By Daniel Hunter

The UK’s retirement savings and income system is the seventh best in the world in this year’s Melbourne Mercer Global Pension Index, a global comparison of national pension systems undertaken by industry experts in Melbourne, Victoria, Australia.

The adequacy and integrity of the UK pensions system continues to score highly, but the UK’s overall score in the Index fell marginally against last year’s results for a variety of reasons, mainly concerning long term sustainability.

The findings also do not factor in the impact of auto-enrolment, which will significantly alter the UK pensions landscape, and which will only begin to be measured in next year’s Index.

The Index also measured for the first time the asset allocation of each country’s collective pension plans, with the UK measured to be investing between 51 and 60 percent in growth assets. By comparison, Australia invests over 70 percent — more than any other country — in growth assets, which include ports and airports in the UK.

The report finds that the greater the exposure to growth assets, the more likely the system will rank near the top of the Index, which helps explain countries’, including Australia’s, continued success in the global rankings; Australia ranked 3rd this year thanks to the fact that its pension assets have grown consistently in recent years. The introduction of the Superannuation Guarantee contribution in 2013 will boost Australia’s position further.

“As a leading financial centre and home to the majority of funds in Australia, Melbourne is leading the way in the pensions policy debate thanks to the experience of its fund managers and their appetite for, and understanding of, growth opportunities," Sally Capp, Agent-General for Victoria in the UK said.

“Now in its fourth year, the Melbourne Mercer Global Pension Index has become an established benchmark for how to measure and assess pensions systems on a global scale. We hope that the insight and guidance provided by our experts in Melbourne can help other countries, such as the UK, try to emulate those pensions systems recognised as the best in the world.”

Denmark received an overall index value of 82.9 and becomes the first system to be classified as ‘A’ grade, moving Netherlands from the top position of the rankings.

“Many of the world’s retirement systems are under increasing stress with an ageing population, low investment returns and, in some cases, significant government debt," Mercer Senior Partner and author of the report, Dr David Knox, said.

"Reform is needed to ensure that adequate benefits are provided over the long term in a sustainable manner. This report highlights several reforms relevant to each country that will provide improved results for individuals, households and the community.”

The Index looks at both the publicly funded and private components of a system as well as personal assets and savings outside the pension system. It is based on more than 40 indicators grouped into three sub-indices: adequacy, sustainability and integrity.

The UK Position

The UK compared favourably on the ‘integrity’ of its system scoring 85 against an average for all countries of 71.5. ‘Integrity’ examines the role of regulation and governance on the UK, the protection provided to participants, and the level of communication provided to members.

The UK also scored significantly above average on the ‘adequacy’ of its system i.e. the ability of it to deliver adequate retirement income to pensioners (with a score of 68 against an average of 62).

However, with a score of 46.5 against an average of 52.1, the UK is lagging behind other countries on the ‘sustainability’ of its pension system. This section tracks the sustainability of arrangements against issues like old age dependency, state pension age, the opportunity for phased retirement and the labour force participation rates of older workers. The data shows that the UK’s system appears to be becoming more unsustainable over time — it had a sustainability score of 56.4 back in the first Index in 2009.

Glyn Bradley, Associate at Mercer explained, “The sustainability of the UK’s system is undermined by three factors. First, a pensions review investigating different ways of enhancing the level and coverage of retirement saving in the UK concluded that mandatory saving does not necessarily serve the best interests of the UK’s citizens, particularly those on low incomes. Consequently, the Government chose to introduce auto enrolment into pension saving, rather than require mandatory pension saving, and to do this in stages: auto-enrolment in the UK requires only requires 3% contributions at first, rising to 8% from 2018. By contrast, the Australian Government is raising mandatory contributions from 9% to 12% in 2012.”

“Secondly, the UK’s national debt has risen sharply since the onset of the credit crunch,” he continued. “The UK’s state pensions are unfunded, and paying for them out of future taxation therefore will require greater inter-generational cross subsidy without reform. The government has stated that a requirement of future state pension reforms is that they be cost neutral to avoid further burdens on future taxpayers.”

“Thirdly, it is surprising how few people in the UK are contributing to a pension. There are fewer active members of company pension schemes today than at any time since 1956. Even taking into account personal pension arrangements, in 2009, for example, nearly three out of four adults in the UK were not putting anything into a pension. This could have serious long term implications, if there is no movement out of the group not saving.”

“Auto-enrolment should result in increased coverage and levels of saving amongst the target group, and we hope to see the results in the 2013 Index,” concluded Mr Bradley, “but it remains likely that further reform is needed in the future, given the way rising life expectancy, stretched public finances, and low investment returns are affecting the cost of retirement provision.”

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