Global Pension Index warns Australia needs more reform

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Global Pension Index warns Australia needs more reform

  • 12 October 2011
  • Australia, Melbourne
  • Melbourne Mercer Global Pension Index expands to include 16 countries and 50% of the world population

  • Netherlands continues to top ranking

  • Australia jumps back up to 2nd from 4th

 

Australia’s retirement income system has jumped up the ranks in a global comparison of pension systems. However, it still needs significant reform to help Australians secure enough retirement savings and to financially support an ageing population according to the 2011 Melbourne Mercer Global Pension Index.

According to the Melbourne Mercer Global Pension Index many of the world’s retirement systems are under significant stress and even the world’s most advanced retirement income systems require ongoing reform to ensure they’re robust enough to support a rapidly ageing population.

Australia has regained its ranking as second in the world, after dropping to fourth in 2010. Netherlands holds its position as number one with Switzerland making up the top three.

There is no perfect retirement income system according to the index. No country received an A grade, and 10 countries received either a C (major risks or shortcomings) or a D (major weaknesses and omissions). But this index can provide valuable lessons and insights into how countries are grappling with the economic and social challenges of an ageing population.

Mercer Senior Partner and author of the report, David Knox, said, in these uncertain economic and political times the risk of governments not being able to financially support their ageing population is becoming more of a reality unless some significant pension reform is made now.

“The best pension systems adopt a multi-pillar approach to spread these long term risks between governments, employers and individuals. It also forms the basis of the analysis undertaken in this report. Such an approach is also particularly relevant in periods of economic uncertainty, as we are now facing,” he said.

Australia’s index value increased from 72.9 in 2010 to 75.0 in 2011 due primarily to a real increase in the size of the age pension and higher net household saving rate, but fell short of being the best in the world due to lower levels of adequacy.

“Australia is very much in reach of becoming the first in the world to receive an A-Grade score if we can address the issue of adequacy by raising the level of compulsory savings via superannuation and continue reforms to reduce costs,” said Dr Knox.

“Our superannuation system is in the middle of significant reform, some of which is likely to boost our score in the index in the future but our current B-Grade is an important reminder that our world-class retirement savings system is in danger of failing us unless we take action now,” he said.

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The overall index value for the Australian system could be increased by:

  • Raising the level of mandatory contributions to improve the level of benefits whilst also increasing the level of household savings;
  • Introducing a requirement that part of the retirement benefit must be taken as an income stream;
  • Increasing the labour force participation rate amongst older workers;
  • Increasing the pension age as life expectancy continues to increase; and
  • Reducing the costs of the system by encouraging greater efficiency.

The Index is in its third year and has grown from 11 to 16 countries, now covering over half of the world’s population. It objectively looks 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.

Dr Knox said, “Each country has to consider its own social, economic, political, cultural and historical circumstances, but despite the differences in the history and development of each country’s system there are some common challenges around the world.”

Common global challenges include:

  • Increasing the state pension age and/or retirement age to reflect increasing life expectancy, both now and in the future, and thereby reduce the level of costs of the publicly financed pension pillar;
  • Promoting higher labour force participation at older ages including the provision of phased retirement;
  • Encouraging or requiring higher levels of private saving, both within and beyond the pension system, to reduce the future dependence on the public pension;
  • Increasing the coverage of employees and/or the self-employed in the private pension system, recognising that many individuals will not save for the future without an element of compulsion or automatic enrolment; and
  • Reducing the leakage of funds from the retirement savings system prior to retirement thereby ensuring the funds saved, often with the associated taxation support, are used for the provision of retirement income.

Professor Deborah Ralston, Director of the Australian Centre for Financial Studies said the Melbourne Mercer Global Pension Index remains critical for governments, industry and academia with an ageing population a top priority for government’s the world over.

“Once again, this third edition of the Melbourne Mercer Global Pension Index highlights the areas of policy debate in pensions around the world. The on-going difficulty of developing systems that provide an adequate level of retirement income and yet maintain sustainability, especially in countries with an ageing population, warrants further research and discussion world wide.  We hope the Index will make a contribution to that end.”

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