Global rating of pension systems, interview with David Knox, Melbourne Mercer Global Pensions index
Now in its sixth year, the Melbourne Mercer Global Pension index has become a yardstick for the world’s industry to assess the successes and failures of pensions policy.
Ranking countries based around three broad categories of pension adequacy, sustainability and integrity of system, has proven popular in those countries – notably Denmark and the Netherlands – that have been rewarded for their broad coverage.
For the first time ever, Austria, Finland, Ireland, Italy and South Africa were included in the index. The Victoria government provides funding for two new countries a year (Italy and South Africa this year), while Austria, Finland and Ireland all signed three-year contracts to cover the research costs associated with their entries.
Where Denmark’s entry into the ranking in 2012 saw it dethrone the Netherlands and claim the top spot, none of 2014’s new entrants offered up any great surprises. That is, with the exception of Italy’s dismal sustainability rating, by far the lowest score achieved by any of the 25 countries surveyed to date.
Finland, for its part, entered the index in the fourth spot, displacing Switzerland and claiming the highest integrity rating of 91.1.
Knox explains that he does not have any “real, definitive idea” – prior to a country joining the ranking – where it will end up, but that he expected the Nordic country to do reasonably well.
Speaking in the historic London offices of the Victoria state government, which to date has funded the research, Knox says he was less certain about Ireland’s placing. “I expected Ireland to probably be similar to the UK, maybe a bit below, because their history is similar.” In the end, Ireland tied for 12th place alongside Germany, three behind the UK, but still ahead of four other European countries.
|Source: Melbourne Mercer Global Pension index 2014|
Austria and Italy were marked down over sustainability concerns, receiving ratings of just 18.9 and 13.4 in the category – far below the minimum 35 points required to receive even a D grade (countries are graded A to E based on their overall scores).
“Austria and Italy struggle, and that’s for obvious reasons – they have a very limited private pension sector,” he says. “Italy is very heavily dependent on public provision, and that can only go so far.”
Now that the report covers 58% of the world’s population, Knox accepts that only a few more countries will need to be added to boost global coverage significantly – Malaysia being one. Of countries closer to Europe, he says Russia is the most obvious target to add in future, but also says Spain could be of interest.
Knox, actuary for two Australian state governments, is keen to avoid offering recommendations in the report. “All we’re saying is that, in the private sector, you need to encourage savings.
“Whether you want to go to compulsion as the first step, or whether it’s auto-enrolment, or whether it’s incentives, these issues are a cultural, local step as to what’s most appropriate.”
Nevertheless, the questions asked hint at how a sustainable and fair system has to function, and a new addition to the adequacy sub-index asks about the continued payment of contributions if the worker becomes unemployed, or takes leave to care for family – a matter that is particularly important to parents, often mothers, who take career breaks.
“The gender balance issue [for pensions] is quite hard to assess, but what we can say is, if you’re receiving income support, worker compensation, disability income or maternity leave, you’re receiving income because you’re out of the workforce. Someone is paying that, and they should continue to pay something into your pension pot. Otherwise, you’re going to be aversely affected.”
The index continues to suffer from the time delay in compiling the authoritative World Bank and OECD data, resulting in significant changes in a number of countries – notably Australia, the UK and Poland – not yet being reflected in the ranking.
In the case of the UK, ranked 9th, the government’s surprise overhaul of access rights, which will allow savers to draw down accrued benefits from age 55, will eventually affect its adequacy score. One of the sub-indice’s current questions explores how regulation restricts access to retirement savings, and places an emphasis on their being “preserved until the later years of a working life”. A further hit will come from the absence of a legal requirement to take out an annuity, factored into the following question.
Similarly, changes to Poland’s pension system – the wholesale transfer of Polish sovereign debt to the state social security institution (ZUS) and its cancellation, alongside a ban on fixed income asset investing – will likely see the country slip from its middle-of-the-road ‘C’ grade and 15th place ranking.
Knox also warns his countrymen that they are unlikely to remain in second spot next year. Australia only claimed the position because it had “gone up perhaps more than it deserved to go up” on increases to the mandatory contribution rate now postponed for several more years.
The Australian seems happy with the work he has completed over the past six years, and says he has enjoyed examining how various reforms around the world have affected a country’s ranking. But he is coy about the Victorian government’s continued funding of the project, and therefore MMGPI’s future existence, only noting that there was a state election in late November.