‘Ticking time bomb’: The world's pension funds face an ageing crisis

The global pension systems are facing a significant demographic challenge as increased life expectancy and declining birth rates put pressure on retirement funding, raising concerns about their capacity to provide for future generations. Pension plans typically fall into two categories: defined-benefit plans, which guarantee retirees a fixed income, and defined-contribution plans, where payouts are based on the savings accumulated and the performance of investments.

The aging population presents distinct difficulties for these two types of pension systems. Defined-benefit plans are grappling with increasing liabilities as retirees live longer, while defined-contribution plan members risk exhausting their savings, which places additional pressure on the performance of these funds. “The enormity of the problem is significant and has become more pronounced over time,” remarked Sebastien Betermier, executive director at the International Centre for Pension Management. He noted that some pension fund members have been retired for nearly fifty years and are now aged 107 or 108. “The longer the lifespan, the more years pension funds must cover, which directly translates into greater liabilities,” he explained. “Consider the financial burden this imposes on the next generation… it’s a ticking time bomb,” Betermier told CNBC.

The severity of this issue is highlighted in the recently published 2026 Marsh CFA Institute Global Pension Index (MCGPI) report. Out of 55 pension systems analyzed in the report, 43 have fertility rates that fall below the replacement level of 2.1 children per woman, with 23 systems recording rates below 1.5. Additionally, life expectancy at age 65 in developed regions has surged by 50.9% since 1950, now averaging 20 more years, which means that retirement benefits must be sustained for a much longer duration. The ratio of workers available to support retirees is also projected to decline sharply.

The MCGPI report emphasized that “the funding of future pensions and aged care becomes increasingly critical as the worker-to-retiree ratio diminishes.” It further pointed out that “very few systems, in their current operational state, are secure.” This issue is particularly pressing for pay-as-you-go pension schemes, where contributions from current workers primarily fund the benefits of existing retirees, making these systems especially susceptible to a shrinking workforce.

In the United States, the Old-Age and Survivors Insurance Trust Fund, which provides retirement and survivor benefits to millions of Americans, is expected to deplete its reserves by the fourth quarter of 2032, according to the latest report from its trustees. Fully funded pension schemes, which invest the contributions of workers and employers to finance future benefits, are also at risk. As members retire and begin to withdraw benefits, some funds may find themselves disbursing more than they receive in new contributions, prompting a reevaluation of their investment strategies and liquidity needs, as noted by the MCGPI.

The report cautioned that “future benefit outflows will surpass the level of contributions or premiums… this financial strain will inevitably intensify in the future.” The demographic shift is forcing pension funds to rethink their investment approaches, with some opting for higher-risk strategies to generate the necessary returns to meet increasing retirement obligations. Many mature funds are already in a position where they are disbursing more in benefits than they are receiving in contributions, leading them to depend more heavily on investment returns and accumulated assets.

In Australia, approximately one-third of superannuation funds reported negative cash flows from assets over a three-year period, indicating that benefit payments exceeded contributions, according to a 2025 report by the Australian Prudential Regulation Authority. Observers in the industry suggest that the push for higher returns has led some funds toward more complex and riskier investments, such as private equity, infrastructure, and private credit. “You can attempt to achieve higher returns on your investments, but that will necessitate taking on greater levels of risk,” Betermier stated.

Jean-Pierre Aubry, associate director of state and local research at Boston College's Center for Retirement Research, noted that pension funds are increasingly leaning toward riskier investments, although the degree of this shift varies widely across different markets. “I believe that everyone is incrementally increasing risk where feasible. The costs are escalating due to this demographic transition,” Aubry commented. He pointed out that U.S. state and local government pension funds allocate only about 20% of their assets to bonds, with the majority invested in equities and private assets, making them significantly more vulnerable to investment risks compared to their counterparts in Europe and Canada.

Not all pension managers view the aging population as a justification for higher risk investments. David Elias, CEO of the Australian pension fund Hostplus, emphasized that demographic changes are merely one of many factors influencing investment decisions. He underscored the necessity of maintaining a diversified portfolio across various asset classes, geographical regions, and industries while ensuring that potential returns adequately compensate for the associated risks. Elias also mentioned that governments could implement measures to alleviate the pressures of an aging population, including immigration policies and technological advancements, while recognizing that demographic shifts could also present new investment opportunities. “I don’t underestimate the creativity of governments in addressing these issues,” he stated. “However, it is a matter that must be tackled, without a doubt.”