Global Pension Index: UK ranked fifth
Mercer's new Global Pension Index recently released compares the retirement income systems of 11 countries, across five continents.
London -- The United Kingdom's retirement income system has been ranked fifth in a world according to the first ever Global Pension Index. The index compared 11 major private and public pension systems from around the world and rated them on the basis of adequacy, sustainability and integrity.
The Index, produced by Mercer, is the first time the world’s retirement income systems - some of which are held up as best practice - have been compared and ranked on a basis that considers a retirement income system in its entirety.
With an ageing population on the agenda as a critical issue for all governments around the world, this index can provide lessons and better insight into how countries are grappling with the related economic and social issues, according to Mercer.
The Netherlands obtained top ranking in the Index with a score of 76.1 out of a maximum of 100, followed by Australia (74.0), Sweden (73.5) and Canada (73.2).
John Betts, a worldwide partner in Mercer’s retirement business, said that while the UK system has some good features, major shortcomings need to be addressed to ensure its long-term sustainability.
Mr Betts added: “As highlighted by this Index, improving the general level of retirement income for pensioners is one of the key actions that can be taken to enhance the UK system. With an aging population that is putting an increasing amount of pressure on already-stretched government resources, it is essential to act on this. Practically, this could only be done in conjunction with increasing the retirement age and encouraging greater retirement flexibility.”
He continued: “Another challenge for both the government and employers will be to keep the UK’s good standing on ‘integrity’ by ensuring new or amended plans brought in to respond to the introduction of personal accounts in 2012 are simple, effective and well communicated.”
The report recommended that the UK system could be improved by raising the minimum pension for low-income pensioners; adjusting the level of mandatory provision to increase the net; a replacement for median-income earners; increasing the labour force participation rate amongst older workers; raising the level of household saving.
No country in the Index was classed as having an A-grade system (score greater than 80), proving even the world’s most advanced pension and superannuation models still need refinement to ensure they are robust enough to support the world’s rapidly ageing population.
The indexed countries with the lowest ranking retirement income systems were Japan with a score of 41.5, China (48.0) and Germany (48.2). While these countries don’t fall into the lowest grade E category, which corresponds to a score below 35, the efficacy and sustainability of their systems will be in doubt if major weaknesses are not addressed.
Dr David Knox, a worldwide partner in Mercer’s retirement, risk and finance consulting business, who oversaw the study, said that the global results indicated a need to address common challenges.
“The fact that no country achieved an A-Grade classification confirms that no one system is perfect or currently robust enough to withstand the challenges presented by an ageing population,” Dr Knox said.
“The best arrangements for a particular country will depend upon its individual social, economic, political, cultural and historical context. However, by examining common and desirable characteristics of a retirement income system, lessons can be learned by governments to help them better prepare for demographic change and ensure older citizens have access to adequate incomes in retirement,” he said.
The overall index considers results from more than 40 indicators which reflect certain features that are desirable in all retirement income systems. These characteristics have been grouped into adequacy, sustainability and integrity.
The adequacy of benefits – or how much income is available to a retiree – was given the highest rating in the index. The Netherlands (80.5) and Canada (76.2) scored highest in this index due to the level of minimum public pension and a relatively high net replacement rate of income for median income earners. The UK was in seventh position for this sub-index with a score of 56.6 (eight points above China and thirty points below the Netherlands). Japan had the lowest score at 39.2.
Participation in private pension plans and the level of pensions assets (expressed as a percentage of GDP) were the two major factors in the sustainability sub-index. Sweden (75.2) and Australia (71.0) rated the highest on this sub-index, while Japan (34.4) and China (38.5) scored the lowest. The UK came seventh again with a score of 56.4.
The Index also took into consideration the integrity of the private pension provisions which is important in maintaining the community’s confidence in the system. Based on an assessment of four key areas – prudential regulation, governance, risk protection and communication – the highest rating countries for the integrity sub-index were the Netherlands (88.2), Australia (87.8) and the UK (86.3). The UK this time ranked third with its score of 86.3.
It is hoped that the Index will be repeated annually and that the future studies will be expanded to include more countries. The report is expected to generate strong interest internationally, including with organisations such as the World Bank and OECD (Organisation for Economic Co-operation and Development).
Melbourne Mercer Global Pension Index 2009
The following table shows the overall index value for each country, together with the index value for each of the three sub-indices: namely adequacy, sustainability and integrity. Each index value represents a score between 0 and 100.