By Daniel Archibald | CFA
Despite warnings of a retirement savings shortfall, Australia's superannuation system, relative to the size of the country, is one of the biggest and best functioning retirement schemes in the world. If you add in the age pension safety net, the overall standard of living in retirement attainable by a vast majority of the population is likely to be above that of most other countries.
Ranking of Global Pension Schemes
Source: Melbourne Mercer Global Pension Index
The Melbourne Mercer Global Pension Index (MMGPI) looks to rank country's retirement schemes and currently ranks Denmark at the top with an A rating. Australia and the Netherlands fit in just behind with most of the rest of the wealthier northern European countries not far below these top 3. Chile is somewhat of a surprise and achieves a high rating due to more to its structure than its current level of funding.
Overall, it seems countries with fully funded defined benefit schemes (e.g. Denmark, Netherlands) or those with robust defined contribution schemes (e.g. Australia, Chile) have scored the highest. Countries with low Government debt levels and high safety net levels have also fared well.
Australia
According to the MMGPI report, Australia's pension scheme misses the top mark owing to a few structural issues. They recommend the following changes to improve sustainability:
• Increase age pension age (and labour force participation of older workers) in line with demographics
• Mandate annuities for part of retirement benefits
• Increase the preservation age (i.e. age at which you can touch your superannuation)
Denmark
Denmark received the top mark owing to the fact that the population's guaranteed pensions are fully funded (i.e. the money is there to be paid when required). This is unlike the social security schemes of the US and France which for the most part are underfunded.
Singapore
Singapore's Central Provident Fund is one of the biggest institutional investors in the world and is the basis for funding the country's retirement needs. The MMGPI report notes that they do see issues relating to the level of assistance given to the poorer members of society.
UK
The UK pension system was ranked relatively well, owing to its overall size. However, the report did recommend the following:
• Introducing a defined contribution scheme (similar to Australia's super scheme)
• Increasing coverage to all workers
USA
Even though the size of the US retirement savings pool is by far the biggest, the overall ranking was quite low. Some reasons for this include:
• Access to benefits at younger ages
• Low safety net level
• Low mandatory contribution rate into schemes and social security fund
• High Government debt
With ageing populations and declining birth rates, the pressure on global pensions systems is likely to grow. Governments may need to start making hard decisions now, to ensure the sustainability, adequacy and integrity of the retirement income schemes.