Global Pension Index reveals USA needs to enhance its retirement

2018 Global Pension Index reveals USA needs to make changes to enhance its retirement systems

2018 Global Pension Index reveals USA needs to make changes to enhance its retirement systems

  • October 22, 2018
  • United States, New York
  • The Netherlands takes first place, as Denmark comes in second
  • USA retains “C” ranking but overall index score rises slightly
  • Index expanded to include Hong Kong SAR, Peru, Saudi Arabia and Spain
  • Private pension systems need to expand to include all the workforce

Ageing populations continue to pose a challenge to governments worldwide, with policymakers struggling to balance the twin goals of delivering financial security for their retirees that is both adequate for the individual and sustainable for the economy.

Now in its tenth year, the Melbourne Mercer Global Pension Index (MMGPI) reveals who is the most and who is the least prepared to meet this challenge.

Measuring 34 pension systems, the Index shows that the Netherlands and Denmark (with scores of 80.3 and 80.2 respectively) both offer A-Grade world class retirement income systems with good benefits - clearly demonstrating their preparedness for tomorrow’s ageing world.

However, common across all results was the growing tension between adequacy and sustainability. This was particularly evident when examining Europe’s results. Denmark, Netherlands and Sweden score A or B grades for both adequacy and sustainability, whereas Austria, Italy and Spain score a B grade for adequacy but an E grade for sustainability thereby pointing to important areas needing reform.

Author of the study and Senior Partner at Mercer Australia, Dr David Knox says that the natural starting place to having a world class pension system is ensuring the right balance between adequacy and sustainability.

“It’s a challenge that policymakers are grappling with,” says Dr Knox. “For example, a system providing very generous benefits in the short-term is unlikely to be sustainable, whereas a system that is sustainable over many years could be providing very modest benefits. The question is – what’s an appropriate trade-off?”

As highlighted in Chart 1, all systems should consider adjusting their strategy so they are moving towards the top right quadrant. Through the study, policymakers can understand the characteristics of leading systems and find ways to improve their own.

Chart 1: Adequacy versus Sustainability ratings for global pension systems


Source: Melbourne Mercer Global Pension Index 2018

Dr Knox adds that it’s not enough for a system to be sustainable or adequate; an emerging dimension to the debate about what constitutes a world class system is “coverage” and the proportion of the adult population participating in the system.

“In some countries, broad coverage has been successfully accomplished through compulsory workplace pension systems or, in some cases, auto-enrolment arrangements,” he says.

“However, with changes in the way people are working around the world, we need to ensure these schemes include everyone so that the whole workforce is saving for the future. This includes contractors, self-employed, and anyone on any income support, be that parental leave, disability income or unemployed benefits.”

Peter Stewart, Global Wealth Consultant, Multinational Client Group, Mercer, added that America’s ranking should give pause for reflection on what the current system is and how to move in a strategic direction.

“There continues to be room for improvement in the United States’ retirement system across the adequacy, sustainability and integrity dimensions. As the population continues to age and uncertainty persists in the global economic environment, there are mounting concerns about individuals’ ability to meet their spending needs in retirement. The time is now to review America’s retirement framework and assess what changes could be made to improve the system.”

Professor Deep Kapur, Director of Australian Centre for Financial Studies added thoughts about the reasons behind retirement challenges, saying that

“Ageing populations, high sovereign debt levels in some countries and the global competition to lower taxes constrain the ability of some jurisdictions to improve retirement income security. With a decade of unique data, the MMGPI and associated research can provide valuable global comparative insights to planners and policymakers on the way forward.”

What does the future look like?

Some pension systems face a steeper path to long term sustainability than others, and all start from a different origin with their own unique factors at play. Nevertheless, every country can take action and move towards a better system. In the long-term, there is no perfect pension system, but the principles of “best practice” are clear and nations should consider creating policy and economic conditions that make the required changes possible.

With the desired outcome of creating better lives, this year’s Index provides a deeper and richer interpretation of the global pension systems. Having now expanded to include Hong Kong SAR, Peru, Saudi Arabia and Spain; the Index measures 34 systems against more than 40 indicators to gauge their adequacy, sustainability and integrity. This approach highlights an important purpose of the Index – to enable comparisons of different systems around the world with a range of design features operating within different contexts and cultures.

Melbourne Mercer Global Pension Index by the Numbers

This year’s Index reveals that many North-Western European countries lead the world in developing world class pension systems. The Netherlands, with an overall score of 80.3, beat Denmark to first place, a spot held by Denmark for six years, by 0.1. Finland bumped Australia (72.6) out of third place with an overall score of 74.5 and Sweden (72.5) coming in fifth place.

“The Index is an important reference for policymakers around the world to learn from the most adequate and sustainable systems,” Dr Knox says. “We know there is no perfect system that can be applied universally, but there are many common features that can be shared for better outcomes.”
 

Melbourne Mercer Global Pension Index – Overall index value results

The Index uses three sub-indices – adequacy, sustainability and integrity – to measure each retirement income system against more than 40 indicators. The following table shows the overall index value for each country, together with the index value for each of the three sub-indices: adequacy, sustainability, and integrity[1]. Each index value represents a score between zero and 100.

2018 Results

System

Overall Value Index

Adequacy

Sustainability

Integrity

 Argentina

       39.2

       40.8

       33.8

       44.1

 Australia

       72.6

       63.4

       73.8

       85.7

 Austria

       54.0

       68.1

       21.5

       76.7

 Brazil

       56.5

       72.5

       28.5

       70.1

 Canada

       68.0

       72.1

       56.0

       78.2

 Chile

       69.3

       59.2

       73.3

       79.7

 China

       46.2

       53.4

       38.0

       46.0

 Colombia

       62.6

       68.4

       50.1

       70.9

 Denmark

       80.2

       77.5

       81.8

       82.2

 Finland

       74.5

       75.3

       61.0

       92.1

 France

       60.7

       79.5

       42.2

       56.5

 Germany

       66.8

       79.9

       44.9

       76.6

 Hong Kong

       56.0

       39.4

       54.9

       84.2

 India

       44.6

       38.7

       43.8

       55.2

 Indonesia

       53.1

       47.3

       49.5

       67.4

 Ireland

       66.8

       79.0

       45.9

       76.6

 Italy

       52.8

       67.7

       20.1

       74.5

 Japan

       48.2

       54.1

       32.4

       60.7

 Korea

       47.3

       45.4

       48.1

       49.3

 Malaysia

       58.5

       45.2

       60.5

       77.1

 Mexico

       45.3

       37.3

       57.1

       41.6

 Netherlands

       80.3

       75.9

       79.2

       88.8

 New Zealand

       68.5

       65.4

       63.4

       80.6

 Norway

       71.5

       71.5

       58.1

       90.2

 Peru

       62.4

       68.0

       54.2

       65.1

 Poland

       54.3

       53.8

       46.2

       66.4

 Saudi Arabia

       58.9

       61.6

       53.3

       62.6

 Singapore

       70.4

       64.4

       69.5

       81.2

 South Africa

       52.7

       41.9

       46.8

       78.2

 Spain

       54.4

       68.7

       27.8

       68.6

 Sweden

       72.5

       67.6

       72.6

       80.2

 Switzerland

       67.6

       58.0

       67.5

       83.2

 UK

       62.5

       57.8

       53.4

       82.9

 US

       58.8

       59.1

       57.4

       60.2

Average

       60.5

       61.1

       52.0

       71.6

 

-Ends-

Melbourne Mercer Global Pension Index

The Melbourne Mercer Global Pension Index is published by the Australian Centre for Financial Studies (ACFS), in collaboration with Mercer and the State Government of Victoria who provides most of the funding. Financial support has also been provided by The Finnish Centre for Pensions.

About Mercer

Mercer delivers advice and technology-driven solutions that help organisations meet the health, wealth and career needs of a changing workforce. Across the Pacific, organisations look to Mercer for global insights, thought leadership and product innovation to help transform and grow their businesses.

Mercer’s more than 23,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), the leading global professional services firm in the areas of risk, strategy and people. With more than 65,000 colleagues and annual revenue over $14 billion, through its market-leading companies including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit www.mercer.com.au.

About the Australian Centre for Financial Studies

The Australian Centre for Financial Studies (ACFS) is a research centre within the Monash Business School. The Centre was established in 2005 with seed funding from the Victorian Government and became part of Monash University in 2016. The asset management and pension industries are an area of particular focus for the Centre. For more information, visit www.australiancentre.com.au.

Trade and Investment Victoria

Trade and Investment Victoria leads the Victorian Government's strategy to increase the state's export opportunities as well as attract international business investment to Victoria to create Victorian jobs and grow the economy.

Through its global network of 23 offices, Trade and Investment Victoria provides free professional investment advice and services to potential and existing overseas partners, helping facilitate investment and access to export markets.

Businesses looking to invest, explore commercial opportunities or create research linkages in Victoria should contact Trade and Investment Victoria for more information.

trade.vic.gov.au

Invest.vic.gov.au

 

CONTACT INFORMATION
  • Australian Centre for Financial Studies
  • Frieda Kukulka