UBS International Pension Gap Index Contents

20 May 2021 Chief Investment Office GWM Investment Research

UBS International Pension Gap Index

04 12 Editorial Sustainability and adequacy: Not mutually exclusive 05 Overview of results: 14 A call to action Your action plan: Building long-term financial security 06 Introducing “Average Jane” 17 Jane around the world 07 Pension systems: 42 A relatively new concept Appendix: Methodology Assumptions 10 Glossary Sources Personal responsibility: Necessity and freedom

This report has been prepared by UBS AG Switzerland. Please see the important disclaimer at the end of the document.

2 UBS International Pension Gap Index Jane around the world

Copenhagen, Denmark P. 20 Munich, Germany Amsterdam, Netherlands P. 27 P. 18 Stockholm, Sweden London, UK P. 35 P. 25

Toronto, Hong Kong Taipei, Taiwan Canada New York City, P. 23 P. 37 P. 40 US Tokyo, Japan Delhi, India P. 28 P. 39 P. 21 Paris, France Milan, Italy P. 29 P. 26 Zurich, Switzerland P. 41

Saint Petersburg, Russia Rio de Janeiro, P. 32 Singapore Sydney, Brazil Dubai, UAE Santiago de Chile, P. 34 Australia P. 31 P. 22 Chile Tel Aviv, Israel P. 36 P. 33 P. 38

Lagos, Nigeria P. 24

Cape Town, Riyadh, Saudi Arabia South Africa P. 30 P. 19

UBS International Pension Gap Index 3 Editorial

Retirement is not the end of the road. It is more the beginning of an open highway. For any road trip to be a success, some form of preparation is needed. This includes budgeting how much money you need and want to spend. Retirement is no different. Being aware of your future income sources and spending requirements is a prerequisite to making the most out of it. Yet it’s a topic that is too often overlooked.

Thinking ahead will help you answer one of the most important questions: Will your pension be enough to sustain your desired standard of living in old age? The UBS Jackie Bauer International Pension Gap Index shows that the answer is often no. In most countries around the world, relying solely on the mandatory pension is not enough to maintain your accustomed lifestyle. However, private savings and investments can smooth out bumps in the road.

But how much capital do you really need? The answer depends on your individual situation. You need to understand how your pension system works and what benefits you can reasonably expect from it. Further, you need to think about how much money you might need in old age to finance your dreams. Regardless of your situation, the earlier you start preparing your retirement road map, the more options you keep open. James Mazeau We hope this report helps you navigate through the complexity of pension systems and assists you in planning your personal financial situation. We encourage you to take matters into your own hands to make the most of the journey ahead.

Enjoy the read.

Jackie Bauer James Mazeau Head CIO Retirement CIO Retirement & Public Policy Research & Public Policy Research

4 UBS International Pension Gap Index Overview of results: A call to action

The UBS International Pension Gap Index analyzes personal engagement a pension system demands 24 pension systems around the world. With the from its participants. The results can be broadly di- help of a fictitious character, we assess how much vided into three categories: places where starting income a retiree can expect to receive from the to save at 50 is feasible, others that require starting mandatory pension system*¹. We also determine to at a younger age, and those where significant life- what extent that income is sufficient to maintain an long personal effort is required. accustomed standard of living in retirement. Our aim is to show readers that they should take addi- The rest of the report is organized as follows: We tional steps to secure their financial situation in old first introduce “average Jane” and the way we age. The results are a call to action: Private savings approach the analysis. We then provide a brief and investments are required almost everywhere to overview of the structure of modern pension sys- maintain a comfortable lifestyle in retirement. tems, their strengths and weaknesses, and a sum- mary of the results. The general mechanism of pen- There are just a few places where Jane—and per- sion systems and our results should not be judged haps most of her peers—can lean back and relax, relative to one another, but by evaluating their indi- especially if they start late with private pension vidual sustainability and adequacy both for the indi- provisions. However, the key statistic, the required vidual beneficiary today and for society as a whole private voluntary savings as a share of current net in the future. Further, we explain what the overall income², varies substantially among the 24 jurisdic- conclusion of this analysis means for the reader and tions (Fig. 1). The results are clearly influenced by make recommendations to prepare for retirement. the person for which they are calculated. Jane may This is followed by one-pagers detailing the fea- not always be the perfect representative, but her tures and results of each pension system. situation nevertheless gives a sense of how much

Figure 1 UBS International Pension Gap Index Required savings rate in %, the darker the color the lower the savings rate

Canada Denmark Russia 50% Germany 14% 108% Taiwan 30% 91% Netherlands Sweden 5% 9% UK 26%

Israel France 41% 44% Italy Japan Switzerland 28% 102% 14% UAE Hong Kong USA 0% 74% 42% Nigeria Saudi Arabia Singapore 7% 145% India 3% 35% Brazil 69% South Africa 49% Australia Chile 7% 80%

Source: UBS

1 Words/expressions marked with * are explained in the glossary. 2 For details about the calculation method please consult the appendix.

UBS International Pension Gap Index 5 Introducing: "Average Jane"

Jane is a single 50-year-old woman with one adult able to finance a luxurious lifestyle in retirement. child. She has worked her whole life in the same Nonetheless, she aims to continue her basic urban city since starting her career at age 20. With the lifestyle after she stops working. It includes living in exception of a three-year break at 30, she has been a two-room⁵ rental apartment in a middle-class continuously employed in full-time positions and outer city neighborhood. This will often represent will stay employed until she retires at the statutory her single largest cost. retirement age. Today, Jane enjoys a basic urban lifestyle. She earns the median³ wage that a While some work-related expenses such as regular woman working full-time receives in her city and commuting will drop, other costs will rise. Since she enjoys moderate regular increases in income. has more free time, she will enjoy more leisure activities, spending time with family and friends. For We analyze how 24 Janes in cities around the example, she will undertake regular activities with world are covered by their local pension systems. her grandchildren and meet with friends over food The cities in our study are: Amsterdam, Cape Town, and coffee. Additional recreational spending will Copenhagen, Delhi, Dubai, Hong Kong, Lagos, have to be on a small scale, for an occasional local London, Milan, Munich, New York, Paris, Riyadh, vacation rather than regular overseas journeys. To- Rio de Janeiro, Saint Petersburg, Santiago de Chile, ward the latter part of her retirement, Jane also has Singapore, Stockholm, Sydney, Taipei, Tel Aviv, to consider her health and potentially rising medical Tokyo, Toronto, and Zurich. This enables us to and frail-care costs. compare the pension systems in these jurisdictions based on Jane’s specific characteristics⁴. Jane needs to think about the income she can expect from the mandatory retirement system and Jane has had a good life, but until now has not the additional private savings she needs to support saved for anything more than a rainy day. At age her desired lifestyle. Until now, she has only con- 50, she still has on average 15 years of work before tributed the minimum required amount to the she retires. Jane realizes that she needs to start mandatory pension system. This means in most thinking about the “longest holiday” of her life. cases that she may receive far less in pension pay- The future is by definition uncertain, as are her re- ments than she needs to finance her retirement. tirement benefits. But planning ahead today will in- We calculate her required savings rate. This is the crease her peace of mind. proportion of her current net salary Jane will need to save and invest until retirement to maintain her How should she prepare for retire- current lifestyle once she stops working. ment? Jane needs to think about the lifestyle she desires Jane needs to think about the and will be able to afford, as well as any special cir- lifestyle she desires and will be able cumstances she might face, and the costs associ- to afford, as well as any special ated with them. Most likely the first half of her retirement will be more active than the second. Jane circumstances she might face and is realistic and knows that she will not easily be the costs associated with them.

3 The median is the number that divides a ranked scale into two parts: 50% of the numbers will be lower and 50% higher. So the median is not as affected by outliers as an arithmetic average would be by extremely high or low wages. Median statistics are not published for all jurisdictions; in those cases, the average is used and adjusted. 4 Jane as we have created her is not representative of a particular person, nor entirely true to individual cultural norms. Nonetheless, a standardized per- sona is needed for our analysis to ensure comparability across pension systems. 5 Two room = single bedroom, single living room plus kitchen/dining room and bathroom.

6 UBS International Pension Gap Index Pension systems: A relatively new concept

Three pillars: Different objectives and Three pillars: Different objectives mechanisms and mechanisms Pensions influenced by culture Strengths and weaknesses Today, state-backed pension systems can be broadly classified into three pillars (Fig. 2). Contributions to all three pillars are usually tax deductible up to a certain level, whereas pension payouts are usually Throughout history, humans have worried about taxed, sometimes at lower rates than regular in- the economic consequences of old age. Tradition- come. ally, the old have relied on their families or charity, or have been forced to sell valuables to finance The first pillar is often a mandatory, collective and their basic needs. Informal solidarity systems pre- publicly managed scheme. It usually pays a stream vailed. of basic income that is indexed to inflation or wage growth. The amount is customarily earnings- or Old age insurance has only been formalized very re- contributions-related, but is generally capped. It is cently relative to the history of humanity. The first sometimes means tested*. The receipt of benefits is pension schemes, mostly company-managed, were typically conditional on having worked for a mini- established in the early 19th century and only cov- mum period. First pillars are commonly financed ered a small proportion of workers. Throughout the through taxes and worker and/or employer contri- second half of the 20th century, the concept of in- butions. A common feature of these schemes is the come in retirement has been generalized and incor- pay-as-you-go* nature of financing, meaning that porated in mostly state-managed social security contributions from current workers finance the programs. It is only in the last 40 years that per- pensions of current retirees. sonal solutions have flourished. This has created complex pension ecosystems. The second pillar is often a mandatory, collective and privately managed scheme. It is mostly occupa-

Figure 2 Basic principle of multi-pillar pension system

1st pillar 2nd pillar 3rd pillar State pension Occupational pension Private pension

Redistributive system financed Contributions to defined Private savings and through taxes and/or benefit or defined contribution investments, potentially tax employer/employee contribu- funds by employer/employee. incentivized. Lump sum and/or tions. Often the payout is Earnings/capital-based annuity payments based on capped. annuity and/or lump sum. accumulated capital.

Maintain decent Cover additional Meet basic needs living standard wishes and dreams

Source: UBS

UBS International Pension Gap Index 7 tion-related and provides a pension payout in the Many, however, provide a framework that people form of an annuity* and/or a lump sum*. The can use voluntarily to improve their personal out- amount of the benefit is related to earnings contri- look. butions. As a general rule, the more you have earned or contributed, the higher the benefits you Every government has different can expect to receive. Second pillars frequently ambitions for its pension system. come in the form of funded defined benefit* or defined contribution* plans. In the former, payouts are defined in advance according to a formula, Which approach is best? Our report does not tackle such as the average wage during the working pe- this question, as the answer is highly political and riod. Defined contributions pay a benefit that de- depends on one’s view of the role of the state. We pends solely on the amount of assets accumulated look at how pension ambitions are implemented in until retirement in the case of a lump sum, or addi- various jurisdictions. We do not compare manda- tionally on life expectancy* and market conditions tory systems based on the level of benefits they if an annuity is available. provide, as this is a subjective parameter that is tied to the prevailing culture, traditions and politics. The third pillar is a voluntary, mainly personal and Rather, we focus on analyzing whether the various privately managed plan. It can be structured schemes can sustainably deliver the benefits they through various products, like savings accounts are designed to provide. Each national system has with restrictions, insurance or simply private invest- its strengths and weaknesses. Therefore it is impor- ments. They are offered by many different provid- tant to understand what drives individual pensions ers. Payouts can take various forms such as lump and what determines the stability of the overall sys- sums or annuities. Despite the voluntary nature of tem. these plans, they are of utmost importance in certain pension systems. This is particularly true where Clearly, financial well-being in retirement is condi- mandatory schemes only aim to ensure a basic in- tional on having a job in working age to contribute come in old age. and save for old age or acquire future benefit rights. Therefore, a sound labor market is a Pension influenced by culture prerequisite for any pension system to perform well. In addition, with populations aging around Every government has different ambitions for its pension system. Most at least ensure a basic income to avoid penury in old age. Some also aim to A sound labor market is a ensure a decent living standard. Few want and can prerequisite for any pension system provide pensions that fully replace working income. to perform well.

8 UBS International Pension Gap Index the world, pension systems and labor markets are graphics have less impact on a pension fund’s more interdependent and need to adapt to those assets and investment returns. Depending on the changes in tandem. Building a pension tends to be exact design of the system, unemployment still rep- harder for women. They more often leave paid em- resents a risk to personal savings, but these ployment or work part time to take care of older or schemes are much more exposed to investment younger family members. Social and family policies risk. For defined benefit plans, overly generous pay- also need to adjust to modern and aging society, as outs may be hard to finance when investment re- do companies. Moreover, longer life expectancies turns falter. If the fund has a lot of participants in are obliging people to seek to stay in the workforce or close to retirement, it has limited risk-taking abil- longer, even though the job market doesn’t always ity. This reduces return prospects. In defined contri- accommodate older workers. bution plans, participants are exposed to longevity risk*, bad investment advice or inaction and limited Strengths and weaknesses knowledge when they are responsible for their own investments. First pillar schemes are especially dependent on the labor market and demographics, given they are Third pillar plans share similar weaknesses to the based on an intergenerational* redistributive model second pillar. In some countries, the access to sec- where future promises rely on future contributors. ond and third pillar is de facto reserved for formally High unemployment therefore reduces the contri- employed middle to high income earners. In these butions that directly finance retirees. In the long circumstances, only the well-off enjoy the benefits run, the system also comes under severe strain if of these schemes. Workers benefit the most if they the demographic structure of society changes and have access to all three pillars. In essence, the more the future funding source dries up. When the pillars an individual can build on, the more diversi- working-age population shrinks and the retired fied their income streams and the better their population grows, financial imbalances appear un- safety net. There is no one-size-fits-all, and what less the system adjusts. As first pillar schemes often works in one place might not work in another. finance basic needs, it is hard to reduce their bene- Most importantly, different pillars, no matter how fits. Higher contribution rates or tax rates and a ris- well designed and how well they function together, ing retirement age are required. Ideally, all of these need to be easy to apply and be broadly accepted measures should be enacted countercyclically, but by the public. this is often easier said than done. When the working age population In the second pillar, schemes are fully backed by as- shrinks and the retired population sets that are usually invested on behalf of participants. High unemployment and shifting demo- grows, financial imbalances appear unless the system adjusts.

UBS International Pension Gap Index 9 Personal responsibility: Necessity and freedom

Starting at 50 may work The other jurisdictions in this group—the Nether- Manageable if one starts young lands, Denmark, Sweden and Switzerland—run Save as you go similar three-pillar models where workers receive part of their pension through a redistributive state- managed system, part from an occupational pension fund, and are also incentivized to save pri- The pension systems we analyze in this report all vately. The Nordics and the Netherlands are have strengths and weaknesses. They have differ- particularly interesting examples, since they have ent sensitivities to demographics, economic and fi- enacted progressive reforms linking pension system nancial shocks, and political interests. Different sys- parameters to demographics. Their systems are tems also require different levels of additional therefore less impacted by populist ideas and politi- private saving to ensure a comfortable retirement. cal meddling. In Denmark, the retirement age is Below, we divide these into three groups according linked to life expectancy, and will thus climb to 75 to the level of additional personal commitment re- if life expectancy continues on its current path. In quired on top of the mandatory pension system. Sweden, part of the pension annuity is linked to the balance between the generations. Switzerland Starting at 50 may work is the only country still having a hard time adjusting to demographic realities, and it is an open question In the first category are systems that require a sav- how much longer it can stay in this group. ings rate of 0–20% of current net income, which is in most cases manageable for a full-time employee. Manageable if one starts young The UAE stands out as the only system out of the 24 we analyze where private savings are not re- In this second category, our analysis suggests sav- quired. Its pension system consists of only one de- ings of between 20% and 50% are required from fined benefit pillar. It is financed by employee and age 50 to supplement income from the mandatory employer contributions, but also benefits from the pension system. This group includes Italy, Germany, nation’s natural resource wealth. Thus, the UAE of- the UK, India, Israel, the US, France, South Africa fers most nationals a pension income almost equiv- and Canada. Such a high savings rate is not feasi- alent to working income, depending on contribu- ble for our Jane, but most likely will be manageable tion time. for young people with a long-term financial plan. The younger one starts to invest, the lower the sav- Singapore, too, relies on just one pillar, but it is split ing effort required. Continental Europe in particular into three branches with different targets, a mix of faces aging societies and a lack of willingness to savings, pensions and medical coverage. This pro- compromise on reforms. Italy is a rare exception, vides a broad foundation for pension savings. having implemented reforms some years ago. It is Given that contribution rates are high, the system now gradually phasing out its burdensome public delivers a high replacement rate*. Australia is one defined benefit plan. This also means younger gen- of few jurisdictions with a low required savings rate erations already know today that their pensions rel- that relies mainly on a defined contribution plan ative to their lifetime contributions will be lower with some state pension support. The nation’s min- than Jane and her peers who are retiring soon can ing boom and the thriving economy benefited expect. those who have invested their pensions over the past few decades and enjoyed high stock market France and Germany continue to rely heavily on re- returns. distribution. While France spreads this over two branches of its first pillar, Germany has only one

10 UBS International Pension Gap Index state-backed solution. However, whereas occupa- these regions may provide multi-generational family tional pension plans are not widespread in France, or community support networks, which may rem- in Germany about two-thirds of workers are cov- edy pension system shortcomings. ered, even though it is not mandatory. Thus, for many Germans the situation might be more favor- The reasons for the high required savings rate are able than our result indicates. The UK follows the as different as the cultures. Russia and Brazil, for classical Anglosphere model with a small state pen- example, rely heavily on redistribution in an econ- sion and reliance on company-sponsored pension omy where wages are low and the benefits of eco- plans. The latter has only been mandatory for the nomic growth are not evenly distributed. Nigeria’s last few years, and thus younger generations might high inflation makes it difficult to accumulate real have better coverage. Canada is also at the lower savings. Chile has a well-developed pension system, end of this group. While it relies on a pay-as-you- but high fees consume a substantial share of pen- go fund, it provides low pensions that aim to re- sion value. place only a third of average wages. While this is supported by taxpayer-financed social security sup- The pension systems in Hong Kong and Taiwan plements, it makes the defined benefit fund sus- have only become mandatory recently. While the tainable over the long term. former has benefited from being a hub for financial services and the latter from manufacturing, wages Save as you go of the majority of workers have not risen in line with economic growth, which makes saving harder. In this last category, more than 50% of current in- Japan is the furthest advanced from an economic come must be saved after 50, and sometimes even perspective and has high living standards, but also more than 100% to maintain the current lifestyle in has the most challenging demographic profile. retirement. This impossible undertaking arises for With one of the highest life expectancies in the de- various reasons like such as short time horizon, veloped world, retirement is simply too long on av- high inflation or low pension payouts, among oth- erage for citizens to start enjoying it at 65 based on ers. These pension systems require a high level of the mandatory system alone. personal responsibility from a young age. The category includes Brazil, Chile, Hong Kong, Taiwan, Ja- pan, Nigeria and Russia. Cultural norms in some of

Starting at 50 may work Manageable if one starts young Save as you go

UK UAE Italy Singapore Germany Brazil Netherlands India Hong Kong Saudi Arabia Israel Chile Australia US Taiwan Sweden France Japan Denmark South Africa Russia 0–20% Switzerland 20–50% Canada >50% Nigeria

UBS International Pension Gap Index 11 Sustainability and adequacy: Not mutually exclusive

Compromise necessary need to be weighed against each other, and still it Continuous improvement remains a judgement call. Moreover, what may be a good system for one person might not be perfect for another, depending on wage and lifestyle, among other things. Last, the evaluation might also A low retirement age plus high life expectancy look different depending on whether one does it equals long retirements. The longer that period, the through the individual or collective lens. more savings are needed, either within or in addition to the official pension system. Yet this is not al- Compromise necessary ways the case; Emiratis and the Swiss, for example, have among the highest number of years in retire- The Netherlands and Denmark have enacted re- ment, yet a comparatively low required savings forms to make their systems more sustainable with- rate. This is because their pension systems promise out compromising on adequacy. Yet this is not a high benefits. Whether they can continue to do so heavenly miracle; it is based on give-and-take. sustainably is a different question. On the other Workers have to be prepared to increase their time hand, the US has one of the shortest retirement in the workforce and employers have to appreciate spans, but is only average in terms of required sav- more experienced older workers. Resource-rich re- ings rate. Its system is deliberately designed merely gions like the Middle East are in a more favorable to help avoid poverty in old age. starting position to sustain adequate pension levels if they manage their public finances well and build More often than not, systems that offer generous their future economic success on a broader basis benefits tend to be less sustainable. This is particu- beyond hydrocarbons. larly the case if those benefits come from redistribution between the generations (e.g. Switzerland, Private savings and a sound Germany). The long-term finances of pension systems based on a higher degree of personal respon- investment strategy are key for a sibility or purely defined contribution mechanism financially secure retirement. tend to be more sound, but often provide lower income (e.g. Canada, Hong Kong). These examples However, in general it is clear that most people highlight the trade-off between pension sustain- cannot fully rely on income from mandatory pen- ability and pension adequacy. sion systems, no matter how adequate and sustainable they are, to maintain their accustomed lifestyle However, just because a pension system is more in retirement. Even if they start to save at a young sustainable or more adequate does not mean it is age and thus require less savings than Jane, they better in absolute terms. There are different param- may have to brace for change if the system needs eters like contribution rates or retirement age that reforming. Private savings and a sound investment

12 UBS International Pension Gap Index strategy are key for a financially secure retirement. Clear rules help workers to project As we see by looking at the individual results of this themselves into the distant future, analysis, realizing this at the age of 50 may in most which is what retirement planning is cases be too late. Even if it is not late, it requires a lot more effort compared to starting at an earlier about. age. Political gridlock can jeopardize the sustainability of A pension system’s overall adequacy should not pension systems when fixed parameters, such as re- only be judged by what the mandatory part offers. tirement age, are reviewed and decided on by poli- The incentives for private provisions, as well as the ticians. Some systems have freed themselves from economic environment and thus the ability to save such risk by implementing rule-based approaches, privately, also matter. Adequacy and sustainability such as indexing retirement age to life expectancy. can be combined in a public pension system, as Clear rules help workers to project themselves into demonstrated by the Netherlands and Sweden. the distant future, which is what retirement planning is about. We think these initiatives are key to Continuous improvement the long-term success of pension systems, as they free up precious political time for forward-looking Financial concerns related to old age have changed discussions. dramatically over the past 150 years. The worry is no longer: How will I survive when I’m too old to The main question today is: work? Now retirement has become a social right in the developed world, and the main question is: Will Will I be able to sustain my lifestyle I be able to sustain my lifestyle when I stop work- when I stop working? ing? And tomorrow’s expectations may yet be very different from today’s. If you are preparing for retirement, we think it is paramount that you understand your pension sys- To continue to fulfill their purpose, pension systems tem. You need to know the goal of the system, its must be periodically reviewed and reformed. They limits and vulnerabilities. Above all, depending on must adapt to evolving social norms, demographic your lifestyle and financial objectives, you need to developments and economic realities. Pension sys- figure out what share of the job is in your hands. tems face many challenges such as rising life expec- And, most importantly, you need to factor reforms tancy and changing work habits. Will all of them into your calculation. stand the test of aging societies and the fourth in- dustrial revolution? The stakes are high, and there is no guarantee that all will keep their current promises.

UBS International Pension Gap Index 13 Your action plan: Building long-term financial security

Budgeting is the best starting point However, a budget is only the first step in a holistic Investing is a bigger hurdle financial plan. You also need to analyze your finan- Time horizon and goals determine your cial situation in detail. What is the time horizon left savings and investment strategy to generate income from employment and how long is your investment horizon? What is your risk appetite? How much cash do you need? How much can you invest? Here it helps to determine Saving and investing can be challenging, especially your spending plans, like buying a car or real es- for a retirement lifestyle that is neither imminent tate, financing a child’s education, or sustaining a nor tangible. Moreover, it requires a conscious ef- certain lifestyle. These goals also make saving a fort. You need to sit down and analyze your finan- more tangible exercise. cial situation, grapple with future uncertainties, make assumptions, and take decisions with poten- Trade-offs may be required between consuming tially far-reaching implications. The result of this now or saving to consume later. There is no right or analysis might indicate that you need to change wrong answer on how much to save. What’s more, your current accustomed lifestyle. However, once savings for future consumption can be invested and this initial hurdle is overcome, small checks and ad- can even be an important factor to reach your justments should be sufficient along the way, and spending goal. Overall, it comes down to the life- the reward will be peace of mind. style one wants to lead, both today and tomorrow. Since humans are prone to letting emotions trump Budgeting is the best starting rationality, it helps to discuss these issues with a point trusted person. How much can I save? The easiest way to answer Investing is a bigger hurdle this question is to set up a budget. This provides a much better feeling of how much you spend, what Cash savings invariably lose value over time due to you spend on, and more importantly reveals the inflation. Since interest rates are low around the level of spending required to maintain or improve world, it is hard to find low-risk returns. Our re- your lifestyle. It provides an opportunity to ask quired savings rate for Jane assumes that savings whether that spending is actually necessary, are invested in a mix of bonds and equities. If sav- whether it delivers actual material or emotional ings were not invested, Jane’s required savings value, and whether a more elaborate lifestyle is re- rates would be at least double. Investing makes a ally necessary for happiness. Perhaps capital could difference even if only small amounts are put to be better allocated, either by spending differently work on a regular basis. Over a long time horizon, or saving. More often than not this simple budget- the compound interest effect is an important con- ing exercise leads to positive surprises. tributor to your financial success (Fig. 3).

14 UBS International Pension Gap Index Figure 3 Example of the compound interest eﬀect Annual savings of 1,000 Swiss Francs with 1% and 3% interest

70,000 70,000

60,000 60,000

50,000 50,000

40,000 40,000

30,000 30,000

20,000 20,000

10,000 10,000

0 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Investment 1% interest Investment 3% interest

Source: UBS

Time horizon and goals in the next three to five years that isn’t already cov- determine your savings and ered by reliable sources of income. A Liquidity strategy can provide a buffer that enables you to fi- investment strategy nance your living costs in any market situation. It Most people experience investing as an emotional also gives the riskier assets in your portfolio—par- endeavor. Moments of volatility and market down- ticularly in the Longevity strategy, which represents turns stick in our minds. However, if you are disci- the other assets you plan to spend during your life- plined, you are likely to be successful in most envi- time—a chance to recover from a downturn before ronments. A focused investment concept using our you resume tapping into them to cover your spend- Liquidity. Longevity. Legacy. (Fig. 4) framework ing needs. If you hold too much in your Liquidity helps you set the right investment strategy to strategy you may miss out on return opportunities match your lifestyle and your life goals in every financial market situation. A Liquidity strategy can provide a This starts with the right amount of liquid assets— buffer that enables you to finance such as cash, bonds, and borrowing capacity—that your living costs in any market will be sufficient to cover any amount of spending situation.

Disclaimer: UBS Wealth Way is an approach incorporating Liquidity. Longevity. Legacy. strategies that UBS Financial Services Inc. and our Financial Advisors can use to assist clients in exploring and pursuing their wealth management needs and goals over different timeframes. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved. All investments involve the risk of loss, including the risk of loss of the entire investment.

UBS International Pension Gap Index 15 Figure 4 UBS Wealth Way

Now – The next Five years beyond your 3-5 years – lifetime lifetime Liquidity Longevity Legacy Cash ow For longer-term For needs that for short-term needs go beyond your expenses own

To help maintain your lifestyle To help improve your lifestyle To help improve the lives of others Entertainment and travel Retirement Giving to family Taxes Healthcare and long-term Philanthropy Purchasing a home care expenses Wealth transfer over generations Purchasing a second home

Source: UBS

that could help you fund and grow your Longevity Should you be nearing retirement and already want strategy. to think about how much to leave to the next generation, you can start to set up a Legacy strategy. The Longevity strategy should be mainly invested to These assets will last beyond your lifetime. This protect your retirement, with a preference for in- means that you can invest more in riskier, higher- vestments that provide consistent growth and in- yielding, and illiquid instruments, although we still come. They should grow faster than inflation to fi- recommend a diversified approach to reduce the nance your future spending needs and to serve as a risk that an individual investment or asset class will reservoir for topping up your Liquidity strategy peri- cause you to fall short of your growth aspirations. odically. As the Longevity strategy is not directly For your Legacy strategy, we would recommend in- used to cover your daily liquidity needs, you can volving the next generation in investment decisions, consider longer-term investments and incorporate especially around philanthropic decisions. If a por- some illiquid investments as well. Your risk toler- tion of your Legacy strategy is earmarked for inheri- ance and investment time horizon determine the tance, the appropriate allocation for those assets appropriate mix between bonds, equities, and al- should reflect your heirs’ investment time horizon. ternative investments.

Disclaimer: Timeframes may vary. Strategies are subject to individual client goals, objectives, and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.

16 UBS International Pension Gap Index Jane around the world

UBS International Pension Gap Index 17 Netherlands Amsterdam

Well-established state contributions can vary widely depending and company sponsored on the pension fund. Banks and insurance providers offer voluntary private schemes pension solutions which benefit from The Netherlands has a well-established tax relief. pension system, built on three pillars. All residents can benefit from the state-ad- Jane’s almost there ministered Old Age Pensions system (AOW). Workers contribute 17.9% of We assume Jane has contributed to a gross salary to the scheme, with mini- defined benefit scheme with average mum and maximum contributions for pay indexed to wage development. low and high earners respectively. All Upon retirement, estimated at 68, the those who have lived or worked in the sum of her AOW and occupational pen- country receive a flat payout in retire- sions would represent 106% of her last ment. The amount is reviewed periodi- net salary. The replacement rate above cally and currently stands at almost EUR 100% is partly explained by the fact 1,300 per month for singles; couples re- that she will pay lower social contribu- ceive less per person. The full amount is tions in old age. Despite her high pro- received for a participation of 50 years. jected replacement rate, Jane would still In this pay-as-you-go system, the refer- have to set aside 5% of her current net ence retirement age is currently 66, but salary starting from today to maintain is set to increase with changes in life ex- her current lifestyle. This is manageable pectancy. for Jane even though the cost of living Jane’s numbers in Amsterdam does not leave her much On top of the AOW, more than 90% of room for saving. Savings rate employees participate in the quasi-man- 5% datory occupational pension scheme The big transition Replacement rate provided by employers. There are vari- is coming 106% ous types of pension funds. The most common is a defined benefit (DB) plan Future pension reforms aim to move Retirement age with annuity payments based on aver- away gradually from DB plans and to- 68 age pay. The options to retire early, post- ward defined contribution (DC) plans, pone payouts, combine payouts with which are considered fairer, more flexi- Life expectancy at 50 another job or even receive more in the ble and resilient to changes in the labor 84 early phase of retirement exist. In DB market. All DB plans will transition to Old-age dependency ratio* plans, all employees contribute the same DC by 2027. While this pension system (65+ per 100 15-65): percentage of their pensionable salary, seems robust in comparison to others, it 59.6 55.9 corresponding to gross salary minus an is not immune to demographic change. 48.6 offset, with a cap for high earners. Em- The old-age dependency ratio is high

35.5 ployee contributions typically range be- and climbing, which will increase pres- tween 4% and 7%, while employer sure on the AOW. 20.0 16.7 12.2

1950 1975 2000 2025 2050 2075 2100

18 UBS International Pension Gap Index South Africa Cape Town

Tax-financed safety net Contributions are not in old age enough

South Africa’s pension system is based We assume Jane and her employer have on three pillars: a means-tested state contributed 12.5% of her income to her pension, occupational pension plans and pension fund and she retires at the age voluntary solutions. The government- of 60. Jane will then receive a pension sponsored old-age pension (Sassa grant) equivalent to 57% of final net salary, re- is a safety net against poverty in old quiring her to save 49% of her net sal- age. This means-tested retirement in- ary to continue to finance her current come is financed through tax revenues lifestyle in retirement. She would not be and paid to residents aged 60 and entitled to Sassa grants in her 20-year above. The monthly grant is a fixed retirement period as her occupational amount that progressively decreases and pension and assets are too high. With a eventually disappears, depending on in- higher total contribution rate through- come and assets, among other condi- out her career, Jane could significantly tions. increase her replacement rate and lower her savings gap. Salaried workers additionally benefit from employer-sponsored pension plans Good, but not good that come in the form of defined bene- enough fit, defined contribution or hybrid plans. Defined benefit plans are more common South Africa’s pension system is the Jane’s numbers in the public sector. Contributions are continent’s most developed, but many usually mandatory and tax deductible up workers do not benefit from its full po- Savings rate to a certain limit. They are generally paid tential. The issues lie with the labor mar- 49% two-fifths by employees and three-fifths ket and the state of the economy. High Replacement rate by employers. There is no official retire- unemployment and a significant infor- 57% ment age to receive an occupational mal economy mean that many people pension. Upon retirement, at least two- do not prepare for financial indepen- Retirement age thirds of pension fund assets must be dence in old age. A large majority of el- 60 converted into an annuity, with the bal- derly people currently rely on governance available as a lump sum. A multi- ment grants to make ends meet. Life expectancy at 50 tude of voluntary pension solutions ex- 79 ist, usually with tax incentives. Old-age dependency ratio* (65+ per 100 15-65):

30.2

22.3

15.5

9.1 7.1 6.9 7.3

1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 19 Denmark Copenhagen

Sustainability and ade- by the time our fictitious character re- quacy can be combined tires. Her pension from the first pillar state pension, ATP and second pillar Denmark’s pension system consists of pension fund would be 58% of her final three pillars. The first includes a means- net salary. Jane needs to save 14% of tested state pension, available to every net income from age 50 to 69 to ensure resident, financed by taxes. Additionally, her living standard stays unchanged dur- all residents are entitled to the ATP pen- ing her 22 years of retirement. This low sion (Arbejdsmarkedets Tillægspension). required savings rate is partly explained It is financed by employees (one-third) by the higher-than-average retirement and employers (two-thirds). Contribu- age, and partly by the adequacy of pen- tions depend on employment level. The sion income compared to living costs. full-time equivalent is currently DKK 248 per month. It is a fully funded insurance Continuous reform efforts scheme meant to supplement the state rewarded by stability pension. It relies on intergenerational redistribution and pays a lifelong pension. Denmark’s demographics are changing, However, ATP payouts are low and not but less rapidly than elsewhere in Eu- enough to ensure an adequate living rope. Today there are three wage earn- standard. While not mandatory, cover- ers per retiree, and the number will fall age in an occupational pension fund is gradually to two per retiree by 2100. almost universal in Denmark. The sec- This gives the government more time to ond pillar is managed by private provid- adjust its pension system to demo- Jane’s numbers ers as purely defined contribution plans. graphic change, which it is already do- Contribution rates vary, mostly between ing by slowly raising the retirement age Savings rate 10% and 20%, and are shared by em- to 75 over the next few decades in ac- 14% ployers and employees. Investment cordance with life expectancy. Clarity Replacement rate strategy and capital accumulation are and transparency around the future re- 58% different for each individual, and pen- tirement age makes long-term financial sions are usually paid as annuities. The planning more feasible. Denmark offers Retirement age third pillar consists of voluntary, tax-in- a high degree of coverage, but also re- 69 centivized savings options; this is not lies on a large share of tax income to fi- considered in this analysis. nance its overall social security system, Life expectancy at 50 which includes the state pension. This 90 Adequate retirement living needs constant monitoring given lower Old-age dependency ratio* expected workforce growth. (65+ per 100 15-65): standard possible If Jane lived in Denmark, she would 51.0 47.4 have one of the longest official working 40.4 lives in the world, with the retirement 33.9 age rising from 65 years currently to 69 21.0 22.3 14.0

1950 1975 2000 2025 2050 2075 2100

20 UBS International Pension Gap Index India Delhi

Generous benefits, ment. Payout is only possible as a lump but low coverage sum which is tax exempt. The official EPF retirement age is 55, but early with- India’s pension system is based on a de- drawals are allowed for various pur- fined benefit scheme called the Employ- poses, like marriage, life insurance or ees’ Pension Scheme (EPS) as well as a medical expenses. defined contribution scheme called the Employees’ Provident Fund (EPF). These Few Indians are state-managed systems mainly cover average Jane formally employed, white-collar profes- sionals and public servants. Private com- If Jane lived in Delhi and were part of panies may offer additional pension so- the minority that is formally employed in lutions. Overall, less than a quarter of the private sector, she would be covered the Indian workforce is covered by pen- by the EPF for her 38-year career and sion insurance. would have accumulated funds in the EPS until 2014. Thus she would be re- Since 2014, the unfunded EPS has been quired to save 35% of her current net closed to new entrants earning more income to continue to meet her living than a certain wage, currently INR costs in retirement. She will retire at 58 15,000 per month. For employees be- on 84% of her final net salary. Such low the threshold, the government con- high replacement rates are not uncom- tributes 1.16% and the employer mon in India given high contribution 8.33% of wages. Existing members who rates to the EPF and generous fixed in- Jane’s numbers earn higher wages can continue to con- vestment returns. However, the fact that tribute voluntarily, but have to shoulder Jane has not used any of her EPF assets Savings rate the government contribution. The offi- before retirement is rather unusual. 35% cial retirement age is 58, but early retire- Replacement rate ment is possible. The monthly pension is An aging society needs 84% calculated based on the average of the to shift into focus last 60 months’ salary (up to a cap) Retirement age times the total contribution years di- Many Indians choose to draw on their 58 vided by 70. Late retirement is encour- pension assets before retirement to fund aged, with a 4% increase in pension important social outlays, such as wed- Life expectancy at 50 payout for every additional year. dings. With rising economic prosperity 79 bringing longer life expectancies, and a Old-age dependency ratio* In the EPF scheme, contributions are population transitioning from ten work- (65+ per 100 15-65): shared between employer and em- ers per retiree to only two by the end of ployee. For salaries below a certain the century, adjustments to the pension 45.5 threshold, currently INR 15,000 per system are necessary. Most importantly, 35.2 month, these contributions are 3.66% pension provision needs to cover a and 12% respectively. For higher salaries larger share of the population and be 20.3 it is 12% each. Contributions earn a dedicated for retirement. 11.1 5.3 6.2 7.2 fixed rate of return set by the govern-

1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 21 United Arab Emirates Dubai

Defined benefits rely solely extended working period she still has to on state funding finance 27 years of retirement given a life expectancy of 86. With a pension The United Arab Emirate’s pension sys- based on recent income, this is feasible tem is based on a single publicly admin- for her, and she does not have to make istered defined benefit scheme. It covers additional savings to continue financing Emiratis and citizens of the Gulf Cooper- her accustomed lifestyle in old age. Her ation Council; slightly different rules ap- replacement rate is over 100% of her ply to other nationals. All UAE nationals last net salary, since there are no social working in the public and private sector contributions to be paid in retirement are eligible for retirement income at age compared to working life. 50 with at least 15 years of service, or at the official age of 60 even with fewer Young population makes years of contribution. All the emirates reforms appear less share the same pension system and have a common administrator except for pressing Abu Dhabi, where the pension fund is The UAE’s population is one of the managed separately based on its own youngest globally. Currently more than pension law, though it follows the same 30 people are in working age for every principle. Contributions to the pension one person in retirement. But this ratio fund total 20% of wages and are paid is not stable. Over the next three de- by employees (5%), employers (12.5%) cades, the ratio will fall to four workers and the government (2.5%). The pen- per retiree. The country has been in a Jane’s numbers sion payout is 60% of the average of transition phase for some time, trying to the last five years’ wages, with an addi- diversify its economy away from natural Savings rate tional two percentage points added for resources. Incentivizing its abundant 0% every year above the 15-year minimum, young talent pool to join in this innova- Replacement rate but no more than 100% in total. The tion spree can further enhance the 101% regular monthly annuity is adjusted for economy’s potential. While the Emirates inflation, and Emiratis pay no tax on will most likely not run out of natural re- Retirement age their income. sources anytime soon, the risk of sharply 60 declining energy prices and thus lower revenues exists. Europe serves as an ex- Life expectancy at 50 No lifestyle change between working age and ample that reforms should be imple- 86 mented while they can still be sweet- Old-age dependency ratio* retirement ened with compensation measures, and (65+ per 100 15-65): Given Dubai-based Jane started working not just when demographic reality 29.4 at age 20, she would have fulfilled the knocks on the door.

23.4 15 working years criteria already today. 20.2 In our model, she works until the statutory pension age of 60 and thus receives the maximum pension. Even with this 6.3 3.2 2.1 1.5

1950 1975 2000 2025 2050 2075 2100

22 UBS International Pension Gap Index Hong Kong

Investment responsibility quired savings rate to maintain her cur- in employees’ hands rent lifestyle is 74% of her current net income. Jane’s life expectancy in Hong The Mandatory Provident Fund (MPF), Kong is 89, making her retirement last a an occupational pension fund akin to a total of 24 years. Due to her low pen- second pillar, is the only mandatory pension income, she will receive an addi- sion system in Hong Kong. It is a fully tional social security payment, the funded occupational defined contribu- OALA. Hong Kong has high rents, in- tion plan. The plan was introduced in creasing Jane’s cost of living. Even if 2000, which means that many employ- Jane did not live alone, private savings ees did not start saving until then, and and investing would be key to financing that elderly workers therefore don’t her long retirement. have a full savings history. Employers and employees are required to contrib- Sustainable system, but ute in equal proportions, currently 5% low benefits of gross wages each up to a monthly income of HKD 30,000. The capital is in- While Hong Kong has one of the most vested in the worker’s chosen invest- sustainable pension systems in Asia, it il- ment fund and strategy. While there is lustrates the trade-off between sustain- no statutory retirement age, the retire- ability and adequacy. The benefit of this ment age range of 60-65 for civil ser- system is that its main pillar does not vants is a good indication. Retirees re- rely on state financing. But it also leaves ceive a lump-sum payment on retirees uncertain about the payouts Jane’s numbers retirement that they can use at their dis- they will receive, as they depend on in- cretion, for example to buy an annuity. vestment returns. Additionally, the share Savings rate Additionally, Hong Kong has a state- of the government budget allocated to 74% managed, tax-funded social security sys- its first pillar is rising, as is the city’s old- Replacement rate tem, including the old-age living allow- age dependency ratio. With one of the 31% ance (OALA) and the old-age allowance lowest fertility rates in the world, its re- (OAA), that provides support for the tired population will grow from one per Retirement age needy on a means-tested basis. Further three workers to one per less than two 65 private third-party options are available workers over the next two to three de- on a voluntary basis. cades. This will make retirement financ- Life expectancy at 50 ing more costly for public as well as pri- 89 High private savings vate pockets. Old-age dependency ratio* (65+ per 100 15-65): requirements due to a relatively young system

64.7 62.6 63.1 If Jane lived in Hong Kong, she would retire at 65 with a pension income of 34.5 only 31% of her net final salary. Her re- 15.3 8.7 3.7

1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 23 Nigeria Lagos

Occupational pension for became mandatory. Jane’s pension pay- formal workers ment will replace 41% of her final net salary, and to make up the gap she will The Nigerian pension system formally re- need to save 145% of her current wage. lies on a single pillar. The 2004 Pension With one child, Jane is far from average. Reform Act changed the pension system The average Nigerian household is large, from optional defined benefit plans to and parents may rely on their children mandatory fully funded defined contri- and their extended community for sup- bution ones. Companies with more than port in old age. three employees withhold 8% of employee wages, to which they add an- Keeping up with inflation other 10%. Employees can choose the pension fund administrator (PFA), that The national pension authority imposes manages their pension investments. a strong home bias* for pension fund These are mostly private companies. The investments. This supports the country’s law sets investment restrictions on re- investment needs, but also introduces tirement savings accounts. PFAs offer other risks such as lack of diversification. default investment allocations for under Inflation has risen by a double-digit per- 50s, over 50s and retirees. Beneficiaries centage annually on average since the can opt for funds with fewer restrictions turn of the century, and pension fund and choose other features such as Sha- returns have not always been able to riah compliance*. beat this rate in the recent past. Given the choice, some Nigerians would prob- Jane’s numbers Upon retirement, set at a minimum age ably invest their old-age savings in local of 50 for men and women, insured per- assets outside the public system, includ- Savings rate sons can either choose a life annuity ing their business or real estate, or seek 145% from an insurance company or opt for a international diversification. Replacement rate programmed withdrawal. Pension assets 41% can be withdrawn prior to retirement for The Nigerian pension system is modern compelling reasons such as inability to by design. However, it does not cater to Retirement age work. Partial lump-sum withdrawals are the vast majority of informal or self-em- 60 allowed as long as the balance of the ployed workers. Less than 10% of the fund is sufficient to generate a payout working population has a retirement Life expectancy at 50 equivalent to at least 50% of last salary. savings account. Most Nigerians are left 79 to fend for themselves. Old-age dependency ratio* Uncommon Jane (65+ per 100 15-65): We assume Jane retires at age 60 and

15.3 chooses a programmed withdrawal. We also assume she only started contribut-

9.6 ing to a pension fund in 2004 when it 6.5 5.4 5.2 5.3 5.1

1950 1975 2000 2025 2050 2075 2100

24 UBS International Pension Gap Index United Kingdom London

Mandatory occupational Private savings part of pension still young Britons’ retirement plan

For a long time, the only guaranteed The two mandatory pension pillars pro- pension income in the UK came from vide London-based Jane with a net re- the state pension, which covers basic placement rate of 64%. Until she retires necessities. The new State Pension of- at 67, Jane will need to save an addi- fers a flat rate payment, currently tional 26% of net salary each month to capped at GBP 179.6 per week, ad- finance her basic urban lifestyle in retire- justed for previous National Insurance ment. This highlights that the pension contributions and price developments. It system is not intended to provide a high is financed by the government without replacement rate, and thus private sav- any dedicated individual contributions. ings are imperative. As the new scheme Currently, workers reach full eligibility started in 2012, Jane could not fully after 35 years of employment. contribute compared to later generations. Assuming a life expectancy of 87 The Pensions Act 2008 introduced an years, Jane can expect to enjoy retire- occupational mandatory defined contri- ment for 21 years. She could improve bution scheme, which was phased in her prospects by using voluntary options beginning in 2012. People who entered such as additional company-offered the workforce before 2012 will have plans, as well as other third-party ar- lower pension capital at retirement com- rangements. pared to younger workers unless they Jane’s numbers have saved voluntarily. The total compul- Incentives to save more sory contribution rate was 2% for the Savings rate will rise period 2012–2017, 5% in 2018 and, 26% currently, 8% for all subsequent years, Other reforms were introduced along Replacement rate shared between employer and em- with the mandatory occupational pillar. 64% ployee. Employees can contribute more, They include tax incentives to postpone voluntarily, or can even opt out of their early retirement, or to take the money in Retirement age employer’s plan if they have equivalent installments rather than all at once. Vol- 67 private options available. The pension untary tax-optimized savings options capital is invested until retirement, at have also become available. This is im- Life expectancy at 50 which point it can be withdrawn all at portant as the average UK household 87 once or in installments, immediately or has a relatively low savings rate of ap- Old-age dependency ratio* at a later point. Up to 25% can be with- proximately 8%. Additional reforms in- (65+ per 100 15-65): drawn tax free, while the other 75% is clude a further rise in the retirement age taxed whether it is withdrawn as a lump to at least 68. While demographic 53.9 48.5 sum or an annuity. change is taking place more slowly in 42.9 the UK than elsewhere in Europe, the 31.5 number of workers per retiree has 22.5 24.4 16.2 dropped from four in 2000 to little more than three today, and will decline further to just two over the next 50 years. 1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 25 Italy Milan

Transition underway This is far higher than younger workers who entered the workforce after 1995 Italy’s pension system is in transition. In can expect. Jane must save about 28% 1995, a fully funded defined contribu- of net earnings every month until retire- tion (DC) plan was introduced that cov- ment to finance her basic urban lifestyle ers all wage earners since. Total contri- in Milan. Jane’s retirement age will be butions amount to 33% of salaries, 67 with a life expectancy of 88 years. financed two-thirds by employees and one-third by employers. This new pen- New system phase-in sion system also requires workers to implies lower pensions save approximately 7% of their gross salary in a pension fund. This so-called Italy, like many of its European neigh- Trattamento di Fine Rapporto (TFR) ex- bors, has accounted for the fact that life isted before the 1995 reform, but was expectancy is rising and that the share earmarked to cover periods of unem- of pensioners will increase from one per ployment and held by the employer. Un- 2.5 workers to one per 1.5 workers over der the new system, full pension eligibil- the next few decades. The statutory re- ity is reached after 35 working years, tirement age has been rising gradually, and the retirement age stands at 67. but plans to link pension age to life expectancy and thus to continue to in- Before 1995, Italy’s public pension sys- crease it slowly have been shelved lately. tem consisted of a single unfunded de- The transition from defined benefit to fined benefit (DB) plan managed by the defined contribution fund is making the Jane’s numbers state. Past contributions into this Italian pension system more sustainable. scheme have been carried forward. The However, this also means that future Savings rate pension capital in this plan grows at the pensions should be less generous. For 28% rate of nominal GDP. At retirement, the younger workers, the additional TFR Replacement rate effective pension for the decommis- pension savings should partially com- 86% sioned scheme is calculated with a pensate for the lack of public defined transformation coefficient determined benefit pensions. Further it implies that Retirement age by the government, which is based on the share of savings directed to long- 67 total contributions and life expectancy. term investments and private voluntary pension plans will need to rise, and Life expectancy at 50 those investments should focus more on 88 Generous replacement rate will decline equities rather than traditional bond Old-age dependency ratio* products for their greater return poten- (65+ per 100 15-65): Since Jane entered the job market be- tial. fore the 1995 reform was introduced, 71.3 68.8 70.3 she can expect to receive roughly 86% of her final net salary from the old DB, 39.9 the TFR and the current DC scheme. 27.1 19.1 12.4

1950 1975 2000 2025 2050 2075 2100

26 UBS International Pension Gap Index Germany Munich

Only one mandatory pillar savings are important for her 21-year retirement. This means disciplined invest- Germany’s mandatory state pension sys- ments from an early age are required to tem relies on a single defined benefit enable Germans to maintain their life- scheme. It is a pay-as-you-go system style in retirement. Given the average that redistributes income between the household savings rate in Germany is generations. Employer and employee 10%, this seems feasible. share equally in contributions, which currently total 18.6% of wages, with a Unsustainably high level of cap. Due to an aging population, the government spending scheme also relies on state subsidies to cover promised benefits. The Deutsche Germany has undertaken some reforms Rentenversicherung is responsible for its over the past couple of years. The pen- administration. Pension payments are sion age is rising slowly; it was 65 in determined by a points system. The for- 2012 and will reach 67 in 2031. The cal- mula to calculate the accumulated culation used to translate contributions points is based on number of years of into a monthly pension already includes contribution as well as a person’s wage a sustainability factor, which adjusts ac- in relation to the country’s average cording to the changing ratio of workers wage. A point receives a value at retire- to retirees. Additionally, to deal with ris- ment accounting for price and wage de- ing outflows and stagnant inflows, tax velopment. Germany’s second pillar, the breaks for pensioners will be phased out occupational pension, is not mandatory, by 2040. The population is aging fast, Jane’s numbers and only about two-thirds of workers and fewer than three workers currently are covered. About as many have a vol- support every retiree, down from more Savings rate untary third pillar, mostly the state in- than six in the 1950s. In two to three 30% centivized Riesterrente. However, this decades it will be only two workers per Replacement rate option is rather expensive. retiree. This could undermine the sus- 62% tainability of the German pay-as-you-go High lifestyle costs make it system, which already costs the state Retirement age difficult to save more than 10% of GDP compared to a 67 7.6% OECD average. In Munich, Jane would have to save Life expectancy at 50 30% of her current net wage to sustain 87 her basic urban lifestyle in retirement. Old-age dependency ratio* Her replacement rate of 62% based on (65+ per 100 15-65): the mandatory part of the pension sys-

57.5 tem is about country average. Given the 53.2 54.6 high living costs in Munich, her savings

37.7 potential is limited. Germany-based Jane can expect to live to 87 and thus private 23.4 24.3 14.4

1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 27 United States of America New York City

Taxpayer-financed social retirement sufficient to finance her life- security system style. For this, she must save 42% of her monthly net wage for the next 17 years. The US mandatory pension system is New York is one of the most expensive called the Old-Age, Survivors and Dis- cities in the world, which explains part ability Insurance Program, or more com- of the high savings requirements. But as monly Social Security. It works on a pay- Americans are widely aware, private sav- as-you-go basis. Currently, employers ings are needed to supplement their So- and employees each pay 6.2% of gross cial Security pension. For example, the wages, and the scheme is supplemented 401(k), which encourages tax-deferred by tax revenues. The highest 35 years of contributions, is a popular scheme. As it wages adjusted for wage development is not compulsory for employers to offer are used to calculate the pension. Each the 401(k) scheme, it is not considered year is credited with points, and a mini- in our calculations. But due to a contri- mum amount, approximately 10 years’ bution cap, it would most likely not be worth of contributions, is needed to be able to fill the gap completely and fur- eligible for retirement. The pension is ther voluntary savings, preferably with a progressive and divided into three long-term investment strategy, would be tranches, meaning the initial dollars of required. income receive a higher replacement value to ensure basic survival for lower- A young population buys income households. The subsequent time dollars receive lower replacement rates. Jane’s numbers Early retirement is possible, with re- The Social Security Administration has duced benefits starting at 62. Late re- raised the retirement age to cope with Savings rate tirement is encouraged, with increased demographic change. It is currently 66 42% benefits up until age 70. The money not years and two months, and will increase Replacement rate needed to pay current benefits is held in by two months per year over the next 50% Social Security’s trust funds. These funds five years to hit 67. The US has one of are close to their peak and will decline the lowest life expectancies in the devel- Retirement age as ever more people rely on their bene- oped world, and its population is rela- 67 fits, while the number of contributors is tively young. Thus the effects of demo- stagnant. graphic change will materialize more Life expectancy at 50 slowly than elsewhere. Currently, there 84 Intentionally low are still four workers for every retiree. Old-age dependency ratio* replacement rate Nevertheless, without government ac- (65+ per 100 15-65): tion, Social Security’s reserve is projected 49.1 Social Security is intended only to pro- to be depleted by 2035. The system is 45.5 vide the basis for an individual’s pension thus not very sustainable and will need 36.6 income. However, as Jane earns a me- adjustment. 29.3 dian salary, her replacement rate will be 18.7 16.7 almost 50%. Nonetheless, this alone 12.6 does not provide her with an income in

1950 1975 2000 2025 2050 2075 2100

28 UBS International Pension Gap Index France Paris

It’s all based on ditional pension benefits to compensate redistribution for time spent on childcare.

France’s retirement system is based on a The later the better multitude of schemes. We take the two most common ones into account. Both We assume Jane retires at age 65 with a work on a pay-as-you-go basis, are ad- full pension. In the first year of retire- ministered by public bodies and are sub- ment, she will receive about 78% of her sidized by public money. All employees last net income from RGSS and her oc- are eligible for the Régime Général de la cupational pension, the latter making up Sécurité Sociale (RGSS). Employer and less than one-third of benefits. With a employee contributions total 15.45% of life expectancy of 87, Jane will enjoy 23 wage up to a ceiling and 2.3% thereaf- years of retirement. She would need to ter. The standard RGSS pension is based save about 44% of her disposable in- on 50% of the average of an employ- come to supplement her retirement in- ee’s 25 highest annual salaries. For the come from the mandatory system. This purpose of the calculation, past salaries is almost impossible to achieve consider- are adjusted for wage growth. Pension ing she lives in Paris, where the cost of payouts are adjusted for inflation every living is high compared to the median year. wage.

AGIRC-ARRCO is the occupational pen- Will France sion for private sector workers. The liberalize pensions? Jane’s numbers schemes for managers and civil servants have different names, but similar mech- France has fewer than three workers for Savings rate anisms. It is funded three-fifths by em- each retiree, and the sustainability of the 44% ployees and two-fifths by employers. To- French system is reduced by high and Replacement rate tal contributions are 7.87% on a first rising public debt. The current govern- 78% tranche of wage and 21.55% on a sec- ment has initiated pension reforms, but ond. The contributions are translated they are currently on hold and will prob- Retirement age into points. At retirement, the accumu- ably only resume after the next presi- 65 lated points are converted into an annu- dential election. It seems the pay-as- ity payment based on the value of a you-go model is here to stay. Life expectancy at 50 point. 87

Old-age dependency ratio* Employees can leave the workforce at (65+ per 100 15-65): age 62 with a full pension if they have worked the required number of quar- ters, which is birth year dependent. If 60.4 54.3 49.3 their contribution period is too low, they 36.9 can take a pension cut or work longer

21.5 24.7 and benefit from a full pension at age 17.3 67, no matter what. Parents receive ad-

1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 29 Saudi Arabia Riyadh

Redistribution for citizens pension, Jane needs to save 7% of her net salary to maintain her current life- Saudi Arabia’s basic pension system is a style in retirement. Covering this is man- pay-as-you-go scheme. It is mandatory ageable with her estimated 20% savings for all Saudi employees, excluding for- capacity. eign workers. Civil servants are covered by another scheme. Total contributions Too generous to be sum up to 18% of wages, half of which sustainable are covered by employers. The Saudi pension system does not in- Saudis, both men and women, can centivize workers to secure their finan- claim a pension from the age of 60, pro- cial situation in retirement personally. vided they have at least 10 years of con- The concept of a tax break doesn’t exist, tributions. The pension is based on the as income is not taxed, which makes in- average wage of the last two years and centivizing private pension savings the contribution period. There is a back- harder. However, like most other societ- stop to prevent large pay rises in the last ies, Saudi Arabia’s population is aging. two years prior to retirement. Pensions This threatens the fragile equilibrium of are increased by up to 20% depending its pay-as-you-go scheme. The old-age on the pensioner’s number of depen- dependency ratio is expected to rise dents. quickly over the coming few decades. Planned reforms aim to increase the re- Early retirement is possible at age 55 in tirement age to 65 for men and 63 for Jane’s numbers case of arduous working conditions. It is women by 2028. also possible to retire before the age of Savings rate 60 if one has contributed for at least 25 7% years. Employment and pension can be Replacement rate combined after 60, with potentially a 102% lower pension payout before the age of 65. Workers who have contributed but Retirement age do not meet the requirements for a pen- 60 sion may receive a lump sum.

Life expectancy at 50 81 It’s almost too easy for Jane Old-age dependency ratio* (65+ per 100 15-65): We assume Jane retires at the age of 60 48.9 on 102% of her last net income. This

37.8 rate is above 100% mainly because there are no retirement contributions on 25.9 pension payments. With a relatively high

6.1 6.2 5.1 6.1

1950 1975 2000 2025 2050 2075 2100

30 UBS International Pension Gap Index Brazil Rio de Janeiro

A mostly redistributive Mandatory is not enough system We assume Jane has contributed only to The mandatory Brazilian pension system the RGPS scheme. At the ordinary retire- is based on a pay-as-you-go scheme ment age of 62, her pension would be (RGPS) that is mainly for the private sec- about 46% of her last net salary. To tor and is operated by the National So- maintain her current lifestyle in retire- cial Security Institute (INSS). Most civil ment, Jane would need to save and in- servants are enrolled in the RPPS vest 69% of her net income, which is scheme, which is not discussed in this not feasible. Contributing to employer- report. The RGPS is financed through sponsored schemes would definitely contributions from workers and employ- help. ers. System parameters were changed in 2019. Employees contribute between Reforms versus 7.5% and 14% of their wages depend- demographics ing on salary level, with a cap for high earners. Employers contribute at least Brazil’s pension system faces a demo- 20% of wages. The state chips in to graphic challenge: lower birth rates, cover redistribution shortfalls. higher life expectancy and an aging population. The dependency ratio is set The minimum retirement age is 65 for to more than double in the next 30 men and 62 for women. The RGPS pen- years. Until recently, civil servants en- sion is based on a formula that takes joyed very generous pensions. Govern- Jane’s numbers into account length of contribution, av- ment spending on RGPS pensions alone erage wage during the contribution pe- stood at 8.5% of GDP in 2018, which is Savings rate riod and life expectancy at retirement. very high considering coming demo- 69% RGPS payouts have a floor and a cap graphic developments. Long-awaited Replacement rate and are periodically adjusted. A full pen- pension reforms were enacted in 2019, 46% sion corresponds to 60% of average but may not be sufficient to offset de- wage during the contribution period mographics and decades of generous Retirement age provided men have worked at least 40 benefits. 62 years and women 35. The minimum contribution period is 20 years. Life expectancy at 50

83 Workers in the private sector may volun- Old-age dependency ratio* tarily contribute to their employer’s ex- (65+ per 100 15-65): isting pension plan if one is available. These come in the form of defined ben- 64.3 efit, defined contribution or hybrid 56.3 plans. Only around 10% of the work-

36.2 force is enrolled in occupational pension funds. 16.6 5.4 6.5 8.1

1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 31 Russia Saint Petersburg

Employers cover all Little time to save contributions We assume Jane retires at 60, even The mandatory Russian pension system though she could in theory be entitled is based on a national pay-as-you-go to early retirement due to her long time system. Employers contribute 22% of in the workforce. Her replacement and employees’ wage up to a certain thresh- required savings rates will be 30% and old (and 10% thereafter) to the Russian 108% respectively. Saint Petersburg- Pension Fund (PFR). Employees do not based Jane will not be able to sustain contribute anything, while self-em- her lifestyle in retirement based on the ployed workers contribute according to public pension alone. Closing the gap in different rules. Contributions give rise to 10 years is an impossible challenge. De- points according to a formula, with a laying her retirement age by a couple of cap on the number of points one can years would significantly lower the re- accumulate per year. Women receive quired savings effort. pension points for part of the time spent on childcare. Frozen plan and pending reforms In retirement, the monthly pension is calculated as the total number of points During the Soviet era, the pension sys- accumulated multiplied by the value of a tem was entirely state financed. Since point, in addition to a basic flat rate the Soviet Union’s collapse, the pension benefit. The values of the points and the system has been amended several times. Jane’s numbers basic flat rate are adjusted annually by The government still contributes signifi- the government by at least the rate of cantly to meeting pension obligations. In Savings rate inflation. A minimum amount of points 2002, a defined contribution plan was 108% and contribution period are required to introduced for a share of pension contri- Replacement rate receive a pension. Non-working pen- butions (6% of wages). This plan has 30% sioners with low pension incomes can been suspended since 2015, and contri- benefit from various supplementary butions have been shifted to the pay-as- Retirement age means-tested benefits. you-go system to improve its financial 60 balance. The raising of the retirement The retirement age is currently 56 for age should ease the pressure on public Life expectancy at 50 women and 61 for men, and is set to in- finances, but further reforms are 84 crease gradually to 60 and 65 respec- needed. Old-age dependency ratio* tively by 2028. Early retirement is only (65+ per 100 15-65): permitted for long careers or arduous working conditions. Late retirement is 42.9 incentivized, with each year of post- 38.1 35.9 ponement increasing the pension pay- 27.9 out. Pension and work can be combined 18.0 13.3 with some restrictions. Pensioners above 7.4 80 receive double the basic flat rate benefit. 1950 1975 2000 2025 2050 2075 2100

32 UBS International Pension Gap Index Chile Santiago de Chile

Long-established defined from the age of 65. Voluntary private contribution plans solutions are well developed including company-sponsored and individual The Chilean pension is based on three schemes. Contributors benefit from tax pillars. The first is a solidarity pension, incentives and a large choice of invest- the second an occupational defined ment funds. contribution scheme, and the third is private solutions. The first pillar is fi- Too late to catch up nanced by tax revenues and ensures a minimum income in old age. Various We assume Jane retires at the age of 65 conditions must be met to benefit from and chooses a lifetime annuity for her this pension, including 20 years of resi- occupational pension. She is eligible for dency in Chile. The solidarity pension is the solidarity pension, like a majority of progressive, adjusted for inflation, and women retirees today. Jane’s pension is paid out from the age of 65. 46% of her net final salary, and her required savings rate to maintain her life- The second pillar is a mandatory defined style is 80% of her current net salary. contribution plan for all workers, estab- The high cost of living in the capital city lished in 1981. The minimum retirement and the comparatively low median wage age is 60 for women and 65 for men. make it very hard for her to save and in- Employers do not contribute. Employees vest for retirement. Starting to think and self-employed persons contribute about retirement at 50 is too late to 10% of earnings (up to a salary ceiling) maintain her living standard in old age. Jane’s numbers to one of a handful of authorized private Pension Fund Administrators (AFP). Savings rate Some fine tuning could They can choose their AFP fund alloca- help 80% tion from among five risk strategies, Replacement rate with age-based restrictions. Changing The Chilean pension system is advanced, 46% AFP is subject to fees, and there are especially compared to other Latin lock-in periods in some cases. AFPs typi- American systems, but it would benefit Retirement age cally levy service fees on contributions from more calibration. Discussions over 65 and payouts. Various payout types exist, pension reforms include raising pension including life annuities and programmed fund contributions to 16%, with part of Life expectancy at 50 withdrawals. Early retirement is possible the increase falling on employers. In- 87 provided the accumulated capital ex- creasing the number of AFPs could also Old-age dependency ratio* ceeds a given threshold. Pensioners can boost competition and drive down fees. (65+ per 100 15-65): continue to work while receiving a pen- Suggestions include the creation of a sion. state AFP and linking fees to perfor- 65.5 mance. 58.6 When women give birth to or adopt 40.9 children, the state gives them a voucher

21.8 worth 18 months of pension contribu- 11.8 tion at minimum wage. This capital is in- 5.9 7.6 vested and grows with the rest of the 1950 1975 2000 2025 2050 2075 2100 pension capital and can be cashed in

UBS International Pension Gap Index 33 Singapore

Savings vehicle for all Use of funds before retire- phases in life ment determines savings

Singapore’s pension system, adminis- rate tered by the Central Provident Fund If Jane lived in Singapore, she would re- (CPF), is a funded scheme with three ceive a pension equivalent to 88% of features: the ordinary account (OA), the her final net salary and have to save only special account (SA) and the medisave 3% of her current net salary to continue account (MA). The OA is intended to to finance her living standard. This com- provide a savings vehicle to fund retire- fortable position is due to not only the ment, housing, education, and other comparably high overall contribution purposes. OA savings can be accessed rate, but also steady high returns. The before retirement. At age 55, any funds fact that Jane has not used her OA sav- left in the OA up to a ceiling are com- ings to buy an apartment, as many resi- bined with the SA, and then called the dents of Singapore do, additionally in- retirement account (RA). This is reserved creases her retirement savings. solely for retirement. A certain minimum amount of the RA has to be used to Rising old-age dependency purchase an annuity to ensure lifelong ratio requires adjustments income. The rest can be withdrawn as a lump sum. The MA can only be used for Singapore’s system has many positive medical purposes, and contributions are features. The three pillars prioritize re- currently capped at a total of SGD tirement provision, but also serve other Jane’s numbers 63,000. Contributions are paid by both important life events. Guaranteed in- employee and employer, and range be- vestment returns incentivize people to Savings rate tween 12.5% and 35% of salary de- save early and to withdraw pension cap- 3% pending on age. A larger share of the ital later or in installments. However, Replacement rate total contributions is allocated to the OA Singapore’s population is aging rapidly, 88% in younger years. As employees age, the and its citizens have a high life expec- share allocated to SA and MA rises. tancy. While there are still almost four Retirement age Each account earns a fixed rate of inter- workers for each retiree, this number is 65 est, which currently stands at 2.5% for only one-fifth of what it was in the OA and 4% for all other accounts. A 1950s. There will be fewer than two Life expectancy at 50 small amount of total savings receives workers for each retiree in two to three 90 an additional 1% interest. Currently, the decades’ time. This raises challenges, in- Old-age dependency ratio* legal minimum retirement age is 62, but cluding how long high rates of return (65+ per 100 15-65): this is set to rise to 65 over the next ten can be achieved, and whether the in- years. centives for working longer and saving 67.7 66.2 more are sufficient to accommodate de- 58.8 mographic change.

26.0

8.5 4.2 6.5

1950 1975 2000 2025 2050 2075 2100

34 UBS International Pension Gap Index Sweden Stockholm

Redistribution with a pinch with tax revenues for those with small of choice pensions.

The Swedish mandatory pension system Around 90% of employees in Sweden is based on state-managed schemes and participate in the quasi-mandatory occu- occupational pension funds. Total contri- pational pension scheme, based on in- butions amount to 18.5% of gross dustry-specific defined contribution wages, three-fifths of which is paid by plans. Contributions amount to 4.5% of the employer. Employer contributions employee wage up to a threshold and above a ceiling are not credited to the 30% thereafter. Again, employees may scheme, but instead are paid as tax to have a say in fund allocation. The mini- the state. The state pays contributions mum retirement age is 55 for this for individuals who are away from work scheme. Private pension solutions exist, to provide childcare. Contributions are but have not been tax deductible since channeled into two schemes: the vast 2016. majority flows into a pay-as-you-go plan called the income pension (inkomstpen- “Money, money, money” sion) and the balance into a funded defined contribution plan called the pre- Money shouldn’t be an issue for Jane. mium pension (premiepension). We assume she retires at age 67 and chooses a guaranteed annuity for her Income pensions are paid in the form of premium and occupational pensions. annuities. Payouts depend mainly on The net pension in her first year of re- Jane’s numbers personal contributions, historical aver- tirement will be 71% of her last net sal- age wage growth, the retirement age ary. Jane should be able to set aside the Savings rate and life expectancy. Pensions continue required 9% of her current net income 9% to grow in retirement provided a bal- to maintain her lifestyle in retirement. Replacement rate ance is kept between total contributions 71% and payouts in the scheme. Retiring Can it get any better? later leads to higher pensions. In the Retirement age premium pension, assets grow with the The Swedish pension system is state of 67 investment performance of underlying the art in many ways. Major pension re- funds. Workers can choose their alloca- forms introduced in the 1990s are bear- Life expectancy at 50 tion from hundreds of funds and change ing fruit. Still, the income pension sys- 86 them at any time. Roughly 30% of tem is highly influenced by Old-age dependency ratio* Swedes stick to the AP7 default fund. demographics. Current reform discus- (65+ per 100 15-65): State pensions are available from the sions revolve around indexing retirement age of 62 but the minimum retirement age to life expectancy. On the premium 53.1 47.4 age will gradually be raised to 67 by pension side, the fund offering should 41.4 2026. There is also a means-tested top- be streamlined. 34.5 26.9 up pension (garantipension) financed 23.6 15.3

1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 35 Australia Sydney

Basic coverage but highly her net final salary, requiring her to save sustainable 7% of her current net salary to continue to finance her accustomed lifestyle in re- The Australian pension system is built on tirement. Despite high living costs in two pillars: Mandatory private pension Sydney, this is feasible. Australia’s retire- funds and a means-tested state-fi- ment age is not set in stone. We assume nanced pension scheme. Since 1992, it is 67 for Jane, which coincides with employers have been obliged to contrib- the start of Age Pension payouts. She ute to their employees’ superannuation has a life expectancy of 88 years, mak- funds, a defined contribution scheme. ing her retirement 22 years long. Jane The employer contribution rate is cur- can invest her savings either through rently 9.5% of gross earnings and sup- tax-optimized private super-contribu- posed to rise to 12% over the next tions or through private solutions. years. Employee contributions are voluntary, but attract tax benefits. The super- Fiscally stable, but vulnera- annuation fund capital is invested at a ble to domestic shocks risk level of the employee’s choosing. At retirement, the balance is converted into Australian demographics are changing annual installments. If income and the more slowly than elsewhere in the de- value of existing assets are below a cer- veloped world. The ratio of working to tain threshold, retirees receive additional retired people has fallen from more than social security benefits from the Age seven to around four over the past Pension paid by the government and seven decades, and recent restrictions Jane’s numbers funded by tax revenues. The Age Pen- on immigration may accelerate the sion top-up is important in later retire- trend. Despite the government-spon- Savings rate ment years, when it compensates for sored Age Pension, public pension 7% the loss of purchasing power of the oc- spending is fairly low, and given its Replacement rate cupational pension. The Age Pension is modest debt-to-GDP ratio, Australia has 55% also intended to favor low to medium room to maneuver. However, the na- income earners, as higher income earn- tional economy depends heavily on nat- Retirement age ers receive progressively lower pay- ural resources, leaving it vulnerable to 67 ments. price volatility. Further, superannuation funds may have concentrated positions Life expectancy at 50 in the Australian market and could be 88 Occupational pension in focus exposed to domestic shocks, especially Old-age dependency ratio* in the housing market. The latter is also (65+ per 100 15-65): Jane is eligible for the Age Pension. This a concern for private individuals who is partly due to the fact that contribu- have their wealth and pensions concen- 50.2 tions to superannuation funds (so-called trated in their real estate. It is therefore 43.3 37.7 super-contributions) only started in important to mitigate those risks with 28.1 1992, with initially low contribution an internationally diversified investment 18.5 rates, and partly that she does not con- approach for private savings. 13.8 12.5 tribute herself, as it is not mandatory. Her total pension payment is 55% of 1950 1975 2000 2025 2050 2075 2100

36 UBS International Pension Gap Index Taiwan Taipei

Official retirement age not High savings rate makes realistic for many up for low pension

Taiwan’s occupational pension for pri- Jane, who lives in Taipei, has to save vate-sector workers is called the Labor 91% of her net salary every month, as- Pension. It is a funded defined contribu- suming she retires at 60, to finance her tion plan, established in 2005, in which basic urban lifestyle in retirement. If Jane employers have to contribute at least were to stay in the workforce a couple 6% (up to TWD 150,000 per year) of an more years, as many Taiwanese do, this employee’s gross salary, while employ- figure would fall substantially. The Labor ees can voluntarily contribute up to 6%. Pension, including the claims from the The pension fund capital earns a guar- pre-2005 system, and Old-Age Benefit anteed investment return at least equal will provide her with a replacement rate to the two-year deposit rate. At retire- of only 32%, due to a low contribution ment, insured persons with more than rate. Taiwanese Jane’s life expectancy of 15 years of service can choose between 86 implies a need to finance 27 years of an annuity or a lump sum. Workers with retirement with just 10 years left to less contribution years can only receive a work. Taiwan’s household savings rate is lump sum. Workers are eligible to retire generally high, and homeownership is at 60, but many decide to work longer. common. Therefore, many Taiwanese Before 2005, workers would accumulate may be better prepared for retirement a maximum of 45 points, two for the than Jane is at age 50. first 15 years of work and one for each Jane’s numbers subsequent year. Each point was roughly Rapid economic growth worth one month’s wage. The benefit Savings rate requires an adequate pen- was small and distributed as a lump 91% sum. sion system Replacement rate Taiwan’s economic growth has been 32% In addition to the Labor Pension, all pri- rapid in recent years. Likewise, its pen- vate and public workers participate in sion system has evolved over the last de- Retirement age the Old-Age Benefit pension system cades. By now the majority of Taiwanese 60 managed by the Taiwanese government. are covered by a labor insurance Contributions currently stand at 10.5% scheme, but pension payout is low. Like Life expectancy at 50 of monthly insured wages, financed by so many of its Asian neighbors, Taiwan’s 86 employees (20%), employers (70%), demographics are changing fast. This is Old-age dependency ratio* and the government (10%). Total contri- putting further pressure on the pension (65+ per 100 15-65): butions will rise to 13% over the next system. The ratio of active workers to few years. As for the Labor Pension, re- retirees is falling. The Old-Age Benefit, 71.9 65.0 67.1 tirees can choose between a lump sum which is financed via redistribution, is and a monthly pension if they have less sustainable than the Labor Pension. worked more than 15 years; otherwise 29.0 they receive a lump sum. The monthly 12.5 pension payment is adjusted for infla- 5.6 3.9 tion and paid until death. 1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 37 Israel Tel Aviv

Defined contribution along capital can be paid as a lump sum pro- state support vided the annuity amount exceeds half of the national average wage. Israel’s pension system is organized around two mandatory pillars: a public Too late to keep up old age insurance scheme and occupational pension funds. Israeli residents We assume Jane did not contribute to above the age of 18 must pay into the occupational pension funds before they national insurance system (Bituach became mandatory. This impacts the Leumi), a pay-as-you-go scheme. Contri- size of her pension. When retiring at butions amount to 14.6% of employee age 62 and opting for a lifetime annuity, wages, around half of which are paid by her pension payments will be 66% of the employer. Contributions are reduced her final net salary. Maintaining her cur- for low earners and capped for higher rent lifestyle requires she saves 41% of earners. her current net salary. That savings effort is more than Jane can afford, but The minimum retirement age is currently younger people will likely have better re- 67 for men and 62 for women. Upon tirement prospects as they will have retirement, all insured workers are enti- contributed more and from an earlier tled to a flat payout indexed to inflation. age. The payout is income-tested until the age of 70. Early retirement is not al- More reforms needed lowed, but late retirement is possible Jane’s numbers until 70, and rewarded with a 5% in- The Israeli pension system has under- crease for every year. Workers who have gone many rounds of reform in the last Savings rate contributed for a long period receive a 25 years, which should bear fruit in the 41% top-up of up to 50%. Pension and labor future. The change in Israel’s old-age Replacement rate income can be combined up to the age dependency is forecast to be less severe 66% of 70. than OECD peers. However, increasing life expectancy and decreasing birth Retirement age On top of the Bituach Leumi, salaried rates mean further adjustments to mini- 62 and self-employed workers have been mum retirement ages will be needed. required to contribute to defined contri- Current discussions revolve around grad- Life expectancy at 50 bution plans since 2008. Total contribu- ually raising the retirement age for men 85 tions currently stand at a minimum of and women to 70 and 65 respectively. Old-age dependency ratio* 18.5% of wages, two-thirds of which (65+ per 100 15-65): are paid by employers. Depending on the company, employees can contribute 44.8 more, with a cap on the income tax ad- 33.1 vantage related to these contributions. 27.6 21.8 Upon retirement, individuals receive a 16.2 lifetime annuity. Part of the accumulated 12.8 6.1

1950 1975 2000 2025 2050 2075 2100

38 UBS International Pension Gap Index Japan Tokyo

Largest pension fund in to finance 27 years of retirement. the world Clearly, this savings gap falls if we consider the voluntary savings options, Japan has a two-tier pension system. which are widely used. The average Jap- Both schemes are unfunded pay-as-you- anese has a relatively high savings rate. go systems where workers fund their re- This case shows that making use of pri- tired counterparts. The first is called the vate savings is vital to financing one’s National Pension, administered by the lifestyle in retirement. Japan Pension Service. This pays a flat rate calculated as a share of the national Change is only slow to average income. It is distributed to all come who qualify with 10 years of coverage at the age of 65. The second, called the Japan’s working-age population is Employee Pension, is related to earnings shrinking, while the number of retirees and calculated based on working years is rising, resulting in a higher bill for and average lifetime salary. Both pension benefit payments. The country’s schemes pay annuities that are continu- old age dependency ratio is already ously adjusted. Japanese pension capital around one retiree per two workers. Ja- is invested in the largest pension fund in pan also has a high level of government the world, the Government Pension In- debt and its spending on pensions as a vestment Fund, with approximately USD share of GDP is already high. This sug- 1.6tr of assets as of end-2020. While it gests a rethink is required to deploy cap- was set up by the government, it is ad- ital into more productive uses. The gov- Jane’s numbers ministered independently. ernment has undertaken steps to reform the system in recent years. The pension Savings rate calculation mechanism has been ad- 102% Retirement age not realistic justed to account for an aging popula- Replacement rate tion with the so-called macroeconomic 40% In Tokyo, Jane would have to put aside a slide, which indexes pension payouts to striking 102% of her monthly net salary, prices and wages, should they rise or Retirement age in addition to the mandatory pension fall. However, starting in 2021, pension 65 system contributions, to maintain her payouts will no longer be indexed to in- lifestyle when retired. Her pension is flation, but solely to wage growth. Ad- Life expectancy at 50 only 40% of her final employment in- ditionally, the voluntary retirement age 91 come. Japan has one of the highest life will be raised to 70, allowing seniors to Old-age dependency ratio* expectancies in the world and relatively stay in the workforce beyond the legal (65+ per 100 15-65): high living standards. While the statu- retirement age.

74.3 75.1 73.8 tory retirement age is 60, pension benefits are only paid out at 65, and many

50.6 Japanese choose to work even longer. Jane can expect to live until age 91. We 24.9 assume she retires at 65 and will need

8.2 11.3

1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 39 Canada Toronto

World-famous pension Basic pension supple- fund mented by social security

The Canadian Pension Plan (CPP) is the Toronto-based Jane would have to put main pension pillar for all Canadian aside 50% of her monthly income to fi- provinces except Québec. It is a federally nance her basic urban lifestyle in retire- administered defined benefit scheme. Its ment. Since her pension income in To- investments are managed by a profes- ronto would likely be relatively low, she sional body and it enjoys world recogni- would receive the full OAS pension, but tion for its performance over the past no GIS support. Along with the CPP she few years. As of 2021, employer and receives, she would enjoy a total net re- employee each contribute 5.45%, with placement rate of around 41%. Jane a cap on insured wages. The total con- can expect to live to 88 and has to cover tribution rate will rise over the next few 24 years of retirement. It is especially years with the aim to provide a replace- important for her to consider additional ment rate of about 30% of final salary voluntary retirement savings options, at a retirement age of 65. The pension such as employer-sponsored plans or amount depends on the number of private investments. months worked and the relevant pensionable earnings. Pensionable earnings Private savings crucial to are determined according to the ratio finance retirement between a worker’s actual income and a maximum amount set by the govern- There are still more than three workers Jane’s numbers ment each year. for every retiree in Canada, which gives the state-financed supplement schemes Savings rate In addition to the CPP, the Canadian some breathing room for now. The CPP 50% government offers the Old Age Security scheme is sustainable despite being a Replacement rate (OAS) benefit to all qualifying residents. defined benefit fund, since payouts are 41% Since the income threshold is high, the relatively low and it is managed with an majority of Canadian retirees receive it. eye on the long term. However, with Retirement age A second means-tested social security Canadian life expectancy rising, higher 65 benefit is called the Guaranteed Income contributions and subsequently higher Supplement (GIS). It is intended to pre- pensions may benefit pensioners’ living Life expectancy at 50 vent poverty in old age and provides standards. Private savings are essential 88 payments depending on income and as- to financing an adequate living standard Old-age dependency ratio* sets. Both OAS and GIS are funded by in old age. (65+ per 100 15-65): government revenues.

51.5 48.6 41.3 32.0

18.4 12.2 13.0

1950 1975 2000 2025 2050 2075 2100

40 UBS International Pension Gap Index Switzerland Zurich

Pension system strength are high compared to other pension sys- founded on two manda- tems. Second, the redistribution system is more generous than elsewhere. The tory pillars two pillars provide Jane with a replace- Switzerland is one of the few countries ment rate of about 63% of her prior fi- with two mandatory pension pillars that nal income. However, with a life expec- are both financed by employer and em- tancy of 90 and given that Switzerland ployee. Pillar one is the government-ad- has one of the lowest retirement ages ministered old-age and survivor’s insur- for women in Europe, she needs to fi- ance scheme (AHV). It is a pay-as-you-go nance 26 years of retirement. scheme that ensures a minimum pension above poverty level. Pillar two is the Reforms urgently needed private occupations pension fund (BV), which follows a funded principle and Switzerland’s population is aging rapidly. can be taken as pension, lump sum or a The ratio of active to retired was as high mix. Both pillars are financed equally by as five to one in 1970, but is just above employer and employee contributions, three to one today. It is expected to fall in total 8.7% for pillar one and between to just two to one by 2050. There have 7-18% for pillar two. Together, the two been numerous reform proposals in the aim to achieve a total pension income of past few years, but only minor measures 50–70% of pre-retirement income. Be- have been enacted, which have served sides these two pillars, Switzerland has a to keep the system financially afloat for third pillar, which is not mandatory and a few more years. Two bigger reform Jane’s numbers not considered in our calculations. It in- packages, one for each of the first two cludes private tax-incentivized savings pillars, are being debated in parliament Savings rate schemes and life insurance plans. The as of this writing. Some of the compo- 14% statutory retirement age is currently 64 nents are vital, like raising the retirement Replacement rate for women and 65 for men, with retire- age for women to 65 and increasing in- 63% ment five years earlier or later possible. centives for longer employment in the AHV. On the occupational pension fund Retirement age Moderate required side, the payout formula should be re- 65 savings despite high living viewed, an imperative to make the system more sustainable. However, there Life expectancy at 50 standards are also attempts to introduce redistri- 90 In Switzerland, Jane has to save an af- bution in the second pillar which would Old-age dependency ratio* fordable 14% of net salary to fully fi- damage the foundation and strength of (65+ per 100 15-65): nance her urban standard of living in re- the three individual pillars of the Swiss pension system. 55.5 tirement. This low required savings rate 49.9 51.6 is due to two factors. First, both mandatory pillars receive dedicated contribu- 32.7 tions from worker and company. Contri- 22.7 19.1 butions to the second pillar in particular 14.1

1950 1975 2000 2025 2050 2075 2100

UBS International Pension Gap Index 41 Appendix

42 UBS International Pension Gap Index Methodology

The key statistic of the UBS International Pension Gap Index is the monthly required savings rate Jane needs from age 50 until retirement to support a basic urban lifestyle under each jurisdiction’s conditions and is calculated as follows:

1. Estimate average monthly cost of living for ev- 6. Take the difference between total costs and ery city by creating a retirement cost basket total net income to calculate surplus or deficit consisting of housing, staples and personal for each year of retirement. care items, transportation, recreation, medical 7. Apply a net present-value (NPV) calculation, care, and gifts and donations. This basket is assuming an investment return from a yield- largely based on Numbeo numbers, as well as oriented investment strategy, to arrive at the on the personal experience of UBS staff. total pension gap* when retirement starts. 2. Analyze the retirement and social security sys- 8. Perform a second present-value calculation tem to determine the expected pension in- with the result from step seven over the re- come. maining working period to estimate the abso- 3. Inflate prices to reflect nominal costs and in- lute amount of money needed to be saved, as- come at each point in time. suming a slightly higher investment return 4. Adjust income for tax obligations and other from a balanced mix of equities and bonds. regular charges and fees such as health insur- 9. Divide the result from step eight by the current ance. net income to receive the required savings 5. Apply an uncertainty discount* to adjust ex- rate. All calculations are performed in the local pected net income. currency.

Figure 5 UBS International Pension Gap Index Methodology explained Savings required to close the pension gap including investments 85 = life 50 = today 65 expectancy Retirement

Cost of living (in retirement) Net (employment) income Pension gap Net (pension) Cost of living income (in working life)

X0 X1 Xn

Savings r (NPV) X = NPV = Σ n amount 1 – (1+r)-n (1+r)n

Income (either from employment or pension) Pension Gap Cost of living (either during employment or retirement) Investment return including compound interest Private savings amount to close the pension gap Source: UBS, 2017

UBS International Pension Gap Index 43 Assumptions

All of Jane’s jurisdiction-specific characteristics, like Figure 6 retirement age and life expectancy, stem from the Uncertainty discount factor most recently available specific data. The jurisdiction’s median female gross full-time equivalent in- Australia 7% come is mostly available on local statistics office da- Brasil 15% tabases. Where it is not, which is mainly the case in Canada 5% developing economies, average wage is used with Chile 5% some adjustments. It is important to remember that Denmark 2% we use the female median wage, which is often France 15% lower than the male equivalent, and thus the pen- Germany 15% sion is lower. For most jurisdictions we have made Hong Kong 5% assumptions about wage development. We have India 15% used historically available data, as well as UBS ex- Israel 5% pectations of future productivity growth and infla- Italy 15% tion rates. Tax rates and social security contribu- Japan 20% tions come from government sources. The required Netherlands 2% savings amounts are based on the assumption that Nigeria 5% the savings and the pension capital is invested. Dur- Russia 20% ing working life we assume an investment strategy Saudi Arabia 15% in a balanced mix of equities and fixed income. In Singapore 10% retirement we calculate using investment returns South Africa 10% based on a less risky, mainly fixed income strategy. Sweden 3% All investment returns are based on the UBS Capital Switzerland 10% Market Assumptions. Since pension systems across Taiwan 10% the world face challenges and are in a constant UAE 15% state of debate and reform, we add an uncertainty UK 5% discount to each individual analysis (Fig. 6). USA 10%

Source: UBS

44 UBS International Pension Gap Index Glossary

Defined benefit (DB) plan: A type of retirement Mandatory pension system: A jurisdiction’s pre- plan in which the employer, employee or both vailing pension scheme that citizens and/or resi- make contributions to a registered retirement ac- dents are legally obliged to participate in and from count on a regular basis. The employer/sponsor which they can expect a pension payment in the promises a specified pension payment, lump sum future. or combination thereof at retirement. This benefit is usually predetermined by a formula based on the Means test: The analysis of a person’s financial re- employee’s earnings history, tenure of service and sources (e.g. income, assets) that conditions the re- age rather than depending directly on individual ceipt of subsidies. wage contributions and investment returns. The financial risk lies primarily with the employer/sponsor Old-age dependency ratio: The ratio of people in of the scheme. retirement age per 100 people of working age.

Defined contribution (DC) plan: A type of retire- Pay-as-you-go pension system: A mostly un- ment plan in which the employer, employee or funded defined benefit scheme where no assets are both make contributions to a registered retirement set aside and current pension benefits are funded account on a regular basis. Starting at retirement, by current worker’s wage contributions and/or regular or lump sum pension payments are then taxes. made from the cumulated savings and the returns on them. As these payments depend on the invest- Pension annuity: A stream of payments over a de- ment performance of the funds in the account, a fined period or until death of the recipient. DC fund provides much less income security for the employee, and more limited obligation for the em- Pension gap: The difference between pension in- ployer, than a defined benefit pension plan (i.e., come and cost of living in retirement, usually nega- the employee bears the investment and longevity tive. risk). Replacement rate: The ratio of first net-retirement Home bias: Tendency of investors to invest in fi- income to last net-working income. nancial instruments of their home country. Shariah-compliant: In the context of pension fund Intergenerational: Occurring between the gener- investments, refers to financial instruments that ations. In the context of pensions, often relates to comply with principles of Islamic law. issues such as equality, financial redistribution, security, etc. Uncertainty discount: Jane’s estimated pension payout is adjusted with an “uncertainty discount.” Life expectancy: The statistical measure of the av- It accounts for the fact that her pension payout, erage lifetime of a specified set of people grouped starting in about 10-20 years and continuing for by age, usually measured as life expectancy at two decades or more, is not certain today. The un- birth. For this report we take life expectancy at age certainty factor takes into account jurisdiction-spe- 50 from specific mortality tables. cific demographic developments, public finance to support the current pension system and the struc- Longevity risk: The risk of not having sufficient fi- ture of the pension system itself, as well as poten- nancial resources to meet long-term expenses tial reform measures. We derive a percentage dis- when living longer than expected. count factor for each jurisdiction we have examined. Lump-sum payment: A one-time payment of total or partial retirement benefits.

UBS International Pension Gap Index 45 Sources

Australia: pension system – superannuation www.super- Netherlands: pension system – Sociale Verzekeringsbank, guide.com.au, age pension Australian Government, Services Netherlands Enterprise Agency, International Center for Pen- Australia; life expectancy – Australian Bureau of Statistics; sion Management; life expectancy and wage – Statistics Neth- wage – Australian Bureau of Statistics erlands; inflation – European Central Bank; taxes – Pricewater- HouseCoopers Brazil: life expectancy and wage – Brazilian Institute of Geog- raphy and Statistics; retirement system – Brazilian government; Nigeria: pension system – National Pension Commission; in- taxes – PricewaterHouseCoopers flation – Central Bank of Nigeria; taxes – PricewaterHouseCoo- pers Canada: OAS – Government of Canada; pension system – re- tirehappy.ca; retirement age – Government of Canada; wage Russia: pension system – Pension Fund of the Russian Federa- and life expectancy – Statistics Canada tion; inflation – Central Bank of Russia; wage – Federal State Statistics Service; life expectancy – World Health Organization Chile: life expectancy – World Health Organization; wage and life tables – Instituto Nacional de Estadísticas; pension system – Saudi Arabia: pension system – General Organization for So- Superintendencia de Pensiones, International Center for Pen- cial Insurance; life expectancy – World Health Organization sion Management; taxes – PricewaterHouseCoopers; inflation – Banco Central de Chile Singapore: life expectancy – Department of Statistics Singa- pore; wage – Department of Statistics Singapore; pension sys- Denmark: pension system – European Commission; pension tem – Central Provident Funds Board; inflation and productiv- system – ATP www.atp.dk, state pension www.pension.dk; life ity – Monetary Authority Singapore expectancy – Statistics Denmark; wages – Statistics Denmark South Africa: pension system and taxes – South African Gov- France: life expectancy and wage – Institut national de la ernment; life expectancy – World Health Organization; infla- statistique et des études économiques; pension system – tion – South African Reserve Bank www.cleiss.fr/, www.agirc-arrco.fr/, www.legislation.cnav.fr; inflation – European Central Bank; taxes – www.service-public. Sweden: wage, life expectancy and inflation – Statistics Swe- fr/ den, Sveriges Riksbank; pension system – Swedish Pensions Agency; taxes – PricewaterHouseCoopers Germany: wage – Statistisches Bundesamt; life expectancy – Statistisches Bundesamt; pension system – deutsche Renten- Switzerland: pension system – Bundesamt für Sozialversicher- versicherung www.deutsche-rentenversicherung.de ungen; life expectancy – Bundesamt für Statistik; wage – Bundesamt für Statistik; inflation – Swiss National Bank; pro- Hong Kong: pension system – www.mpfa.org.hk, www.swd. ductivity – Swiss National Bank gov.hk/oala; life expectancy – Census and Statistics Depart- ment; wages – Census and Statistics Department Taiwan: pension system – Bureau of Labor Insurance; life expectancy – National Statistics; wages – National Statistics India: wage – Labour Bureau Government of India; pension system – OECD; life expectancy – World Health Organization United Arab Emirates: pension fund – United Arab Emirates’ Government; wages – Dubai Statistics Center; life expectancy Israel: inflation and wages – Bank of Israel; life table – Society – World Health Organization; inflation – International Mone- of Actuaries; taxes – KPMG, Ministry of Finance; pension sys- tary Fund tem – National Insurance Institute of Israel, Shoresh Institute United Kingdom: pension system – gov.uk; retirement age – Italy: pension system – www.epheso.com; life expectancy – Is- gov.uk; life expectancy – Office for National Statistics; wages – tituto Nazionlae di Statistica; wages – Istituto Nazionlae di Sta- Office for National Statistics tistica United States: social security system – Social Security Admin- Japan: life expectancy – National Institute of Population and istration; retirement age – usa.gov; inflation – Federal Reserve Social Security Research; pension system – Japan Pension Ser- Bank of America; productivity – Federal Reserve Bank of Amer- vice; wages – Ministry of Health, Labor and Welfare; social in- ica; life expectancy – Centers for Disease Control and Preven- surance – www.n-jim.jp tion

46 UBS International Pension Gap Index Publication details

UBS International Pension Gap Index UBS Chief Investment Office Global Wealth Management

Authors Jackie Bauer, CFA James Mazeau, CFA Valérie Jermann

Publication date 20 May 2021 Editors Aidan Fenten Erin Jaimovich Design Helena Powers Languages English, German Images Shutterstock Cover: Gros Morne National Park, Newfoundland, Canada Jane around the world: Kromlau, Germany Appendix: Gros Morne National Park, Newfoundland, Canada Contact [email protected]

Acknowledgments

The authors are grateful for the support and knowledge provided by: Alessandro Bee, Ainsley Carbone, Alejo Czerwonko, Caroline Simmons, Chisa Kobayashi, Crystal Zhao, Daniel Kalt, Dean Turner, Gaétan Peroux, Julie Tsai, Justin Waring, Katharine Jiang, Lars Kornmod, Mans Levin, Matteo Ramenghi, Michael Bolliger, Michael Skousgaard, Patrick Koster, Ronaldo Patah, Tatiana Boroditskaya, Yemi Aguda

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UBS International Pension Gap Index 49