CIO Research Global pension systems compared

Private savings are essential to secure an adequate standard of living in retirement. This is the conclusion of the latest UBS International Pension Gap Index.

by Jackie Bauer, UBS CIO WM 05 Nov 2017

For the first time, the UBS International Pension Gap Index analyzes the benefits of the mandatory pension systems in twelve countries worldwide. The study calculates how much a person has to save privately as a percentage of today's net income, to afford an adequate standard of living in retirement.

The analysis was carried out with an "Average Jane" in mind, a fictitious person who is 50 years old and has earned the median wage throughout her career. Until today she has only done the bare minimum to save for her retirement. She lives in a city and leads a simple life and wants to keep it that way in retirement. It is central for Jane to estimate her cost of living in retirement as well as the expected payouts from her mandatory pension system. The difference between the two would be the deficit that Jane needs to finance privately.

Savings vary greatly, but are essential

The results differ greatly among the twelve countries we look at, but Jane has to save privately in each of them to cover her retirement costs. Switzerland has the most comprehensive cover. Assuming Jane invests her savings in a diversified portfolio from age 50 onwards, she needs to save roughly 11% of her current salary to meet her retirement needs. Her pension payout from the first and second pillar will amount to about 50% of her final salary.

Australia and Singapore follow Switzerland, but by some distance. Due to the low retirement age of 62 and the long life expectancy, Jane has to finance the longest retirement in Singapore. Australia has a lean system, but benefits from higher investment returns compared to other countries.

Many European countries have introduced reforms to raise the retirement age to 67 over the coming years. Still, even with a lower life expectancy, the savings requirements in France, Germany, Italy and the UK are almost four times as high as in Switzerland for the 'Average Jane'. In the US and Canada, Jane needs to save more than half her current income. At the bottom of our list are Japan, Hong Kong and Taiwan, where personal responsibility for retirement saving takes on an even more important role.

Three trends challenge pension systems

UBS's International Pension Gap Index indicates three trends that challenge pension systems globally. First is demographic change. Declining fertility rates and rising life expectancies change the structure of societies. A falling number of working people need to support a growing number of retirees. Second, the low interest rate environment makes it hard for pension funds to generate decent returns. Lastly, public spending on pensions and social security related issues has risen over the years. With public debt inflating, it will be hard to serve the growing needs of the population in general.

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