As retirees approach their golden years, the reality of how much their mandatory pension will pay out starts to bite.
UBS analyzed 12 cities across the world in order to try and identify where people could best enjoy their retirement. And in an attempt to apply their research universally to a typical retiree, the Swiss bank's International Pension Gap Index, published Tuesday, based its results around "average Jane."
Jane represents a 50 year-old single woman, with one adult child, who has worked her whole life in the same city since she started her career at 20. UBS said Jane earned the median wage, enjoyed an urban lifestyle and "had not saved for anything more than a rainy day" before entering her final decade in work.
The bank's analysis concluded that, in every location, Jane's income would not be enough to lean back and relax in retirement.
Where in the world to retire?
The Swiss city of Zurich was ranked as the best place to retire, according to UBS' analysis. Switzerland's largest city was found to have a two-pillar retirement system in place that meant Jane would only have to save around 11 percent of her monthly income to sustain her basic lifestyle in retirement.
However, as Switzerland has a life expectancy of 90 years of age, UBS said Jane would need to finance 27 years of retirement — the longest period in Europe.
Meanwhile, the capital city of Taiwan was found to provide the most challenging environment for typical retirees. Taipei was the lowest ranked municipality featured in the UBS International Pension Gap Index.
UBS said if Jane lived and worked in Taipei and wanted to retire at 60 years old in relative comfort, she would need to save 157 percent of her salary every month. However, analysts at the Swiss bank said this figure would fall substantially if Jane opted to work beyond her 60th birthday — as many Taiwanese citizens choose to do.
Elsewhere, London and New York were both found languishing in the bottom half of UBS' pension gap research.
Britain's capital was ranked in seventh position, with Jane needing to save 47 percent of her salary each month in order to fund a basic urban lifestyle. Londoners have an average life expectancy of 87 years old and so Jane would need to have enough money saved to enjoy her retirement for 21 years.
In New York – which ranked eighth on the index – Jane would need to save 49 percent of her monthly income. The bank suggested the typical retiree would need to save this much each month because New York was one of the most expensive cities in the world. The life expectancy for people living in New York is 83 years old.
Here are the 12 cities ranked from best to worst in UBS' International Pension Gap Index:
1. Zurich, Switzerland
2. Sydney, Australia
3. Singapore, Singapore
4. Paris, France
5. Munich, Germany
6. Milan, Italy
7. London, U.K.
8. New York, U.S.
9. Toronto, Canada
10. Tokyo, Japan
11. Hong Kong, Hong Kong
12. Taipei, Taiwan.
Three major challenges for pension sustainability
Sergio Ermotti, CEO of Switzerland's largest bank, said in the report that while some governments were able to provide a "suitable" income for people in retirement, often the sustainability of an individual's pension was "questionable".
He argued that while mandatory pensions systems only ensured a minimum income to cover basic needs "at best," current and future retirees would not be able to "rely on them if they want to maintain their lifestyle."
The report cites three major challenges for the sustainability of pension systems. The first issue concerned dramatic demographic changes over the past five decades. Since 1970, UBS said that fertility rates in the OECD (Organization for Economic Co-Operation and Development countries) had dropped from 2.7 to 1.7 while, over the same period, life expectancy rates rose from 69 to 81 years of age. This means that fewer "economically active" people are supporting a growing number of retirees for a longer period.
Public finances posed another problem to mandatory pensions systems. On average, OECD nations were found to spend 8.1 percent of their GDP (gross domestic product) on pensions, up from 5.7 percent in the 1980s. UBS said that rising debt levels had restricted the fiscal freedom of various governments.
Lastly, the Swiss bank said low interest rates had created a challenging investment environment for pension funds.
Ermotti concluded future retirees should not be "overly optimistic" that the challenges domestic governments face to provide a secure retirement for its citizens would be resolved quickly.