Pension funds around the world face an ageing crisis

The world’s pension systems are confronting a demographic crisis as longer lifespans and dwindling birth rates threaten to stretch retirement finances, raising questions about their ability to sustain payouts for future generations.

Pension offerings generally fall into two categories: defined-benefit plans, which promise retirees a predetermined income, and defined-contribution plans, where payouts depend on accumulated savings and investment returns.

Ageing poses different challenges for the two systems: defined-benefit schemes face mounting liabilities as retirees live longer, while defined-contribution members risk outliving their savings, placing greater pressure on funds’ investment performance.

The problem is “huge, and it’s gotten more pronounced over time,” said Sebastien Betermier, executive director at the International Centre for Pension Management, noting that some pension funds have members who have been retired for nearly half a century, aged aged 107 or 108.

“The higher the longevity, the more years the pension funds have to cover, and so that immediately comes in as an additional liability,” he said. “Think about the cost that it imposes actually on the next generation … it is a ticking time bomb,” Betermier told CNBC.

The scale of the challenge is laid bare in the 2026 Marsh CFA Institute Global Pension Index, or MCGPI, report published Tuesday last week. Of the 55 pension systems covered by the index, 43 have fertility rates below the replacement level of 2.1 children per woman, while 23 have rates below 1.5.

Meanwhile, life expectancy at age 65 in more developed regions has increased by 50.9% since 1950 to about 20 additional years, meaning retirement benefits must now last considerably longer. The number of potential workers supporting older people is also set to decline sharply.

“The funding of future pensions and aged care both become more critical as the ratio of workers to retirees continues to decline,” the MCGPI report stated. “Very few systems, as they currently operate, are secure.”

The problem is particularly acute for pay-as-you-go pension systems in which contributions from today’s workers largely fund benefits for current retirees, leaving them especially vulnerable to a shrinking workforce.

The pressures are already evident in the U.S., where the Old-Age and Survivors Insurance Trust Fund, which finances retirement and survivor benefits for tens of millions of Americans, is projected to exhaust its reserves in the fourth quarter of 2032, according to its latest trustees’ report.

Fully funded pension schemes, which…