New Zealand needs to increase the contribution rate to KiwiSaver and introduce ways of allowing people to turn their lump sum savings into an income stream in order to improve its pension system.
That's the view of an annual global pension review which saw New Zealand drop down two places from eighth to 10th place this year out of 39 retirement income systems looked at by investment consultants Mercer.
Mercer CFA Institute Global Pension Index gave New Zealand a B rating with a score of 68.3 out of 100.
The B rating means the system has a sound structure with many good features, but has room for improvement. Only the Netherlands and Denmark received an A rating.
New Zealand's system ranks well for integrity with a score of 82.9 but is let down by adequacy and sustainability where it only scored 63.8 and 62.9 respectively.
The New Zealand index value fell from 70.1 in 2019 to 68.3 due to reductions in the net replacement rates published by the OECD.
The net replacement rate is how well individuals replace their income in retirement compared to what they earn while working.
The report noted New Zealand could increase its index value by increasing the level of KiwiSaver contributions, raising the level of household savings and reducing the level of household debt.
It also recommended introducing a requirement that part of the retirement benefit be taken as an income stream and continuing to expand the coverage of KiwiSaver and thereby raising the level of pension assets.
Martin Lewington, chief executive of Mercer New Zealand - which is also a KiwiSaver provider - said "sustainability had traditionally let down New Zealand's retirement system, however adequacy dropped this year as well".
"While still above average, our retirement system has dropped to a C+ grade for adequacy and sustainability. It's disappointing that our ratings here have gone backward."
Lewington said while changes could be made to increase New Zealand's rating these were difficult in the current economic climate.
"...as we enter a challenging economic environment, raising the level of KiwiSaver contributions and placing more focus on income streams in the place of lump sums becomes more difficult to achieve.
"The growing gender inequality is also a concern and something the system must address. This further highlights the importance of investing in responsibly invested funds which help tackle gender issues head-on as part of their Environmental, Social and Governance (ESG) policies," Lewington added.
Around three million Kiwis belong to KiwiSaver but about 1.2 million of those members don't contribute to it. The minimum contribution rate is 3 per cent.
Shane Solly, a chartered financial analyst from CFA Societies New Zealand, said Covid-19 may have been the first time many New Zealanders have seen their KiwiSaver pension balances take a short-term hit.
"While it is great to see New Zealanders maintaining their KiwiSaver contributions, many are in low-risk default schemes, which may not provide the wealth accumulation they need for a comfortable retirement."
The report also came with a warning that the economic impact of Covid-19 will heighten the financial pressures many retirees face.
David Knox, senior partner at Mercer and lead author of the study, said the economic recession caused by the global health crisis had led to reduced pension contributions, lower investment returns and higher government debt in most countries.
"Inevitably, this will impact future pensions, meaning some people will have to work longer while others will have to settle for a lower standard of living in retirement.
"It is critical that governments reflect on the strengths and weaknesses of their systems to ensure better long-term outcomes for retirees."
Deep Kapur, director of the Monash Centre for Financial Studies (MCFS), said that many governments around the world had responded to Covid-19 with substantial fiscal stimulus, and central banks had adopted unconventional monetary policy.
"The outlook for investment returns is muted while volatility may be elevated, adding to the normal challenges of risk management in a pension portfolio."
Kapur said Covid-19 had also increased gender inequality in superannuation savings.
"Even before Covid-19 disrupted economies across the world, many women faced retirement with less savings than men.
"Now, that gap is expected to widen further in many pension systems, particularly in the hardest-hit sectors where women represent more than half of the workforce, such as hospitality and food services," Knox added.