Global retirement security falters as inflation spirals – Natixis Investment Managers’ Global Retirement Index 2022

by | Sep 13, 2022

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Retirement security globally is under increasing pressure, as inflation, a volatile market environment and low interest rates impact retirement pots, according to Natixis Investment Managers’ 2022 Global Retirement Index (GRI).

Now in its tenth year, the GRI is a multi-dimensional index, designed to examine the factors that drive retirement security, combining key indicators essential for people to enjoy a healthy and secure retirement. This year’s index reveals that 2022 could be one of the worst years to retire in recent memory, as retirees risk not only taking retirement income from an already depleted pool of assets, but as they will have to take on greater risks with portfolios to make up the ground already lost.

In the UK, retirement security has declined for the fifth consecutive year, falling one spot in the ranking to 19 out of 44, with an overall score of 69%, down from 72% in 2021’s index.

The GRI includes 18 performance indices, grouped into four thematic indices which cover key aspects for welfare in retirement: the material means to live comfortably in retirement; access to quality financial services to help preserve savings value and maximize income; access to quality health services; and a clean and safe environment.

For the four sub-indices, the UK ranks as follows in the 2022 GRI:

  • 29th for Finances in Retirement
  • 21st for Health (compared to 18th in 2021, and 19th in 2012)
  • 7th for Quality of Life (7th in 2021; 6th in 2012)
  • 23rd for Material Wellbeing (compared to 22nd in 2021; and 27th in 2012)

Inflation: an immediate threat to retirement security?

For most of the past decade inflation has been exceptionally low. Between 2012 and 2020 inflation for the 38 OECD member countries averaged just 1.76%. However, in the first half of this year, inflation rose for those 38 countries, spiking at 9.6% in May 2022.

The speed at which costs have increased gives reason to rethink fundamentals in retirement planning. Significant price rises for oil, food, and housing are reducing the purchasing power of retirees and presenting a core economic lesson to those planning for retirement.

Moreover, financial professionals around the world say underestimating the impact of inflation is the number one mistake investors make in their retirement planning.2

Andrew Benton, Head of Northern Europe at Natixis IM said: “While inflation has a negative impact on individuals, certain institutions may see an indirect benefit. Pensions generally perform better in inflationary times as central banks implement interest rate hikes to curb inflation. This is because of the seesaw effect that rates have on pension liabilities. In simplest terms: the higher the rate, the lower the liabilities.

“Now with rates increasing, liabilities are shrinking for many. But not all pensions respond in equal measure. The maths on inflation ultimately works out for the better for private pensions. With inflation driving rates up and liabilities down, these managers generally see their contribution rate decline. On the public side of pensions, the maths may not be as advantageous.”

A Global View of Retiree Wellbeing

At a global level, across the 18 performance indicators of retiree welfare examined this year’s GRI reveals:

  • Norway reclaimed its No. 1 ranking after four years ranking at No. 3
  • Iceland, which has held the top spot since 2018, fell to 3rd, while Switzerland held its strong position at No. 2.
  • The remainder of the Top Ten countries this year are Ireland (4th), Australia (5th), New Zealand (6th), Luxembourg (7th), Netherlands (8th), Denmark (9th), and the Czech Republic (10th).
  • Luxembourg and the Czech Republic entered the list of top ten countries for the first time this year, rising to No. 7 and No. 10, respectively.  Germany and Canada, which were among the top ten countries last year, fell to No. 11 and No. 15, respectively, in this year’s GRI.
  • Countries in the top ten overall typically score very well across all four sub-indices. Both Norway and Iceland have the distinction of finishing in the top ten in all four sub-indices.

10 years of the GRI: familiar issues, new risks

When the GRI was first published 10 years’ ago, the risks to global retirement security were clear – aging populations; pension funding shortfalls; and an uncertain economic environment. While these core issues remain the same ten years later, performance at a country level has shifted significantly.

Ireland has seen the largest gains in the GRI rankings over the past decade, jumping from 38th overall in 2012 to fourth this year. The Finances sub-index is the biggest driver of its gains and now ranks seventh amongst all countries. while the Quality of Life sub-index also had a meaningful positive impact on Ireland’s overall score trajectory, moving from 24th a decade ago to 12th this year. Within this Sub-index, the largest improvements over the ten years are in biodiversity and environmental factors.

New Zealand improved 28 spots from 34th to sixth overall. Compared to a decade ago, New Zealand has realized the largest gains in the Health sub-index. The country had the second-lowest score for the sub-index in 2012 with poor performance in the health expenditure indicators. Since then, the sub-index score has improved 26 spots to 16th this year.

The Czech Republic is a new entrant in the top ten this year and has experienced significant score growth from a decade ago. It started at 22nd in 2012 and now ranks tenth overall this year. The Finances and Material Wellbeing sub-indices are the main drivers of the Czech Republic’s overall positive movement from 2012.

Meanwhile, the Slovak Republic has witnessed the biggest drop in GRI rankings over the last 10 years, falling fourteen spots to 30th from 16th, primarily due to declines in the Finance Sub-index; it slipped about 20 spots for the past two years compared to 2012, brought on by a poor ranking on the governance indicator coupled with diminishing performance on tax pressure.

The Finance Subindex has also caused the fall in France’s overall ranking, as tax pressure and bank nonperforming loan indicators push it to the bottom five in the sub-index’s 2022 ranking.

Looking forward: an increasingly challenging picture for retirement security 

The OECD projects the over-65 population will increase from 17% to 27% by 2050, up from 17% in 2019, increasing the strain on retirement security, and putting additional pressures on healthcare and long-term care systems.

Even regions with young populations could soon face challenges as improved nutrition, healthcare and environmental factors contribute to longevity and low birth rates help push the overall population ever older. This is the case in both China and Latin America in 2022.

Ageing populations present limited choices for policy makers, especially as retirement and health benefits will have to compete with the need to pay off public debt, which has ballooned to $226 trillion among advanced economies as of 2020.3To make up for the funding shortfall, policymakers may have to choose one of the following options, none of which is popular amongst voters: raise income tax, raise the retirement age, or reduce benefits.

“The challenges that are being faced now and will be faced in the future are clear. Getting retirement right and helping to ensure individuals can live with dignity after their working years is a core sustainability issue for society. Difficult decisions will have to be made as policy makers strive to reconcile balance sheets with commitments to public retirement and healthcare benefits. Success will require a concerted effort from not only policy makers, but employers, the financial services industry, and individuals. It all starts with understanding the risks,” said Andrew Benton.

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