Denmark’s pensions supremacy was once again confirmed in October with the publication of the fifth annual Melbourne Mercer Global Pension index.
Despite the introduction of Mexico and Indonesia, there were no upsets among the top three countries, with the Netherlands and Australia in second and third place and graded with a B+, compared with the A awarded to the nation famous for Lego.
Denmark’s lead, nonetheless, was eroded and it only narrowly maintained its top grade, as re-drafted questions on the interplay of tax and pension contributions, as well as the place of conflict-of-interest policies, saw it awarded only 80.2 points – 0.3 points above a B+, according to the methodology employed by the Australian Centre of Financial Studies.
This year’s index still offered up some surprises, such as increased scores for the UK and Switzerland – the latter changing places with Sweden to claim fourth place in the ranking of 20 countries – while Germany leapfrogged Poland and the US to round out the top 10, coming within striking distance of a C+ grade next year as the pension system’s adequacy score rose to nearly 70.
However, the UK fared less well despite its increased score, seeing it displaced by Singapore and Chile and coming in just ahead of Germany.
Brian Henderson, head of Mercer’s UK defined contribution (DC) business, is nonetheless hopeful the country’s score can increase further. “We don’t score too well on sustainability in the UK,” he says of the country’s below-average 48-point score in the category, compared with adequacy and integrity ratings well above average. “But saying that, there are a number of things in play in the UK that will ultimately improve that. Auto-enrolment is now up and running. That’s not mandatory, and mandatory things go down well with the index. But all indications are that, at the moment, people are not really opting out.”
The mandatory or quasi-mandatory nature of pension saving in Australia, Denmark and the Netherlands are, in large part, responsible for its dominance, but Henderson thinks it more important that the UK addresses the currently fairly low levels of contributions.
He notes that, even once contributions reach the legally required 8% rate upon auto-enrolment’s completion, the country will still lag behind Australia’s 9%. However, Australia increased to 9% gradually over decades, starting significantly lower, and the country’s new government pledged during the election campaign to postpone an escalation to 12% due to the impact on its weakening economy.
Henderson also notes the need for further changes to Australia’s system, saying the absence of “post-retirement” solutions remains problematic despite its score.
To this end, this year’s report also includes a paper on post-retirement solutions and how systems should be improved.
“The conversion of DC benefits into adequate and sustainable retirement incomes remains a largely unresolved problem in many countries,” the paper says, comparing the approach taken in the US and UK with Chile, Australia, Canada and others.
The paper concludes that the global shift to DC has yet to fully address questions of income. “We must focus on the provision of retirement income – after all, that is the purpose of pensions.”
Independent of how such a goal is achieved – whether through a pre- or post-taxation system, the existence of conflict-of-interest policies, or mandatory or opt-out savings – the index should hopefully succeed in sparking the debate.