The Victorian Government of Australia and The Australian Centre for Financial Studies today launched its 6th annual Melbourne Mercer Global Pensions Index which objectively ranks both the publicly funded and private components of 25 country’s pension systems. The United Kingdom’s pension system, ranked 9th, improved its score signaling that the introduction of auto-enrolment to the UK’s pensions system is starting to have an impact.
Since the first index six years ago, the UK has continually improved its ranking, moving from a ‘C’ grade in 2009 to a ‘B’ grade in 2011. For the 2014 index, the UK’s pension system achieved a ‘B’ grade and a score of 67.6 out of a possible 100 in 2014, up from 65.4 in 2013. A ‘B’ grade system has a sound structure, with many good features, but has some areas for improvement.
Higher contributions through the continued introduction of auto-enrolment and the state pension reform have been major influencers in the improvement in the UK’s retirement savings system, according to the 2014 Melbourne Mercer Global Pension Index (MMGPI). While the overall ranking for the UK has not changed and the UK is still positioned in 9th place, there has been significant improvement in the sustainability of the UK’s system, up from 48.0 in 2013, to 52.4 in 2014, as a result of the introduction of mandatory auto-enrolment.
The MMGPI measured 25 retirement income systems against more than 50 indicators under the sub-indices of adequacy, sustainability and integrity. According to Deborah Cooper, Partner at Mercer, the results highlight that introducing mandatory auto-enrolment can contribute to the UK’s efforts in ensuring an adequate and sustainable retirement system.
Deborah Cooper, Partner at Mercer said: “The UK has previously struggled with issues around sustainability, mainly due to the numbers of people covered by our pensions system. The introduction of auto-enrolment, which is currently being phased in, has helped improve the sustainability rating in this year’s MMGPI index. This will continue to improve over the next 5 years as the level of contributions increases and auto-enrolment completes”.
While the UK’s score in the MMGPI has improved this year, Mercer believe that the process of significantly relaxing restrictions around accessing pension savings by opening up more alternatives to annuitisation would likely negatively impact on the UK score next year.
The MMGPI also found while there is no perfect system that can be applied universally around the world, there are certain features and characteristics of retirement systems and attitudes towards pensions that could likely lead to improved benefits for individuals.
Geoffrey Conaghan, Agent General for the Victorian Government of Australia, who is based in London commented, “Financial literacy starts early in life and it is great to see the UK has started introducing personal finance education into the curriculum. In Victoria people see their pensions as part of their overall savings and investments, and like a savings account see the need to top-up and increase their contributions.”
The Index, which has become a valuable resource for financial services professionals, regulators, academics and governments provides details on current performance and includes suggestions for further improvements. The index showcases the depth and breadth of Victoria’s financial services research capabilities which are underpinned by strong public and private partnerships. The Index also highlights the city of Melbourne’s strengths in investment and fund management on the world stage.
Mr Conaghan concluded, “The strength of analysis contained within the report acts as a great ambassador for Victoria’s financial services sector, demonstrating not only its strengths in fund management but its role as the home of leading edge research and the institutional centre of Australia’s A$2 trillion fund management market - the largest in Asia and the third-largest in the world. As Australia’s financial and business hub, Melbourne is regarded as a key centre in the Asia-Pacific region, boasting over 1,000 financial services operations and being home to six of the top 12 largest pension funds in the country.
“The UK investment office for the Victorian Government of Australia is based in London and we work directly with asset managers who are looking to access the opportunities in Victoria’s financial services sector. Asset allocations are likely to increase offshore in the next few years which is why investment managers look to find local representation in key markets. With Melbourne being the key centre in the Asia-Pacific region it is no wonder brands such as Franklin Templeton Investments, Legg Mason Asset Management and Martin Currie have established offices in the state of Victoria.”
Denmark, Australia and the Netherlands held onto the top three spots in the Index. Denmark continued to hold onto the top position in 2014 with an overall score of 82.4. 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.
The MMGPI now covers 25 countries and close to 60% of the world’s population. It has grown from 11 countries in 2009 and is the most comprehensive comparison of pension systems globally.
Professor Deborah Ralston, Executive Director of the Australian Centre for Financial Studies said the expansion of the Index reflects the fact most countries are grappling with the social and economic effects of ageing populations and global comparisons can lead to global lessons for government, industry and academia as they debate how best to provide for an ageing population.
“Although each country’s retirement income system reflects a unique history, there are some common themes as many countries face similar problems in the decades ahead and the Index aims to highlight the best solutions and share them globally,” said Professor Ralston.
“It’s pleasing to note average scores are increasing over time, suggesting pension reform around the world is having a positive effect. The average score for the 14 countries in 2010 was 61.7 compared to 64.3 for the same countries in 2014,” she said.
Good governance critical for success in changing world
Beyond the Index rankings, the 2014 MMGPI looked at the importance of trust and transparency in a retirement income system.
“The tides of accountability for ensuring financial security in retirement are shifting from State and employer responsibility to individuals in many countries. This trend will continue as life expectancy continues to increase and many governments reduce the per capita expenditure on their aged population. This shift means communication to members has never been more important or come under more scrutiny from members, regulators, employers, consumer groups, politicians and the media,” said David Knox, Senior Partner at Mercer and author of the research.
“Ensuring transparency and the trust of individuals is becoming increasingly important. If you lose community trust in a pension system; you risk losing the effectiveness of the system.
“Governments, regulators and financial industries have to ensure good governance frameworks and practices that promote regular easy to understand communication, clear benefit projections, and access to comparative information in a cost-efficient manner.
“The pension industry must develop efficient methods to be transparent in meaningful and relevant ways to all stakeholders. There is now no alternative,” he said.
How can the UK’s retirement savings system improve?
The MMGPI identifies possible areas of reform for each country that would provide more adequate retirement benefits, increased sustainability, and greater trust in the pension system. Suggested measures to improve the UK’s system include:
• raising the minimum pension for low-income pensioners
• increasing the coverage of employees in occupational pension schemes
• increasing the level of contributions to occupational pension schemes
• raising the level of household saving
• increasing the labour force participation rate at older ages
Challenges common to many countries include the need to:
• Increase retirement age to reflect increasing life expectancy
• Promote higher labour force participation at older ages
• Encourage higher levels of private saving
• Increasing coverage of the private pension system with an element of compulsion or automatic enrolment
• Reduce the leakage from the system prior to retirement
• Improve the governance of private pension plans and require improved transparency
The Index looks objectively at both the publicly funded and private components of a system as well as personal assets and savings outside the pension system. It is published by the Australian Centre for Financial Studies (ACFS) in conjunction with Mercer and is funded by the Victorian State Government.
|
