• UK is ranked 11th in 2016, down two places from last year
• Auto-enrolment process should improve UK’s place in the index in coming years but more could be done
The index reveals that the UK’s pension system has dropped behind Ireland and Singapore to 11th place this year, from 9th in 2015. This is due to a reduction in net replacement rate, which is related to a cut in the pensions an employee can expect from both the state and occupational schemes.
“The 2016 state pension reforms are expected to provide less generous state pensions for many workers, compared to the historic earnings-related system,” said Mark Condron, Senior Partner and Mercer’s UK Retirement Business Leader.
“The generous defined benefit schemes of the past also stand in sharp contrast to today’s typical defined contribution schemes, with minimal 2% contributions applied under auto-enrolment requirements. Thankfully, most employers elect to offer more than this amount, which will be increasingly important to help employees build up meaningful provision for retirement.”
The UK received a ‘C+’ grade with a score of 60.1 out of 100, down from a B grade 65.0 in 2015.This grade indicates that although there are positive features present, the system also contains major risks and/or shortcomings that need to be addressed. Without improvements, its effectiveness, and long-term sustainability is called into question.
Mr Condron added: “In some ways the challenges for many UK businesses mirror those of the Government and wider society. Large historic entitlements have built up for current pensioners, in contrast, members of the proportionately smaller active workforce are not on track to build up the same pension pots. With many employees unable to retire as a result, businesses need to prepare for a wider demographic in the workforce by ensuring pensions and savings offerings cater for them all.”
The ranking is expected to improve over the years as the implementation of auto-enrolment reaches its final stage. The report suggests that along with auto-enrolment, the British system could gain a higher rank by:
• Increasing the level of contributions to occupational pension schemes
• Further increasing the coverage of employees in occupational pension schemes
• Raising the level of household savings
• Accelerating the intended increases in the state pension age (the current State Pension age review will shape future policy in this area)
• Restoring the requirement to take part of the retirement saving as an income stream
• Raising the minimum pension for low-income pensioners
This year, Denmark, the Netherlands, and Australia have respectively held the top three positions in the index. Denmark continued to hold onto the top position with an overall score of 80.5 out 100. Denmark’s well-funded pension system with its good coverage, high level of assets and contributions, the provision of adequate benefits and a private pension system with developed regulations are the primary reasons for its top spot.
However, dramatically ageing populations, declining birth rates and a lack of robust retirement systems have resulted in many countries struggling under the burden of providing adequate pensions to senior citizens.
Life expectancies at birth have increased by seven to 14 years in most countries during the last 40 years, equating to an average of one additional year for every four years – a significant result that cannot be ignored in the ongoing reform of the pension system. Even more significantly, the increase in life expectancy of a 65-year-old over the last 40 years ranges from 1.7 years in Indonesia to 8.1 years in Singapore. In the UK the increases have been about 4.7 years for both men and women.
The author of the report and Senior Partner at Mercer, Dr. David Knox, says: “The impact of longer life expectancies, combined with global declining birth rates, is much more significant than has been recognised by many governments and communities.
“Without changes to retirement ages and ages for eligibility to access social security and private pensions, there will be increasing pressure on global retirement systems to the detriment of the financial security provided to older members of our society.
“It is a political imperative that all countries, regardless of their size, and current standing on the MMGPI, implement the necessary policy changes to withstand future challenges presented by the globally ageing population”.
Whilst rapidly ageing populations is a factor affecting the pensions industry other pressure points on a country’s pension system include:
• Increased government debt affecting the ability to pay benefits in a PAYG system
• Low growth/low-interest economic environment that reduces the long-term benefit of compound interest
• Significant unemployment – particularly amongst the youth, preventing these individuals from securing future benefits
• Increasing prevalence of defined contribution schemes and the increased responsibility on individuals to understand the new arrangements
Wade Noonan, Victorian State Minister for Industry and Employment, says: "With a strong financial services sector and deep talent pool, Victoria continues to lead the way in funds management, a central part of any superannuation and annuities system. Through our Future Industries Fund, the Victorian Government is working closely with the financial services sector to deliver continued expansion, investment and jobs growth."
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