The Netherlands, Denmark, and Australia were ranked as the top three pension systems by country, according to a report from Visual Capitalist analytics company. New Zealand, despite having little in the way of compulsory savings, came in at 8th in the world. Rounding out the top 10, in order, were: Finland, Sweden, Norway, Singapore, New Zealand, Canada, and Chile.
According to the analysis in the report, the US, with the largest pensions system in the world, was ranked only 17th. Meanwhile, Thailand, Argentina, and Turkey were ranked the worst. Visual Capitalist is an investment analytics company, founded in Vancouver in 2011, which produces reports on global industry trends. The latest report, written by Carmen Ang, one of the firm’s professional writers, is based on data from the Melbourne Mercer Global Pension Index, aimed to determine which countries’ pension systems are best equipped to take care of their elderly citizens and which are the worst. It’s not a report about super fund or pension assets size. It’s about the adequacy of retirement incomes.
“While it can be difficult to compare one country’s pension system with another, Visual Capitalist noted that there are certain universal elements that can lead to adequate and stable support for pensioners,” the report said. According to the global media outlet Asset International, through its daily newsletter ‘Chief Investment Officer’ (‘CIO’), universal elements were broken down into three sub-indices: adequacy, sustainability and integrity.
“Adequacy refers to the base-level of income, as well as the design of a country’s private pension system. Sustainability refers to the state pension age, the level of advanced government funding, and the level of government debt. And integrity refers to regulations and governance set in place to protect plan members. The three measures were used to rank 37 countries’ pension systems, which represent more than 63 per cent of the world’s population.”
Australia always rates well in these sort of studies because of the compulsory nature of its system, which currently mandates 9.25 per cent of workers’ wages into super accounts, scheduled to move to 12 per cent by July next year. New Zealand, which has less compulsion, is possibly more exemplary. The report said that ‘sustainability’ was particularly significant because of the world’s aging population, as people increasingly started to cash in on their savings.
Denmark was ranked as the country with the most sustainable pension, as it not only has a strong basic pension plan, but it also has mandatory workplace pensions, which means employers are required by law to provide pension plans for their workers. Several countries ranked high on the adequacy part of the scoring but low in sustainability. For example, while Ireland had the highest rank for adequacy, it had a relatively low sustainability ranking. This is partially attributed to Ireland’s low level of occupational coverage and its rapidly aging population, as the country’s worker to retiree ratio is expected to fall to 2:1 from 5:1 by 2050. Likewise, Spain had a high adequacy rating but ranked very low in sustainability due to its low occupational pension participation and low fertility rate, which means its worker-to-retiree ratio is also expected to decrease.
CIO said some general recommendations from the Mercer Index included how countries can improve their pension systems. These include increasing the retirement age to help balance the worker-to-retiree ratio; enforcing mandatory occupational plans; limiting access to benefits by prohibiting people from dipping into their savings pre-emptively and establishing strong pension assets to fund future liabilities.
Greg Bright is publisher of Investor Strategy News (Australia)