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June 2014

Common Challenges Facing The World's Retirement Systems


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The Melbourne Mercer Global Pension Index compares retirement income systems in 20 countries around the world, scoring them on more than 40 indicators relating to:

  • Adequacy ― includes benefit levels and design, tax support, and savings, and comprises 40% of the overall score.
  • Sustainability ― relates to coverage, assets, contributions, and government debt, accounting for 35% of the score.
  • Integrity ― covers regulation, governance, and communication, amounting to 25% of the score.

By providing grades for each of these sub-indexes as well as an overall grade, the index helps to highlight specific areas of weakness for each country, pointing the way toward future reforms.

Now in its fifth year, the index identifies a number of common challenges facing the world’s disparate retirement systems and suggests ways in which these can be tackled. Two new countries were added to this year’s analysis: Indonesia and Mexico.

Making the grade

The results confirm that there is great diversity among retirement income systems around the world, with scores ranging from 42.0 for Indonesia to 80.2 for Denmark, the only country to earn an “A” in this year’s study. (See Figure 1)

Countries receiving a “D” grade tend to be those in the relatively early stages of retirement income system development, such as China, India, Indonesia, and South Korea — although Japan also earns a “D” because of poor sustainability and adequacy scores.

Common challenges and solutions

Increasing life expectancy, increased government debt, uncertain economic conditions, and a global shift to defined contribution plans are putting pension systems worldwide under increasing pressure. Although each country’s social, political, historical, and economic contexts are different, many similar policy reforms can help improve benefits and enhance system sustainability:

  • Raising the state pension or retirement age.
  • Allowing and encouraging people to work past traditional retirement age so they can save longer and amass a larger pension pool.
  • Encouraging or requiring higher levels of private saving to reduce the future dependence on the public pension.
  • Reducing “leakage” from pension plans by limiting the funds that savers can remove prior to


The Retirement 'Trilemma'

Given the combination of needs that individuals willhave  throughout their retirement years (represented in Figure 2 below), a single retirement product is unlikely to be appropriate. The index report provides recommendations for a portfolio of products that can meet those needs, including:

  • Limited access to a lump-sum benefit at retirement.
  • Some access to capital during retirement for unexpected expenses
  • An income product that can provide adequacy and security early in retirement.
  • A pooled insurance-type product for longevity protection.
  • Allowance for the drawdown of some funds while still working during a phased retirement.

Get the report

The full Melbourne Mercer Global Pension Index report contains analysis and rankings of the pension systems in 20 countries and presents suggestions for improving each country’s retirement system.

Download the report here

Contacts

Dr. David Knox (Melbourne)
Senior Partner, Retirement
+61 3 9623 5464
david.knox@mercer.com
Arthur Noonan (Pittsburgh)
Senior Partner, Retirement
+1 412 355 8836
arthur.noonan@mercer.com

 

 

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