Top pension ranking elusive

The Netherlands retains its number one ranking in the third Melbourne Mercer Global Pension Index, but the elusive A-grade is yet to be achieved by any country measured in the index.

David Knox

Senior partner at Mercer and author of the report, David Knox (pictured), says The Netherlands does a couple of things very well and their overall governance and structure is good.

“They have a good base pension, and a good replacement rate for the median earner. They also have high coverage of the workforce, and level of assets proportionate to GDP is high,” Knox says.

The current reform in The Netherlands, which will increase the pension and retirement age, will serve to increase the country’s ranking in the index, he says.

But the index reveals that there is no perfect retirement system; many of the world’s systems are under significant stress; and even the world’s most advanced retirement income systems require ongoing reform to ensure they are robust.

Knox says there are a couple of common reform agendas that would improve the systems around the world.

“There needs to be recognition of the aging population, and an increase in the state pension age or retirement age,” he says. “If people are working longer then adequacy is increased and they are drawing down for fewer years.”

The US, the UK and Australia have all indicated moves to encourage greater labour force participation, he says.

Also, there could be encouragement of a higher coverage of private pensions globally, Knox says.

“In some countries it covers only half the workforce,” he says.

Knox, who will present at next week’s International Centre for Pension Management (ICPM) conference in Washington, says he hopes the Mercer index will be a document considered by policy makers around the globe.

ICPM will also hear from Richard Jackson, a senior fellow at the Center for Strategic and International Studies, where he directs the Global Aging Initiative and prepares the Global Aging Preparedness Index, which provides a quantitative assessment of the progress 20 countries are making in preparing for global aging.

In the Mercer index, there is limited ranking with regard to investments, but countries are scored on their allocation to growth assets.

Knox says Mercer believes between 50 and 60 per cent of a country’s pension assets should be in growth assets, as an indication of diversification. Countries get penalised for being outside, on either side, of that range.

Australia, for example, has more than 60 per cent allocated to growth assets and was rated down because of that.

This year Mercer included a “Gold Standard” as an indication on how to achieve the elusive A-grade.

“We attempted to show for a developed economy which applies regulation and the introduction of appropriate policies, it is possible to reach the A-grade,” he says.

The Mercer report, now in its third year, is funded by the state government of Victoria, and one of the conditions of continued funding was that two additional countries were added each year.

This year Poland and India were included, and next year Korea and Denmark are slated for inclusion.

The index is calculated by assigning values to adequacy, sustainability and integrity. About half of the index questions are sourced from international groups, such as the IMF and the OECD, while the other half are sourced through Mercer.

“We try to break it down into simple questions to reduce subjectivity,” he says.




Global Pension Index


Country           2011    2010    2009

Netherlands     1          1          1

Australia          1          4          2

Switzerland     3          2          –

Sweden           4          3          3

Canada                        5          5          4

UK                  6          6          5

Chile                7          7          7

Poland             8          –           –

Brazil               9          8          –

USA                10        10        6

Singapore        11        9          8

France             12        11        –

Germany         13        12        9

Japan               14        13        11

India                15        –           –

China               16        14        10