Israel joins European standouts with highest rating in Mercer pension index

For the third consecutive year the retirement income systems of The Netherlands, Iceland and Denmark were given the highest rating in the Mercer CFA Institute Global Pension index, with Israel also joining the top rank this year.

The Netherlands had the highest overall index score for 2023 (85.0), followed by Iceland (83.5), Denmark (81.3) and Israel (80.8). The index has been measuring retirement systems since 2009 with new countries added each year. Israel was only added in 2020 and has improved its score in every subsequent year, moving from a B+ rating last year to the highest A-rating in 2023.

Speaking to Top1000funds.com’s sister publication Investment Magazine, David Knox, senior partner at Mercer and lead author of the report, said there is one thing that all the top countries have in common.

“The top four countries that are A-grade – The Netherlands, Iceland, Denmark and Israel – all of them require that most of your benefit be taken as a pension or income,” he said.

By comparison he said countries such as Australia (overall score 77.3) in the B+ tier needed to be more sufficiently geared towards decumulation and focus on retirement income.

The index compares 47 retirement income systems around the globe with three new countries introduced this year – Botswana, Croatia, and Kazakhstan. It covers around 64 per cent of the world’s population.

The index is made up of three sub-indices: adequacy, defined as the system’s design features and how well it caters to people with different levels of income and wealth; sustainability, defined as whether it can continue to perform over the long term; and integrity, which is how well governed the system is.

Countries such as Italy and Spain had a reduced sustainability score this time due to falling birth rates and consequently greater pressure on the pension system. Meanwhile, several Asian systems including those in China, Korea, Singapore, and Japan, have undertaken reform to improve their scores in the last five years.

This year the report also took a deep dive into a topic of special interest and the potential for artificial intelligence (AI) to improve pension and social security systems.

“The ongoing expansion of AI within the operations and decisions of investment managers could lead to more efficient and better-informed decision-making processes, which could potentially lead to higher real investment returns to pension plan members,” Knox said.

“AI by itself is not the complete answer. There will always be a need for human oversight. Despite these risks, AI has the opportunity to deliver a higher standard of living in retirement — a worthwhile objective for all pension systems.”

Meanwhile Marg Franklin, president and CEO of CFA Institute said pension funds face increasingly complex challenges that impact retirees in significant ways and the index plays an important role in pension system accountability.

“More and more often, individuals will have an increasingly important role to play as it relates to their own retirement. As investment professionals, we need to help them prepare for that. Each year, this index serves as a critical reminder that there is a long way to go in many jurisdictions to make pension plans function at their best and for the long-term financial security of beneficiaries.”