Aegon Retirement Readiness Index (ARRI) which assesses and quantifies levels of retirement awareness and savings behavior across 15 different countries using a score on a scale of 0-10, with 10 being the highest.
The Aegon Retirement Readiness Index (ARRI) is built on six key questions from the Aegon Retirement Readiness Survey. Of the six survey questions used, three are broadly attitudinal and three behavioral. They measure:
1. Personal responsibility for income in retirement
2. Level of awareness of need to plan financially for retirement
3. Financial capability / understanding of financial matters regarding plans for retirement
4. Retirement planning – level of development of plans
5. Financial preparedness for retirement
6. Income replacement – level of projected income replacement
As well as these questions, a dependent variable question is asked which is concerned with approaches to saving, for which five broad saver types have been identified: habitual, occasional, past, aspiring, and non-savers.
What does the ARRI indicate?
The ARRI ranks retirement readiness on a scale from 1 to 10. A high index score is considered to be between 8 and 10, a medium score between 6 and 7.9 out of 10, and, a low score being less than 6. (For additional information about the ARRI and its methodology, please see appendix 1 in the report).
Annual Index results explained
In 2019, the global ARRI score stands at 6.0 just entering the "medium" range of retirement readiness for the first time in the eight-year history of the index. The 2019 ARRI score, represents a noteworthy improvement since the index was introduced in 2012.
In 2019, across countries, India ranks highest with a score of 7.8 which represents a medium score, while Japan ranks lowest with a low ARRI score of 4.9. Overall, nine out of the 15 countries have low scores. India's score of 7.8 comfortably places it in the medium range of retirement readiness (scores between 6 and 7.9). Other countries with scores in this range include: the US (6.6 up from 6.5 in 2018), Brazil (6.5 down from 6.6), the UK (6.2 up from 6.0), China (6.2 down from 6.7), and Germany (unchanged at 6.1).
Likewise, countries with the lowest ARRI rankings remain relatively consistent, although there have been some positive improvements in several countries. Japan continues to have the lowest ARRI score (4.9 in 2019) but has increased slightly from its 2018 score of 4.8. Spain's score has increased to 5.4 in 2019 from 5.1 in 2018. France has increased to 5.6 in 2019 from 5.4 in 2018. These improvements have helped to contribute to the overall upward trend in global retirement readiness to an ARRI score of 6.0 in 2019 from 5.8 in 2018.
This year, the survey introduces the Five Fundamentals for Retirement Readiness that people can and should be taking to help ensure they are on track for a comfortable retirement:
- Start saving early and save habitually
- Develop a written retirement strategy
- Create a backup plan for unforeseen events
- Adopt a healthy lifestyle
- Embrace lifelong learning
In 2018, the global ARRI score stands at 5.9 which is considered a 'low' level of retirement readiness. It has stayed unchanged compared to 2017 and little change has taken place since the survey began in 2012 when it was 5.2. Please note that some of the countries included in the survey 2018 diﬀer from those in 2012.
Overall, eight out of the 15 countries score low in the ARRI. India ranks first with a score of 7.3 which represents a medium score, while Japan ranks last with an ARRI score of 4.7. Globally, only 19 percent of workers have high index scores, a finding which varies considerably by country. India has the highest proportion of workers with high scores (40 percent), followed by the US (32 percent) and Brazil (29 percent). Hungary (10 percent), Spain (9 percent), and Japan (4 percent) have the fewest workers with high scores.
In addition to India having the highest ARRI score among the countries in the survey, it also has the highest proportion of 'habitual savers' who always make sure that they are saving for retirement. More than half of Indian workers do (55 percent), compared to just one-fifth of workers in Poland (21 percent).
Over the years, the survey consistently finds that saving on a regular basis is the best route to retirement readiness. However, globally, only 39 percent of workers regard themselves as habitual savers. Twenty-four percent of workers are 'occasional savers' who save for retirement occasionally from time to time, and 12 percent of workers globally are 'past savers', those who are not saving for retirement now, although they have in the past. Nineteen percent of workers globally are 'aspiring savers' who say they are not saving for retirement now, though they do intend to do so in the future. Lastly, a worrying six percent of workers globally are 'non-savers' who have never saved for retirement and don't intend to.
After a small reversal in 2016, retirement readiness has now reached a new high since the survey began in 2012. The global ARRI score today stands at 5.92. While this is still a "low" level of preparedness, it does represent a slight year-on-year improvement of 0.11 ARRI points from 2016. For the first time, in 2017, just over half the countries in the survey (eight out of 15) achieved a medium score of 6.0 or higher.
Winners and losers
The improvement in 2017 has been driven by a combination of factors. Overall, people are feeling more prepared for retirement as many economies continue to gradually rebound from the financial crisis in 2008. However, some countries, such as Brazil, France, and Germany, have seen a year-on-year fall in their ARRI score.
Indeed, Brazil has seen the largest fall in the ARRI score of any country, from 6.71 in 2016 to 6.43 in 2017. The country is in the second year of economic recession and the National Congress is debating a proposal of social security reform. Both elements may have introduced some uncertainty in how Brazilians feel about future retirement benefits.
In the US, where 401(k) plans and equity investing are more prevalent, the ARRI score in 2017 improved by 0.27 since 2016 (compared to a global increase of 0.11). Similarly, in Australia, which has a nationwide Superannuation Defined Contribution plan combined with greater exposure to equities, the ARRI score improved by 0.34. This was the biggest improvement in any of the countries surveyed in 2017.
Stock market performance
More countries are establishing defined contribution plans in which assets are typically heavily invested in equities. As of 2016, the average global pension asset allocation was 46 percent in equities, 28 percent in bonds, 24 percent in other assets (including real estate and other alternatives) and 3 percent in cash.
Reflecting this asset allocation, the strong stock market performance in many countries around the world has directly affected people's confidence in achieving a secure retirement. And it is the countries in which defined contribution plans are more widespread that are leading the charge toward improved retirement readiness, particularly where those countries also have higher allocations in equities compared to other markets.
The slight increase in retirement readiness, as measured by the ARRI, also results from the increasing proportion of workers who indicate that they are habitual savers who always make sure they are saving for retirement (a marginal increase from 38 percent in 2016 to 39 percent in 2017).
In the US, where habitual savers are now in the majority (57 percent) among the various types of savers, there has been one of the strongest improvements in the ARRI score in 2017 (up 0.27 from 2016). In the UK, perhaps spurred on by the introduction of automatic enrollment in 2013, the proportion of habitual savers increased from 40 percent in 2012 to 49 percent in 2017. The US and the UK rank second and fifth respectively in ARRI scores.
Lastly, workers are feeling more positive about their own financial outlook with just over a third (34 percent) expecting it to improve over the next 12 months, an all-time high since the survey began in 2012.
Overall, the retirement readiness among workers globally has increased since the first survey in 2012.
Around the world, there has been a slight increase in awareness of the need to prepare financially for retirement and workers' readiness has improved accordingly. In the original nine countries included in the survey, the United States has the highest score, reflecting that people are more likely to feel personally responsible for their retirement planning. Japan has the lowest score.
In terms of net changes in ARRI scores, globally, the index has increased slightly between 2012 and 2016. The United States experienced the biggest increase in ARRI, while Spain remained flat. Nevertheless, across the survey's original nine countries, the ARRI scores remain in the low category.
Looking at the individual indicators underpinning ARRI, it appears that improvements in the behavioral questions are driving the increases. Specifically, more people believe their personal retirement plans are better developed and they are putting aside more money than they were five years ago. However, the survey also found that fewer workers actually feel responsible for making sure that they will have sufficient income in retirement, thereby raising concerns about the long-term impact this sentiment might have on actual behavior.
Since the survey's inception in 2012, its scope has expanded from nine to 15 countries. In looking at ARRI scores among 15 countries, the upward momentum retreated slightly between 2015 and 2016, a result of mixed performances among the countries. Scores among five countries improved since 2015, three remained the same, and seven declined.
Countries showing decline
Among countries experiencing declines since 2015, the downturns reflect short-term financial shocks, notably the increased volatility in equity markets. China, which has been particularly volatile since last summer, experienced a 0.5 drop in its ARRI score, which is one of the biggest year-on-year drops in the five-year history of the ARRI.
Countries including the United States and the United Kingdom continued to improve in 2016. This is likely not a coincidence given that the widespread access to personal pension and retirement products affords people in these countries greater control over their retirement savings.
In the United States, the stock market has performed strongly, having doubled since 2009. For Americans with 401(k) plans this has likely translated into a retirement "feel-good" factor as rising stock markets typically boost the value of people's retirement savings and pension funds.
Results remain chronically low
Despite gains since 2012, with fluctuations from year to year, the 2016 survey findings indicate that ARRI scores are chronically low, thereby indicating that many workers are falling far short of what is required to be retirement ready. In 2016, more than half (53 percent) of workers globally achieved a low ARRI score (below six out of 10).
Much work needs to be done to improve retirement readiness around the world. No one group can shoulder the burden alone. Identifying and implementing solutions requires a coordinated effort among governments, pensions industry, employers, and individuals.
The overall trend is one of improving retirement readiness among today's generation of working age people. The global ARRI score has edged up slightly from 5.76 (out of 10) in 2014 to 5.86 in 2015. This is the highest score since the survey began in 2012.
Emerging markets continue to forge ahead
The sense of retirement readiness is greatest in emerging markets where real incomes have been growing fastest in recent decades. People in these countries also benefit from high interest rate environments, boosting the value of their savings and creating a sense of readiness.
This is common to all BRIC countries surveyed including India, Brazil and China – which collectively topped the ARRI ranking, although Brazil has seen its ARRI score drop amid combined low economic growth and high inflation.
Workplace retirement plans contribute to a greater sense of retirement readiness...
Among the industrialized countries, the sense of retirement readiness is greatest where workplace retirement plan arrangements are well established. This includes Australia, Canada, Germany, the Netherlands, the U.S. and the U.K. Japan is an outlier where people are less likely to feel retirement ready, perhaps reflecting the country's zero interest rate environment and retirement reforms over recent years.
Meanwhile, concerns about social security reforms loom large...
In countries where government retirement benefits are expected to make up a large part of retirement incomes, people generally feel less prepared, reflecting concerns about those systems' sustainability and future reforms that may lead to a reduction in the level of entitlements. Today's working age population is already calculating that future social security pay-outs will be less generous.
Those saving on a habitual basis feel more adequately prepared for their retirement
Over one-third (36%) of habitual savers achieved a high index score of 8 to 10. This compares with just 3% of those who hold aspirations to save. So just putting something aside for their retirement on a monthly basis will make a difference to a person's confidence in his/her retirement readiness.
Adopting this simple savings behavior is also a realistic aspiration for most individuals. The profile of the habitual saver reveals that this group is not ultra wealthy. In fact, they earn on average around $41,000 annually (equaling $29,000 in emerging markets), which is not much higher than the typical annual salary in most countries surveyed.
Women continue to lag behind men in their retirement confidence
Lower earnings, more time out of the workforce (caring for children or other family members), and working part-time remain the key factors affecting women's savings power and retirement readiness. Fifty-seven percent of women achieved a low Index score (less than 6), compared with just 47% of men, who are more likely to be found in the medium and high scoring groups.
Younger people also struggle to build their retirement readiness
This might be expected to some degree – building a retirement plan takes time, so we would expect those nearing retirement to feel more prepared for it. Younger people also have to contend with other priorities, such repaying student loans or saving to buy a house. What is most concerning is that we don't see any change in retirement readiness among those younger age groups.
It is not until we look at those in their mid-40s that readiness improves. The number of people continually scoring low on the ARRI remains persistently high (between 56% and 59%) among those aged between 18 and 44.