Iceland has been ranked at the top of a key annual beauty contest for the world’s most sustainable and adequate pension systems for 2021 – pushing the Netherlands and Denmark into second and third place in the first year the North Atlantic country has been included.
The latest annual Mercer CFA Institute Global Pension Index (MCGPI) – a study which its creators say covers pension systems accounting for 65% of the world’s population – also highlights what can be done to narrow the gender pension gap, an issue they say is inherent in every system.
A third collaborator behind the study is the Monash Centre for Financial Studies (MCFS), part of Monash Business School at Australia’s Monash University.
Iceland, the Netherlands and Denmark ranked first, second and third respectively in the MCGPI, after the latter two held first and second places respectively in the 2020 line-up.
These three pension systems were the only ones rated “A” – an achievement described in the report as signifying the nation had: “A first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity”.
B+ grades were awarded to Israel, in fourth place, Norway in fifth and Australia in sixth.
The next segment down – plain B grades – included Finland, Sweden, UK, Singapore, Switzerland, Canada, Ireland, Germany, New Zealand and Chile in that ranking order, according to the study.
None of the countries included in the report suffered the ignominy of an E grade – the index’s lowest – but Argentina and Thailand were the lowest-rated pension systems, each receiving a D grade.
The report’s authors said in a summary: “The provision of financial security in retirement is critical for both individuals and societies as most countries are now grappling with the social, economic and financial effects of ageing populations.”
Many of these issues were accentuated by the COVID-19 pandemic in 2020 and 2021, they said, but added that it was not only ageing populations and the effects of the coronavirus that were challenging pension systems around the world.
“The current economic environment with reduced wage growth, historically low interest rates and reduced investment returns in many asset classes, are placing additional financial pressures on existing retirement income systems,” the authors wrote.
Reacting to his country entering the Mercer/CFA ranking right at the top, Stefán Halldórsson, project manager at the Icelandic National Association of Pension Funds (Landssamtök lífeyrissjóða) said: “This comparison is a great boon, because although Iceland’s overall rating is good, there are various suggestions as to where we could do better and also which countries we should look to as a model.”
In Denmark – which topped the Mercer ranking for several years until it was beaten by the Netherlands in 2018 – Karina Ransby, deputy director of industry association Insurance & Pension Denmark (IPD), commented on the judgement, describing her country’s showing as “a great third place”.
IPD pointed out that in top pensions performer Iceland, many people worked well into old age, and labour market pensions were even more widespread there than in Denmark.
“We have long pointed out that we lack more flexibility about retirement age,” Ransby said.
“Retirement does not have to be an either-or decision. Many would like to work longer if they found there was a financial carrot”
Karina Ransby, deputy director of IPD
“Retirement does not have to be an either-or decision. Many would like to work longer if they found there was a financial carrot, or if they were given the opportunity to reduce their hours,” she said, adding that IPD hoped the Pensions Commission would come up with proposals to create more flexibility for the individual, and reward later retirement.
Mercer said the big increase in the UK’s index score this year was driven by a strong improvement in the country’s adequacy sub-index value, which went to 73.9 in 2021 from 59.2 in 2020.
Regarding the UK’s improvement in the ranking, Tess Page, partner and trustee leader at Mercer, said: “We have benefitted from auto-enrolment pushing up savings rates, as well as mostly helpful policy and regulatory changes.
“However, many members still face a cliff edge at retirement and, as ‘generation DC’ approaches pensions age, this issue is only expected to accelerate,” she said.
The report devotes nine of its 97 pages to the issue of the gender pensions gap, saying total pension outcomes in every system around the world provide higher retirement income for males than females.
Among the study’s recommendations to government on how to reduce the inequality, are calls for policy makers to “provide affordable quality childcare which is likely to encourage women to return to the workforce earlier”, and to ensure that pension rights accrued during a partnership are taken into account on divorce or separation.