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 16 countries spread across the Americas, Europe and Asia Pacific. The countries included in this study are shown on the side bar (drop down menu) where each country’s results are shown.
The results show that no country’s system has an index value above 80, which we consider represents an A-grade retirement income system. However, six countries have an index value between 65 and 80, which represents a B-grade system and — with some adjustments or improvements — these countries could be re-classified as A-grade systems. The following table summarises the classifications used.
Grade
Index value
Description
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 has a focus on the private sector system and therefore has a more restrictive scope than the other two sub-indices.
The following diagram presents a high-level summary of the index.
The final chapter 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, particularly as many individuals now remain in good health for longer periods
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
Promoting greater diversity in the provision of retirement income, whilst also requiring that at least a portion of the accumulated benefit be taken as income
New features in the 2011 Index
In 2011 the Melbourne Mercer Global Pension Index was expanded to cover 16 countries, with the addition of India and Poland.
In this year’s study the only change to the index calculations was the introduction of the Total Fertility Rate (TFR) as part of the demographic indicator within the sustainability sub-index. The introduction of the TFR provides a longer term perspective of each country’s future age structure.
A new chapter on “The Gold Standard – an A-Grade System” was included to describe what an excellent retirement system would look like and to demonstrate how it could be achieved.
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