By Dr David Knox, author of the Melbourne Mercer Global Pension Index
In the latest Melbourne Mercer Global Pension Index launched earlier in the month, new entry Demark scored the first ever ‘A’ grade rating in the report’s history, making it the benchmark for pension provision globally and the envy of the rest of the pensions world. While this is cause enough to celebrate, does it mean that we have finally found the perfect retirement system for others to emulate?
Regrettably no. But what the Melbourne Mercer Global Pension Index (which looks at the retirement systems of 18 countries and covers more than 50% of the world’s population) does do, is offer insight into what separates those countries at the top of the leader board in Denmark, the Netherlands and Australia from those at the middle and bottom. The common characteristic of those countries with a well-developed pension system is in ensuring it covers a broad percentage of the population. This is important because more people enrolled in the pension system leads to more assets set aside for the future and therefore less pressure on future government budgets, particularly as the costs of an ageing population increase. While this feature may sound obvious, it is extraordinary how few countries have yet to prioritise, or make mandatory, pension enrolment. When you consider that the UK, a relatively sophisticated pension system, has only just introduced a form of compulsory savings with auto-enrolment, it is not surprising that other countries are still lagging behind in this respect. But what exactly does good coverage look like? Again, our best practice countries offer some insight. Denmark has an overall contribution rate of about 12% of earnings. Australia – also known for offering one of the world’s best retirement systems – currently has a contribution rate of 9%, but which is legislated to rise up to 12% over coming years. So the benchmark is high, and as the Australian example shows, any increase should be gradual. The UK has at least started on this journey, which will take many years before it reaches a meaningful level. Another notable aspect of countries with enviable retirement systems is ensuring there is strong, but sensible, regulation in place. Regulation must ensure pension contributors feel the system is treating them fairly, offers transparency and predictability, and encourages people to save for their retirement. That is, having confidence in the system is important when you are investing part of your future wellbeing in it. By contrast, in countries that rate lower down the Index, particularly the Asian countries that tend to perform poorly, there remains a cultural element to pensions that aren’t as pronounced in western societies. In China and Korea for example pensions systems remain nascent because children have traditionally played an important role in looking after their parents in retirement, rather than reliance on the state or a private pension. In addition, those schemes that do exist in these countries are largely limited to major cities, with the countryside having a less effective pension system. Finally, those countries with a best practice pension model in place tend to have a forward-thinking and flexible approach to pension provision, with systems that are able to continually adapt to every changing demographics and trends. The trick is for governments to anticipate these changes rather than react to them, because pensions are long-term investments that need considerable future planning. Such continual demand for ongoing reform, responding to changing circumstances, explains why there will never be such a thing as the perfect pension system.
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