For the fourth year in a row Denmark has the world’s best pension system, according to a benchmark by Mercer and the Australian Centre for Financial Studies. Other countries that belong to the elite in the domain of pensions are the Netherlands, Australia, Sweden and Switzerland. The UK has lost terrain compared to last year, and needs a range of policy changes if it wants to keep pace with the globe’s leaders.
Since 2009 Mercer annually, together with the Australian Centre for Financial Studies (ACFS), conducts research into the quality and efficiency of pensions systems globally. The study, titled ‘Melbourne Mercer Global Pension Index’ (MMGPI), measures 25 retirement income systems – which according to the authors cover close to 60% of the world’s population – against more than 40 indicators under the sub-indices of adequacy, sustainability and integrity. To determine the position of a country, performance across the three dimensions is rated against a 5-step maturity model, with different weightings applied, ultimately leading to an overall score between 0 and 100 and a final ranking.
For the fourth consecutive year Denmark holds onto the top position with an overall score of 81.7, ahead of the Netherlands (80.5), which compared to last year has moved up one position, and Australia (79.6), the country that lost ground to the Dutch. Primary reasons for Denmark’s top spot are its well-funded pension system with good coverage, high level of assets and contributions, the provision of adequate benefits and a private pension system with developed regulations. Sweden and Switzerland complete the top five, followed by Finland – the top performer when it comes to integrity – and Canada.
The UK is ranked 9th with an overall score of 65.0, down from 67.6 in 2014, which in the methodology of the authors means the system has a sound structure, with many good features, yet at the same time faces some areas for improvement. Key reason for the UK’s drop is the recent change in how people are allowed to use their retirement savings. The so-called “pensions freedom” gives savers flexibility in how to take their money, but it also poses long term challenges to ensuring adequate incomes throughout retirement. “The UK’s new pensions freedoms is a welcome once-in-a-lifetime change but it poses difficult challenges in ensuring that tax-privileged saving is used to provide an adequate income in the final years of life, and not exhausted in middle age. Annuities might be part of the answer, but they’re not the only way of taking an income instead of a one-off withdrawal. We need to ensure sufficient retirement related products, guidance and incentives exist to avoid people outliving their savings,” comments Glyn Bradley, Senior Associate in Mercer’s UK Retirement business.
Measures the UK should take, according to the researchers, to improve the sustainability of the system include boosting the low level of retirement saving, increasing the old age dependency ratio and working on the substantial government debt, which is threatening the state’s ability to deliver adequate retirement incomes, warn the authors.
Looking ahead, the UK’s score is expected to rise again over the next few years as the impact of auto-enrolment (introduced in 2012, which has led to a record number of people enrolled in pension schemes) will become more apparent. However, the report suggests that minimum required contributions alone are unlikely to lead to adequate retirement incomes for many. “Despite the introduction of auto-enrolment and record numbers of people in the UK enrolled in pension schemes, the UK is unlikely to make the A grade soon. Having a pension is not the same as having an adequate pension,” says Bradley.
He adds: “The UK lacks the savings culture of other countries and current minimum auto-enrolment contributions are unlikely to deliver adequate retirement outcomes. We are also an ageing society, with relatively high debt, and our public sector and state pensions are almost entirely unfunded. Our pensions system has a high degree of integrity by international standards, but its low scores on adequacy and sustainability are putting us in danger of being relegated to the C league.”
In the report Mercer and ACFS also analysed the key developments over the past seven years. The analysis amongst others shows that across the board, people are spending longer in retirement. All of the 11 countries that have been part of the MMGPI since it began in 2009 have experienced an increase in the expected length of retirement from 2009 to 2015, with the average length rising from 16.6 years to 18.4 years. Five countries – Australia, Germany, Japan, Singapore and the UK – have increased their pension age to offset the increase in life expectancies, but these are not enough to halt the increasing length of retirement. As a result, the average labour force participation rate for 55-64 year olds has increased from 57.9% to 62.2% between 2011 and 2015, or just over 1% per year, a statistic based on the 16 countries that have been part of the MMGPI since 2011.