tested top-up benefit and voluntary private pensions, which may be occupational or personal. Mercer reported that overall index value for the U.S. system could be increased by raising the minimum pension for low-income pensioners, improving the vesting of benefits and reducing pre-retirement leakage.

Other systems with comparable overall index values to the U.S. included Colombia (61.9), the United Arab Emirates (62.5) and Hong Kong (64.0). Meanwhile, systems scoring the highest were the Netherlands (85), Iceland (83.5), Denmark (81.3) and Israel (80.8), each receiving an ‘A’ grade.

The Netherlands’ system received the highest index value in 2023, as the system provided quality benefits, supported by a strong base of savings from the population and sound regulation, according to Mercer. The firm stated that the Netherlands will continue to be a successful system despite the country currently undertaking significant pension reform, moving from a mostly collective benefit structure to a more individual, defined contribution approach.

“Any comparative ranking of systems is likely to be controversial as each system has evolved from particular economic, social, cultural, political and historical circumstances,” the researchers noted. “This means there is no single system that can be transplanted from one country and applied, without change, to another. However, certain features and characteristics are likely to lead to improved financial benefits for the older members of society, an increased likelihood of future sustainability of the system, and a greater level of community trust and confidence.”

Mercer and the CFA Institute recommended reforms to improve the long-term outcomes of retirement income systems, including:

  • Increasing coverage of employees, including non-standard workers, and the self-employed in the private pension system. This includes recognizing that many individuals will not save for the future without an element of compulsion or automatic enrollment;
  • Increasing the state pension age and/or retirement age to reflect increasing health-adjusted life expectancy, both now and into the future, thereby reducing the costs of publicly financed pension benefits;
  • Promoting higher labor force participation at older ages, which will increase the savings available for retirement and limit the continuing increase in the length of retirement;
  • Encouraging higher levels of private saving, both within and beyond the pension system, to reduce future dependence on the public pension while also adjusting the expectations of many workers;
  • Introducing measures to reduce the gender pension gap and gaps that exist for minority groups;
  • Reducing leakage from the retirement savings system prior to retirement, thereby ensuring that the funds saved, often with associated taxation support, are used for the provision of retirement income; and
  • Improving the governance of private pension plans and introducing greater transparency to improve the confidence of plan members.

The 15th annual Mercer CFA Institute Global Pension Index was released by Mercer and CFA Institute. The report compared 47 retirement income systems, covering 64% of the world’s population.

Data & Research October 17, 2023

Inflation Is Reshaping Retirement Outlooks, MFS Reports

Meanwhile, Morgan Stanley finds investors are bearish on the market, with inflation topping the list of concerns.

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Persistent inflation is taking a toll beyond the shopping cart, according to a new report by MFS Investment Management.

After two years of larger-than-average inflation, cost concerns are driving workers to be more conservative in decisions such as how long they plan to work, as well as their investment choices, according to a survey the firm conducted among 1,000 plan participants.

According to MFS, 63% of workers believe their retirement will not mean an end to their employment, but rather a transition to reduced hours or a different job. Another 61% say they have adopted more conservative investment strategies, and 75% believe they will need to save more than they had thought a few years ago.

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“The uncertainties and disruptions over the past few years have clearly affected workplace savers, who are now less sure about when retirement will come, what it will look like and how they should prepare for it,” Jeri Savage, retirement lead strategist at MFS, said in a statement with the report.

The research comes amid other reports of shifts in investment sentiment, and approach, as higher interest rates and inflation persist.

Bearish Sentiment

Morgan Stanley Wealth Management’s quarterly individual investor pulse survey released Tuesday found that bearish sentiment notched up 4 percentage points from last quarter to 49%.

Similar to the MFS survey, investors ranked inflation as their biggest concern about their investment portfolios, with 51% ranking it as their top concern. Next came a recession, at 32%, and market volatility, at 31%.

“As we approach the end of 2023, headwinds abound with continued elevated inflation and geopolitical tensions on the rise,” Mike Loewengart, head of model portfolio construction for Morgan Stanley Portfolio Solutions, said in a statement with the survey.

The survey of 908 self-directed investors, however, found that overall views of the economy remain relatively optimistic, with more than half of investors (55%) believing the economy will be in better shape by the end of 2023.

The continued strength in the economy, particularly the job market, “leaves investors facing a conundrum—a resilient economy coupled with a volatile market,” Loewengart said. “Environments like these show the power of a diversified portfolio, which can help an investor weather whatever may be ahead for the market. The goal is to invest through the volatility, not react to it.”

In a separate report presenting long-term capital outlook, J.P. Morgan Asset Management noted on Tuesday that its estimate for 10 to 15 years of a 60/40 stock-bond portfolio is about 7% growth.

However, the asset manager noted, diversifying to areas such as alternative funds would boost outlooks. When adding a 25% allocation to alternative assets to J.P. Morgan’s long-term capital market assumptions, a portfolio would stand to grow at 12%, according to the firm.

Confidence Dropping

When it comes to the retirement savings picture specifically, 66% of MFS respondents said they are not confident they will be able to retire when they want. Meanwhile, 32% say they may not be able to retire at all.

Retirement strategist Savage noted that plan sponsors and advisers have an opportunity to “educate workers on the benefits of staying invested, as well as how to get back on track and stay on track.”

That education can include communicating with participants of all ages, not just those near retirement, Savage noted. According to the MFS report, a greater percentage of younger workers (those younger than 45) feel they need to save more this year compared with last (76% vs. 65%) and work longer (58% vs. 53%), because of recent market events.

MFS also found that American retirement savers need further education on how target-date funds work and how many they should have in their portfolio. While more than half of plan participants currently invest in TDFs (56%), only one-third of those younger than 45 and only 19% of older workers own a single TDF, “which is how these funds are designed to be used,” according to MFS.

In addition, more than 50% of participants incorrectly believe that TDFs provide a guaranteed stream of income, a guaranteed rate of return or invest only in cash and other low-risk assets, according to the researchers.

“Our survey highlights that more education is needed to ensure that retirement investors understand the important role that TDFs can play in retirement strategies,” Savage said.

The MFS survey of 1,000 U.S. retirement participants was held from March 22 through April 6. Morgan Stanley’s survey among 908 self-directed investors was conducted from October 2 through October 16.

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