Singapore pension system scores mid-ranking in global study of 70 pension plans

Singapore

SINGAPORE's pension system ranks 30th, middle of the range, in a global study of 70 pension plans by Allianz SE.

Allianz's Global Pension Report 2020 takes the pulse of pension systems, using a proprietary indicator, the Allianz Pension Indicator. The report was released yesterday. The API takes into account demography and fiscal prerequisites, sustainability and adequacy.

In Asia, Singapore ranks sixth, after China, Taiwan, Japan, Indonesia and Korea.

The API framework has been "rebuilt" in the latest study, in order to get a more comprehensive view on pension preparedness for demographic change.

The API score comprises three pillars and takes into account 30 parameters. Each pillar is given a score and a weighting. The first pillar is referred to as "starting points", which combines demographic change and the public financial situation. The second pillar is sustainability, which measures how systems react to demographic change. The third is adequacy or whether a system provides an adequate standard of living in old age.

Based on total scores, the best pension systems are Sweden, Belgium and Denmark. No Asian country ranks among the top 10.

For Singapore, there are huge discrepancies in the sub-categories. It ranks fifth globally in terms of adequacy, thanks to overall coverage of the population and a strong capital-funded pillar resulting in one of the highest private households' net financial asset to GDP ratios worldwide, said a statement by Allianz.

But it is among the bottom third in terms of the long-term sustainability of the pension system and the financial and demographic starting point. According to Allianz this is mainly because Singapore's statutory retirement age - currently at 62 - does not reflect the average life expectancy of Singaporeans, which is among the highest in the world. Singapore's life expectancy at birth is 83.2.

"The already high social contribution rate and the high budgetary deficit hardly leave any leeway for further increases to cushion the effects of the rapid ageing of the population within the next decades. Thus further pension reforms are needed to make the system demography-proof," said Allianz on Singapore.

The study sees demographics as a powerful driver of change in pension systems. Ludovic Subran, Allianz chief economist, said: "Demographics and pensions have been eclipsed by other policies in recent years, first and foremost by climate change and today the fight against Covid-19. But you ignore demographics at your own peril. Demographic change will soon be back with a vengeance. Defusing the looming pension crisis and preserving generational justness and equality are key for building inclusive and resilient societies."

The demographic shift is reflected in the rapid increase of the global old-age dependency ratio, which is the ratio of people aged 65 and older as a percentage of those aged 15 to 64. This is expected to grow by 77 per cent to 25 per cent globally by 2050, the fastest growth in the past 70 years since 1950.

In China, the ratio is expected to rise from 17 to 44 per cent. In industrialised countries, the ratio is forecast to reach 51 per cent in western Europe.

In terms of the second pillar of sustainability, the retirement age is an important lever. As life expectancy increases, the ratio of working life to time spent in retirement has declined markedly, said Allianz. Countries that have adjusted the legal retirement age are seen to have a more sustainable pension system.

In terms of adequacy, the levers include the coverage and benefit ratios and the existence of a capital-funded old-age provision and other sources of income. Capital-funded solutions, however, are increasingly under pressure in the persistent low-rate environment, said Allianz. This has been exacerbated by Covid-19, which has further depressed yields.

Cameron Jovanovic, Allianz SE head of global retirement proposition, said: "The low-yield environment has forced both pension funds and life insurers to explore alternative asset classes. This push into alternatives enables benefit providers to capture the illiquidity premium that matches well with their portfolio duration."