24th October 2016

United Kingdom, London

  • UK is ranked 11th in 2016, down two places from last year
  • Auto-enrolment process should improve UK’s place in the index in coming years but more could be done

The Victorian Government of Australia and The Australian Centre for Financial Studies today launched the 8th annual Melbourne Mercer Global Pension Index (MMGPI), which objectively ranks both the publicly funded and private components of 27 countries’ pension systems, looking at the impact of rapidly ageing populations and the preparedness of countries’ retirement systems to deal with the significant financial pressures this presents.

The index reveals that the UK’s pension system has dropped behind Ireland and Singapore to 11th place this year, from 9th in 2015. This is due to a reduction in net replacement rate, which is related to a cut in the pensions an employee can expect from both the state and occupational schemes. 

“The 2016 state pension reforms are expected to provide less generous state pensions for many workers, compared to the historic earnings-related system,” said Mark Condron, Senior Partner and Mercer’s UK Retirement Business Leader. “The generous defined benefit schemes of the past also stand in sharp contrast to today’s typical defined contribution schemes, with minimal 2% contributions applied under auto-enrolment requirements. Thankfully, most employers elect to offer more than this amount, which will be increasingly important to help employees build up meaningful provision for retirement.”

The UK received a ‘C+’ grade with a score of 60.1 out of 100, down from a B grade 65.0 in 2015.This grade indicates that although there are positive features present, the system also contains major risks and/or shortcomings that need to be addressed. Without improvements, its effectiveness, and long-term sustainability is called into question. 

Mr Condron added: “In some ways the challenges for many UK businesses mirror those of the Government and wider society. Large historic entitlements have built up for current pensioners, in contrast, members of the proportionately smaller active workforce are not on track to build up the same pension pots. With many employees unable to retire as a result, businesses need to prepare for a wider demographic in the workforce by ensuring pensions and savings offerings cater for them all.”

The ranking is expected to improve over the years as the implementation of auto-enrolment reaches its final stage. The report suggests that along with auto-enrolment, the British system could gain a higher rank by:

  • Increasing the level of contributions to occupational pension schemes
  • Further increasing the coverage of employees in occupational pension schemes
  • Raising the level of household savings
  • Accelerating the intended increases in the state pension age (the current State Pension age review will shape future policy in this area)
  • Restoring the requirement to take part of the retirement saving as an income stream
  • Raising the minimum pension for low-income pensioners

This year, Denmark, the Netherlands, and Australia have respectively held the top three positions in the index. Denmark continued to hold onto the top position with an overall score of 80.5 out 100. Denmark’s well-funded pension system with its good coverage, high level of assets and contributions, the provision of adequate benefits and a private pension system with developed regulations are the primary reasons for its top spot. 

However, dramatically ageing populations, declining birth rates and a lack of robust retirement systems have resulted in many countries struggling under the burden of providing adequate pensions to senior citizens.

Life expectancies at birth have increased by seven to 14 years in most countries during the last 40 years, equating to an average of one additional year for every four years – a significant result that cannot be ignored in the ongoing reform of the pension system. Even more significantly, the increase in life expectancy of a 65-year-old over the last 40 years ranges from 1.7 years in Indonesia to 8.1 years in Singapore. In the UK the increases have been about 4.7 years for both men and women.

The author of the report and Senior Partner at Mercer, Dr. David Knox, says: “The impact of longer life expectancies, combined with global declining birth rates, is much more significant than has been recognised by many governments and communities.

“Without changes to retirement ages and ages for eligibility to access social security and private pensions, there will be increasing pressure on global retirement systems to the detriment of the financial security provided to older members of our society.

“It is a political imperative that all countries, regardless of their size, and current standing on the MMGPI, implement the necessary policy changes to withstand future challenges presented by the globally ageing population.”

Whilst rapidly ageing populations is a factor affecting the pensions industry other pressure points on a country’s pension system include:

  • Increased government debt affecting the ability to pay benefits in a PAYG system
  • Low growth/low-interest economic environment that reduces the long-term benefit of compound interest
  • Significant unemployment – particularly amongst the youth, preventing these individuals from securing future benefits
  • Increasing prevalence of defined contribution schemes and the increased responsibility on individuals to understand the new arrangements

Wade Noonan, Victorian State Minister for Industry and Employment, says: "With a strong financial services sector and deep talent pool, Victoria continues to lead the way in funds management, a central part of any superannuation and annuities system. Through our Future Industries Fund, the Victorian Government is working closely with the financial services sector to deliver continued expansion, investment and jobs growth."

Notes to editors
The MMGPI is the world’s most comprehensive comparison of global pension systems, and this year it covered close to 60 percent of the world’s population, measuring 27 systems against more than 40 indicators to gauge their adequacy, sustainability, and integrity. It included diverse countries across the Americas, Europe, and Asia-Pacific regions, this year examining Malaysia and Argentina for the first time.

In order to maintain its relevance and continue to broaden the application of its questions, the Index has included three new questions to better determine country’s ranking. These are the extension of age options to effectively recognise a country’s aging population, the balance between the employer and member representatives on the governing board and extending the use of Worldwide Governance Indicators published by the World Bank.

The mitigating factors that determine each country’s old age dependency ratio 

The MMGPI shows the relative position of each country’s old age dependency ratio in respect to five key factors:

  • The labour force participation of older workers aged 55-64
  • The graph below plots the relative position of each country in respect of both the projected old age dependency ratio and the impact of the five mitigating factors.The labour force participation of older workers aged 65 and over
  • The increase in the labour force participation rate of 55-64-year-olds from 2000-2015 which determines whether the country is actually experiencing more people working at older ages
  • The projected increase in the retirement period from 2015-2035 allowing for the expected increases in life expectancy and the projected increase in the normal eligibility age for social security or the publicly funded pension
  • The level of pension fund assets expressed as a percentage of GDP in each country

The graph below plots the relative position of each country in respect of both the projected old age dependency ratio and the impact of the five mitigating factors.

Melbourne Mercer Global Pension Index – overall index value results

The overall index value for each country’s system represents the weighted average of all three sub-indices

About the Australian Centre for Financial Studies
The Australian Centre for Financial Studies (ACFS) is a not-for-profit research centre of Monash Business School. ACFS specialises in leading-edge finance and investment research. It aims to boost the global credentials of Australia’s financial industry, bridge the gap between academia and industry, and support Australia as an international centre for finance practice, research and education.

ACFS facilitates linkages between academics, industry practitioners and government, and draw on the expertise and experience of each of these groups to promote the transmission of knowledge throughout the greater finance community. ACFS has developed a strong reputation as an independent voice on industry-relevant matters. ACFS contributes to public debate on financial sector issues; conduct detailed, expert analysis; deliver unbiased contracted research to industry partners; host a wide range of knowledge-sharing activities including conferences, lecture series, lunchtime briefings, twilight seminars and roundtable discussions; and facilitate three Research Program Committees that link senior industry and academic leaders in the fields of banking, funds management and insurance. ACFS also engages with major government reviews such as the Financial System Inquiry, Tax White Paper, and Productivity Commission inquiries. 

About Mercer
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and careers of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 countries.  Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With annual revenue of $13 billion and 60,000 colleagues worldwide, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit Follow Mercer on Twitter @Mercer.