- Denmark’s score slides but holds onto no. 1 spot
- China’s score improves but ranking drops slightly relative to other countries
- Fundamental change in approach to post-retirement solutions needed
- Index increases to 20 countries, covering over 55% of world population
China’s retirement income system continues to improve with its value in the 2013 Melbourne Mercer Global Pension Index increasing. However as countries around the world also work to strengthen their systems China’s global ranking fell from fifteenth to sixteenth.
Recognition that income in pension plans is tax exempt was a primary reason for the improvement in China’s score, which increased to 47.1 out of a possible 100 in 2013 from 45.4 in 2012 and 40.3 in 2010 when China was first included in the Index.
Denmark, the Netherlands and Australia held onto the top three spots. Denmark became the first country to achieve an ‘A’ Grade in 2012 and have held onto the position in 2013 despite their overall score falling to 80.2 from 82.9. Denmark’s well-funded pension system with its 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.
Four out of six Asian countries improved or maintained their performance in the Melbourne Mercer Global Pension Index in 2013, South Korea’s score fell and Indonesia was included in the Index for the first time. The overall results indicate pension systems in the region are improving. However, five out of six also maintained a ‘D’ grade which is a system with some desirable features but also many opportunities to improve.
Asian countries made up 30% of the Index - or six out of 20 countries - with Singapore, China, Japan, South Korea, India, and Indonesia included. All, except South Korea and Indonesia, improved or maintained their score in 2013. Singapore was the outstanding performer for the region, making the top ten pension systems in the world; it improved its overall score from 54.8 in 2012 to 66.5 in 2013. South Korea’s index value fell primarily due to a significant increase in life expectancy as measured by the United Nations.
Dr. David Knox, Senior Partner at Mercer and author of the research said, “Pension systems in many Asian countries are in an embryonic phase and we expect them to gradually strengthen in coming years. However, many Asian countries are also facing an ageing population at a rate beyond some Western countries, which makes it particularly challenging, and urgent, to develop a sustainable pension system.”
China has continued its reform to strengthen the social security pension system. With an ageing population, the favourable demographic situation which China has been experiencing will soon come to an end. Accordingly, in the report, the score in “sustainability” section for China has dropped from 30.5 in 2012 to 28.9 in 2013, which is well below the global average level of 51.9.
“China has recognised the unsustainability of its pension system a long time ago. We have seen the government making real efforts in different areas to stimulate pensions saving and encourage the development of supplementary pension arrangements. Greater strides on the regulation side however, in particular regarding tax incentive and investment strategy are anticipated.” said Dr Yumeng Zhang, China Retirement and Investments Leader. “we are very positive on the outlook of the Chinese pension market and believe it will continue to grow at a rapid pace over the next few years..”
The Melbourne Mercer Global Pension Index is now in its fifth year and has increased from 11 countries in 2009 to 20 countries in 2013 with Mexico and Indonesia the latest additions. It now covers more than 55% of the world’s population. 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 measures the adequacy, sustainability and integrity of a country’s pension system and is produced by Mercer and the Australian Centre for Financial Studies and is funded by the Victorian State Government.
The research 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 China’s system include:
- Introducing taxation incentives for employee contributions to the supplementary plans
- Introducing a requirement that part of the supplementary retirement benefit must be taken as an income stream
- Increasing the state pension age over time
- Enabling individuals to retire gradually whilst receiving a part pension
- Improving the level of communication required from pension plans to members
Professor Deborah Ralston, Executive Director of the ACFS said the global response to the Index continues to indicate its value to government, industry and academia as they debate how best to provide for an ageing population.
The 2013 Index includes a special chapter on post-retirement solutions in a defined contribution (DC) world.
Dr. David Knox, Senior Partner at Mercer and author of the research, said “As countries grapple with rising life expectancies, increased government debt, uncertain economic conditions and a global shift to defined contribution (DC) plans, there are still many lessons to be learnt and new solutions to be found, particularly for the post-retirement years.”
“A DC system is well established in many countries and it is clearly heading this way in many others. Australia has arguably been a trail blazer in terms of adopting a DC system. However, the conversion of DC benefits into adequate and sustainable retirement incomes remains a largely unresolved problem in many countries, including Australia.
“Developing effective and sustainable post-retirement solutions has to be one of the most critical challenges for policy makers and retirement industries around the globe.
“Many of the challenges relating to ageing populations are similar, irrespective of each country’s social, political, historical or economic influences. Many of the desirable policy reforms to alleviate these challenges are also similar and the Index aims to highlight the best solutions and share them globally,” said Professor Ralston.
About the Australian Centre for Financial Studies
The Australian Centre for Financial Studies (ACFS) is a not-for-profit consortium of Monash University, RMIT University and Finsia (Financial Services Institute of Australasia) which was established in 2005 with seed funding from the Victorian Government.
The mission of the ACFS is to build links between academics, practitioners and government in the finance community to enhance research, practice, education and the reputation of Australia's financial institutions and universities, and of Australia as a financial centre. ACFS conducts leading edge finance research, commentary and thought leadership. More information can be found at www.australiancentre.com.au and on the Index www.globalpensionindex.com.
Results by Overall Index Value
|Country/Region||Overall Index Value||Sub-Index Values|
|Ranking||Adequacy 40%||Sustainability 35%||Integrity 25%|
1 Includes Mainland China only.
- Each country is given a score between 0 and 100. The overall index value represents the weighted average of the three sub-indices – adequacy, sustainability and integrity.
- More than 50 questions relating to desirable factors in all retirement income systems were used to score each country’s system.
- Weightings used for index value are:
— 40% for the adequacy sub-index
— 35% for the sustainability sub-index
— 25% for the integrity sub-index.
The primary objective of any pension system is to provide adequate retirement income. Thus, this sub-index considers the base level of income provided, the net replacement rate for median-income earners, whether benefits are taken as an income stream as well as several important benefit design issues.
The long-term sustainability of the current retirement income system in many countries is important in context of the ageing population, the increasing ratio of retirees to productive workers and, in some countries, increasing government debt. Countries that do well in sustainability have good pension coverage (normally through some form of compulsion or auto-enrolment); a high level of pension fund assets compared to GDP; a level of mandatory contributions, and a relatively low level of government debt.
It is critical that a nation has confidence in the ability of private sector pension providers to deliver retirement benefits into the future. This sub-index considers the role of regulation and governance, the protection provided to participants and the level of communication provided to members. We consider the requirements set out in relevant legislation. Several countries do well with integrity due to the presence of comprehensive regulations ensuring good governance and providing good communication to members.