What is it?
How is it calculated?
New features in the 2012 Index
The Melbourne Mercer Global Pension Index compares retirement income systems around the world and rates them based on their adequacy, sustainability and integrity. The provision of financial security in retirement is critical for both individuals and societies as most countries grapple with the social and economic effects of ageing populations. There is no perfect system that can be applied universally around the world. Indeed, even comparing the diversity of retirement income systems is certain to be controversial as every system is different and has arisen from each country’s particular economic, social, cultural, political and historical circumstances. However there are certain features and characteristics of retirement systems that are likely to lead to improved benefits, an increased likelihood of future sustainability of the system, and a greater level of confidence and trust within the community.
The Melbourne Mercer Global Pension Index objectively assesses the retirement income systems in 18 countries spread across the Americas, Europe and Asia Pacific. The countries included in this study are shown on the side bar with links to each country’s results.
With the addition of Denmark in the 2012 Index, we have our first A-Grade retirement income system with Denmark receiving an overall index value of 82.9.
The following table summarises the classifications of the grades used.
|A||> 80||A first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity.|
|B||65-80||A system that has a sound structure, with many good features, but has some areas for improvement that differentiate it from an A-grade system.|
|C||50-65||A system that has some good features, but also has major risks and/or shortcomings that should be addressed. Without these improvements, its efficacy and/or long-term sustainability can be questioned.|
|D||35-50||A system that has some desirable features, but also has major weaknesses and/or omissions that need to be addressed. Without these improvements, its efficacy and sustainability are in doubt.|
|E||< 35||A poor system that may be in the early stages of development or a non-existent system.|
How is it calculated?
The overall index value for each country represents the weighted average of the three sub-indices. The weightings used are:
- 40 percent for the adequacy sub-index
- 35 percent for the sustainability sub-index
- 25 percent for the integrity sub-index
The different weightings are used to reflect the primary importance of the adequacy sub-index which represents the benefits that are currently being provided together with some important benefit design features. The sustainability sub-index has a focus on the future and measures various indicators which will influence the likelihood that the current system will be able to be maintained in the future. The integrity sub-index considers several items that influence the overall governance and operations of the system which affects the level of confidence that the citizens in each country have with their system.
The following diagram presents a high-level summary of the index.
Chapter 5 of the report makes several suggestions to improve each country’s retirement income system. Although each system reflects a unique history, there are some common themes as many countries face similar problems in the decades ahead.
These common challenges include:
- increasing the state pension age and/or retirement age to reflect increasing life expectancy, both now and in the future
- promoting higher labour force participation at older ages, which will increase the savings available for retirement and reduce the length of retirement
- encouraging (or requiring) higher levels of saving, both within the pension system and beyond it
- increasing the coverage of employees in the private pension system, where it continues to be voluntary
- reducing the leakage from the retirement savings system prior to an individual’s retirement
New in the 2012 Index
In 2012 the Melbourne Mercer Global Pension Index was expanded to cover 18 countries, with the addition of Denmark and Korea (South).
Two new questions have been added this year. The first addition incorporates the World Bank’s Worldwide Governance Indicators as part of the integrity sub-index. This addition broadens the sub-index by considering governance at the national level, in addition to assessing the governance of private pension arrangements.
The second new question extends the existing question within the integrity sub-index on the requirement to send members an annual report, and asks whether disclosures on the pension fund’s investments are required. With the growth of defined contributions around the world, it is important that members are provided with a minimum level of information on the broad asset classes in which the members’ benefits are invested.
Continuing with 2011’s approach of including a chapter which discusses a contemporary topic, this year’s report has a new chapter on “Asset Allocation for Pension Funds” in which we explore the significant variety in asset allocations between different systems.