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Global systems lack an ‘A’

Comparing more than a dozen pension systems worldwide, some might expect at least one to achieve the highest mark. However, Mercer, working with the Australian Centre for Financial Studies (ACFS) on comparing retirement arrangements across the globe in its second Melbourne Mercer Global Pension index, was unable to award an ‘A' to any of the 14 countries examined in this year's survey.

Professor Deborah Ralston, director of ACFS, who said the study was an invaluable tool for comparing systems across the world, noted that Scandinavia, represented only by Sweden in the survey, had the best system globally.

David Knox, senior partner at Mercer, added that the changes in this year's index reflected the effects of the global financial crisis that "threatened the sustainability" of both public and private pension systems, specifically due to the decline in assets and simultaneous increase in government debt.

He said that these effects were felt strongest in the US and UK - each of whose sustainability rating fell by over nine percentage points - and Canada, which registered a seven percentage point drop.

Ralston said that in Asian countries, represented by China, retirement schemes were often in their infancy. This was in contrast to neighbouring Japan, whose ageing population and birthrate outstripped that of most developed European countries. This explained why it received the lowest sustainability rating of just 28%, placing it second to last in the overall index.

Netherlands was rated as having the best retirement system, with its regulation and governance agreements second to none. However, despite its regulatory framework and being judged as offering the best tax system as well as benefits, the Dutch were only able to achieve 71.6% when graded for sustainability.

Australia and Switzerland were judged as slightly more future-proof, edging ahead with a 0.1% and 0.2% lead, respectively, while the overall winner was deemed to be Sweden, which led with almost 73%.

The bottom four, rating below 30%, were France, Brazil, China and Japan. However, given the rhetoric by president Nicolas Sarkozy during the recent pension reforms in France, as well as the belief many that the country should shift towards a funded system to help combat predicted €50bn shortfalls, the inclusion of a European country at the bottom end of the scale might not be a surprise.

Despite improving by almost six percentage points over 2009, Germany trailed behind
the five other European countries examined, with the UK achieving 63.7% compared with Germany's 54%.

Peter Doetsch, the chief executive of Mercer's German division, blamed Germany's grade on the system's unique approach. He argued: "The comparatively bad ranking for Germany is down to the fact international systems are not directly comparable because of their particularities."

Despite this, Mercer admitted that the country needed to improve its regulatory performance, as well shift away from the pay-as-you-go approach predominant in the first pillar of its five-pillar system.

One of the countries expected to improve in next year's survey is the UK, with a swathe of pension reforms finally agreed for 2012.

The survey shows that while most European countries, and the 14 countries overall, have improved the integrity of their retirement systems drastically over the past year, introducing regulatory changes to increase the average grade by over five percentage points to 72.8%, the big issue still looming was sustainability.

At a time when longevity tables are constantly being corrected, politicians and social partners struggle to strike the right balance between income and contributions and most of the developed world battles with historically high government debt, this is unlikely to change drastically any time soon.

But with reforms imminent in the UK, and the pensions debate ongoing in other countries, the momentum is at least carrying us in the right direction.
 

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