Every European country to feature in the latest Melbourne Mercer Global Pension Index received a minimum of a C grade, with Denmark and the Netherlands taking the top spot achieving an A grade.

The annual index is in its eleventh year, and has this year compared 37 retirement systems, expanded to cover almost two-thirds of the world’s population. It highlights the broad spectrum and diversity of the world’s pension systems, demonstrating even the world’s best systems have shortcomings.

The 2019 Index includes three new systems – Philippines, Thailand and Turkey.
While each pension system has a unique set of circumstances, the report makes clear there are common improvements which can be made to the challenges all regions are facing.

Mercer senior partner and author of the report, Dr David Knox, said: “Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens. It’s imperative that policy makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future.”

Whilst both scoring an A grade, which is described a “first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity”, the Netherlands marginally beat Denmark for the top spot with a score of 81, compared to 80.3 for Denmark.

Ranked at a grade B were Finland, Sweden, Norway, Ireland, Switzerland and Germany. The UK and France were awarded C+, whilst Poland, Spain, Austria and Italy were all given a C grade.

Except for Turkey, a transcontinental country, which was awarded a D grade, no other European country ranked lower than C. Countries in South America and Asia populated grade E, which was the lowest grade given this year, despite there being an option for an E grade.

For each sub-index, the highest scores were Ireland for adequacy (81.5), Denmark for sustainability (82.0) and Finland for integrity (92.3). The lowest scores were Thailand for adequacy (35.8), Italy for sustainability (19.0) and Philippines for integrity (34.7).

Measuring the likelihood a current system will be able to provide benefits into the future, the sustainability sub-index highlighted the weakness of many systems. In particular, the sustainability issue of many South American and Asian systems has been confirmed with an average sustainability grade of D. For example, although Chile achieved a strong 71.7 in this sub-index, Brazil and Argentina scored 27.7 and 31.9, respectively. Similarly, in Asia, while Singapore achieved 59.7, Japan scored only 32.2.

However, this issue is not restricted to developing economies. Many European economies face similar pressures. Although Denmark achieved the highest score for the sustainability sub-index at 82.0, Italy and Austria scored only 19.0 and 22.9, respectively.

While some measures that contribute to the sustainability score are difficult to change, others can be influenced to strengthen the long-term effectiveness of a system. Recommendations include encouraging or requiring an increased level of savings for the future, gradually raising the state pension age and enabling or persuading people to work a little longer.

The Monash Centre for Financial Studies director, professor Deep Kapur, said: “Although some systems are still anchored by defined benefit schemes that may practice liability-driven investment strategies, defined contribution plans are playing increasingly important roles in the accumulation of individuals’ retirement savings. Maximising risk-adjusted investment returns for defined contribution plans by diversifying the assets held by a pension fund is critical.”

“It’s essential the state pension or retirement age is reconsidered in line with increasing longevity – a step some governments have already taken – to reduce the costs of publicly financed pension benefits,” he said.

The report is the first international study of its kind to document the “wealth effect” – i.e. the tendency for spending to increase with rising wealth – in relation to pension assets. The report’s data suggests as pension assets increase, individuals feel wealthier and therefore are likely to borrow more.

Knox, said the growth in assets held by pension funds means households feel more financially secure in having future income from their nest egg, thereby allowing them to borrow funds prior to retirement to improve their current and future living standards.

“As the wealth of an individual grows, whether it be in home ownership, investment portfolios or their retirement savings, so does their comfort with amassing debt. The evidence suggests on a global basis, for every extra dollar a person has in pension assets, their net household debt rises by just under 50 cents,” Dr Knox said.

The Index uses the weighted average of the sub-indices of adequacy, sustainability and integrity to measure each retirement system against more than 40 indicators. The 2019 Index takes a new approach to calculate the net replacement rate, that is, the level of retirement income provided to replace the previous level of employment earnings.

While most previous Index reports have calculated a net replacement rate based on the median income earner, the current report uses a range of income levels based on the Organisation for Economic Co-operation and Development data to represent a broader group of retirees.

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