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According to the twelfth version of the World Pension Index Melbourne Mercer 2020 (MCGPI), Chile shows a drop of three positions compared to the previous version, remaining in 13th place, but it remains the best pension system in Latin America.
According to the study, Chile averaged a score of 67, compared to the 68.7 achieved in the 2019 version. Regarding the evaluation of the three pillars that are measured in this study, in “integrity” the country raised its score from 79.2 to 79.6.
While in “Sustainability” it fell 1.7 (71.7 in 2019) points, reaching 70 points. “Adequacy” it continues to be the weakest item and where the main decrease is seen, reaching 56.6 of the 59.4 reached the previous year.
“The main fall in Chile is observed in the adequacy pillar, this is explained by the drop in the replacement rates of the OECD Pensions at a Glance report, where in 2019 they were 47.0%, 38.2% and 38.6% for those with incomes of 0.5, 1.0 and 1.5 times the average salary, and today they are 43.6%, 35.9% and 36.4%, respectively ”, explained Daniel Nadborny, CEO of Mercer Chile.
Regarding the decline in the sustainability index, the executive added “this is due to the fall in real economic growth, mainly driven by the impact of covid-19 on the economy. This drop was observed in most of the systems studied ”, he concluded.
At the Latin American level, Chile is followed by Colombia with an average score of 58.5 and further behind by Peru with 57.2.
The Netherlands obtained the highest value of the index (82.6) and maintains its number one position in the general ranking, despite the important pension reforms that are being carried out in that country. Thailand had the lowest value of the index (40.8).
For each sub-index, the highest scores were the Netherlands for “adequacy” (81.5), Denmark for “sustainability” (82.6) and Finland for “completeness” (93.5). The lowest scores were Mexico for “adequacy” (36.5), Italy for “sustainability” (18.8) and the Philippines for “integrity” (34.8).
The effect of covid-19 on the future of pension systems
The impact of COVID-19 it goes far beyond the health consequences; There are long-term economic effects that affect industries, interest rates, return on investments, and community confidence in the future. As a consequence, the provision of adequate and sustainable long-term retirement income has also changed.
The level of public debt has increased in many countries after covid-19. This increase is likely restrict the ability of future governments to support their older populations, either through pensions or through the provision of other services such as health or care for the elderly.
To help mitigate the impact of COVID-19, governments have implemented a series of responses to support their citizens and their pension systems.
Professor Deep Kapur, Director of the Monash Center for Financial Studies (MCFS), said that many governments around the world have responded to COVID-19 with significant fiscal stimulus; and central banks have adopted unconventional monetary policy.
“The outlook for return on investments is unfavorable, while volatility can be high, adding to the usual challenges of managing risk in a pension portfolio,” he said.
“Likewise, some governments have allowed temporary access to saved pensions or have reduced the level of compulsory contribution rates to improve the liquidity positions of families. These changes are likely to have a significant impact on the adequacy, sustainability and integrity of pension systems and, in this way, influence the evolution of the World Pension Index in the coming years ”, added Kapur.
For example, Australia allowed people whose income had decreased by more than 20% to have access to a maximum of AUD 20,000 (approximately US $ 13,000) of their pension fund assets, while Chile allowed active contributors to withdraw voluntarily the 10% of your pension funds individual up to a maximum of US $ 5,600.
Regarding this last point, the CEO of Mercer Chile pointed out that “Although the withdrawal of funds is mentioned in the study, it was not reflected in the results.” Given this, it is expected that in the 2021 version of the Melbourne Mercer World Pension Index the impact can be observed, “which can also be measured with the evolution of Chile’s GDP, delivering a more concrete conclusion, “added Nadborny.
“It is interesting to mention that the two main retirement income systems in the World Pension Index, The Netherlands and Denmark have not allowed early access to pension assets, despite the fact that the assets of each pension system represent more than 150% of the country’s GDP “, concluded the CEO of Mercer Chile.
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