Move away from DB plans puts pressure on global pensions

The combination of reduced wage growth, rising inflation and reduced investment returns are straining pension systems, according to an annual survey.

The 2022 Mercer CFA Institute Global Pension Index, released on Tuesday, found that as more employers move away from defined benefit (DB) plans, individuals are assuming more responsibility for their retirement savings.

Canada’s pension system saw its overall score increase slightly to 70.6 from 69.8 last year, but it fell one spot to rank 13th overall. Canada maintained a B grade, placing it in a group that includes Sweden, Switzerland, Germany and the U.K. The U.S. and France were in the next tier with C+ grades.

A-rated Iceland had the highest overall index value (84.7), closely followed by the Netherlands (84.6) and Denmark (82.0). Thailand had the lowest index value (41.7).

Since 2020, the Covid-19 pandemic has highlighted the social, economic and financial effects of aging populations, and the recent shift to defined contribution (DC) pensions means retirees have taken on greater financial risks. Additionally, many governments are considering reducing their level of financial support during retirement to ensure the country’s financial sustainability over the longer term, the report found.

David Knox, senior partner at Mercer and lead author of the study, highlighted the importance of strong retirement schemes in this environment.

“Individuals have been assuming more responsibility for their retirement savings for some time; amidst high levels of inflation, rising interest rates and greater uncertainty about economic conditions, they are doing so in an increasingly complex and volatile environment,” wrote Knox.

“Households will have to consider what the right balance is between receiving a steady income, access to some capital and protection from future risks, given the many uncertainties faced by retirees.”

Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.