On January 11, 2017 I penned a blog post titled “Perpetual Doesn’t Mean Sustainable”, which addressed my concerns about the fact that the idea that public pension systems were perpetual might just be a fallacy. In fact, the funding status for public pension DB plans was deteriorating and I was questioning their sustainability. Little has changed since that January day. I was attending an Opal conference in Arizona when I wrote the post so I can’t lay claim to a cold January day.
Recently, a friend from our industry shared with me the output from the Melbourne Mercer Global Pension Index (MMGPI) to showcase which countries are best equipped to support their older citizens, and which ones aren’t. Why older citizens? According to the study, one-sixth of the world’s population will be over 65-years-old by 2050 making the soundness of a country’s pension system so critically important.
The analysis uses a number of factors, which are then put into three sub-indexes:
- Adequacy – the base-level of income
- Sustainability – The state pension age, the level of advanced funding from government, and the level of government debt.
- Integrity – Regulations and governance put in place to protect plan members
These certainly seem to be reasonable. These measures were used to evaluate the pension systems for 37 countries (including the US) covering more than 60% of the world’s population. The Netherlands ranked highest with a combined score of 81, while Thailand ranked poorest at 39. Regrettably, the US ranks 17th in this global index placing behind Malaysia and only slightly ahead of France, Peru, and Columbia, which complete the top 20.
While each of the 3 sub categories is important, Sustainability is likely the most important given the aging trends that we are witnessing globally. As I wrote several years ago, perpetual doesn’t mean sustainable, and if we don’t change our approach to managing public pension systems, we will truly be challenging the premise that these entities are in fact sustainable.
DB plans are too important to the US plan participant to see them fail. A pay-as-you-go pension system is not sustainable, yet that is exactly what we have for a number of US states at this time. The Covid-19 crisis has impacted state revenues to such an extent that contributing the annual required contribution in 2020 is likely a pipe dream for many systems further destabilizing these plans.
Pension systems were much better funded years ago when the focus was on the plan’s liabilities. As plans began to focus more attention on the return on asset assumption (ROA) as the primary goal greater volatility in the funded status and contribution expense was realized. It is time to get back to basics before it is too late.