UBS International Pension Gap Index
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20 May 2021
Chief Investment Office GWM
Investment Research
UBS International
Pension Gap Index
Contents
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 P. 23 P. 37
New York City,
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
Brazil Singapore Sydney,
Dubai, UAE
Santiago de Chile, P. 31 P. 34 Australia
Tel Aviv, Israel P. 22
Chile 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 3Editorial
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 differ-
ent. Being aware of your future income sources and spending requirements is a pre-
requisite 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 main-
tain 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 bene-
fits 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 situa-
tion, 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 IndexOverview 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
50% Denmark Russia
Germany Taiwan
14% 108%
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
145% 7% 3%
India
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 5Introducing:
"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 ac-
tivities, 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 ex-
pect 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-
ated with them. Most likely the first half of her re-
to afford, as well as any special
tirement 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 IndexPension 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 7tion-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
come in the form of funded defined benefit* or
ambitions for its pension system.
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 cer-
tain 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 in-
come 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 Indexthe 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-
sets that are usually invested on behalf of partici-
shrinks and the retired population
pants. High unemployment and shifting demo- grows, financial imbalances appear
unless the system adjusts.
UBS International Pension Gap Index 9Personal 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 pen-
sion 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 Indexstate-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 cate-
gory 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 11Sustainability 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 addi-
tion 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 redistri-
bution between the generations (e.g. Switzerland,
Private savings and a sound
Germany). The long-term finances of pension sys-
tems 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 in-
come (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 sustain-
able 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 Indexstrategy 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 plan-
ning 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 13Your 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
trusted person.
point
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 IndexFigure 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 strat-
egy 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 fi-
nancial 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 15Figure 4
UBS Wealth Way
Now –
The next Five years
beyond your
3-5 years – lifetime
lifetime
Liquidity Longevity Legacy
Cash flow 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 gen-
eration, 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 IndexJane around
the world
UBS International Pension Gap Index 17Netherlands
Amsterdam
Well-established state contributions can vary widely depending
and company sponsored on the pension fund. Banks and insur-
ance 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
provided by employers. There are vari-
Replacement rate
ous types of pension funds. The most
is coming
106%
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
55.9
59.6 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 IndexSouth 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-
fit, defined contribution or hybrid plans.
enough
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 govern-
ance 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 19Denmark
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
pension. It relies on intergenerational re-
rewarded by stability
distribution 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
expected workforce growth.
Old-age dependency ratio*
(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 IndexIndia
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
formally employed, white-collar profes-
average Jane
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
last 60 months’ salary (up to a cap)
to shift into focus
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 21United 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
share the same pension system and
reforms appear less
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
Life expectancy at 50 No lifestyle change revenues exists. Europe serves as an ex-
ample that reforms should be imple-
86 between working age and 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 statu-
tory pension age of 60 and thus receives
the maximum pension. Even with this
6.3
2.1 3.2
1.5
1950 1975 2000 2025 2050 2075 2100
22 UBS International Pension Gap IndexHong 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 pen- sion 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%
of gross wages each up to a monthly in-
low benefits
come 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
34.5
retire at 65 with a pension income of
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 23Nigeria
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 em-
ployee 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 IndexYou can also read
