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Denmark has the best retirement income system in the world
- Denmark is ranked as number one in Melbourne Mercer Global Pension Index and provides first A grade result
- Introduction of Denmark tops Netherlands from its previous No. 1 ranking
- Melbourne Mercer Global Pension Index expands to include 18 countries and covers over 50% of the world population
Denmark makes its debut in the Melbourne Mercer Global Pension Index, an annual report that ranks pension systems around the world, and instantly achieves the top spot. Denmark received an overall index value of 82.9 and becomes the first system to be classified as ‘A’ grade, moving Netherlands from the top position in the rankings. Denmark’s unique ‘A’ grade ranking has been awarded in recognition of the country’s well funded pension system, its high level of assets and contributions, the provision of adequate benefits and a private pension system with well developed regulations.
Mercer Senior Partner and author of the report, Dr David Knox, said: “Many of the world’s retirement systems are under increasing stress with an ageing population, low investment returns and, in some cases, significant government debt. Reform is needed to ensure that adequate benefits are provided over the long term in a sustainable manner.
“This report highlights several reforms relevant to each country that will provide improved results for individuals, households and the community.”
Dr Knox also commented on this year’s special chapter on the asset allocation of pension funds around the world. He noted that the exposure to growth assets (which includes equities and property) ranges from virtually zero in some countries to more than 70 percent in Australia.
“There is no single answer to the best asset allocation for every country. However, a diverse range of assets across the system is likely to provide a better outcome than heavy concentration in bonds or equities.”
The Danish government has designed a retirement income system that when compared to other countries provides adequate benefits, is sustainable and upholds integrity.
“We are glad to see that the Danish system has been classified as the first A grade country. However we note that even though Denmark has A grade it is not perfect and could still be improved. Danes need to trust the pension system again. The recent years many legislative interventions have created great uncertainty and distrust whether long-term retirement savings pays off, or if savings will simply be netted off public benefits,” Finn Rasmussen, CEO of Mercer in Denmark said.
Finn Rasmussen further commented that there are a number of measures which Denmark should consider adopting to further improve our system and Denmark’s score. These are:
- Raising the level of household saving;
- Introducing arrangements to protect the interests of both parties in a divorce;
- Continuing to boost the labour force participation rate amongst older workers; and
- Providing greater protection of members’ accrued benefits in the case of fraud, mismanagement or provider insolvency.
The Index is now in its fourth year and has grown from 11 to 18 countries, and covers over half of the world’s population. It looks objectively at both the publicly funded and private components of a system as well as personal assets and savings outside the pension system. It is produced by Mercer and the Australian Centre for Financial Studies and funded by the Victorian State Government. It is based on more than 40 indicators grouped into three sub-indices: adequacy, sustainability and integrity.
Professor Deborah Ralston, Director of the Australian Centre for Financial Studies said the Melbourne Mercer Global Pension Index remains a critical comparative tool for governments, industry and academia.
“This fourth edition of the Melbourne Mercer Global Pension Index highlights areas of policy debate in retirement systems around the world. The inclusion of Denmark and Korea this year provides an even broader group of countries for analysis, and extends the range of systems examined in terms of stage of development, cultural and economic backgrounds. Despite these many differences, all countries are challenged by the need to balance the adequacy of the retirement system against its sustainability."
FACT SHEET - METHODOLOGY
- The first Melbourne Mercer Global Pension Index was created in 2009 with 11 countries. There are now 18 countries in the index that represent a diversity of experience and pension systems which are reflective of the considerable range of approaches selected around the world.
- Each country is given a score between 0 and 100. The overall index value represents the weighted average of the three sub-indices – adequacy, sustainability and integrity.
- More than 40 indicators of desirable factors in all retirement income systems were used to score each country’s system.
- Weightings used for index value are:
- 40% for the adequacy sub-index
- 35% for the sustainability sub-index
- 25% for the integrity sub-index.
- The countries that do well in adequacy have an above average base pension to relieve poverty; a good net replacement rate for the median income earner, a system that requires the benefits to be taken as an income stream, and other desirable features.
- The countries that do well in sustainability have good pension coverage (normally through some form of compulsion or auto-enrolment); a high level of pension fund assets compared to GDP; a level of mandatory contributions, and a relatively low level of government debt.
- Several countries do well with integrity due to the presence of comprehensive regulations ensuring good governance and providing good communication to members.
The primary objective of any pension system is to provide adequate retirement income. Thus, this sub-index considers the base level of income provided, the net replacement rate for median-income earners as well as several benefit design issues.
This sub-index recognises that the long-term sustainability of the current retirement income system in many countries is a concern, particularly in the light of the ageing population, the increasing ratio of retirees to productive workers and, in some countries, increasing government debt.
It is critical that a nation has confidence in the ability of private sector pension providers to deliver retirement benefits over many years into the future. This sub-index therefore considers the role of regulation and governance, the protection provided to participants and the level of communication provided to members. We consider the requirements set out in relevant legislation. This year we have added an indicator based on the World Bank’s Worldwide Governance Indicators.