UK pensions system seventh strongest in the world – Mercer report

The UK’s retirement savings and income system is the seventh strongest in the world, despite 11 million employees not participating in workplace schemes, according to the Melbourne Mercer Global Pensions Index.

But the country’s ranking should improve significantly in 2013 when auto-enrolment and pension reform impact take effect, the report found.

The report, which places the UK system above those in Germany, France and the US, ranks national systems on grounds of sustainability and integrity as well as adequacy.

The global comparison of national pension systems carried out by pension experts in Melbourne, Australia found the UK scoring highly on adequacy and integrity of the system but the country’s overall score fell over concerns of long-term sustainability.

Denmark nudged the Netherlands off top spot, becoming the first system to be classified as ‘A’ grade in the report.

The Index also measured the asset allocation of each country’s collective pension plans. The UK was measured to be investing between 51 and 60 percent in growth assets.  Australia invests over 70 percent – more than any other country – in growth assets. The report’s methodology favours countries with higher exposure to growth assets.

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, defined as the ability of it to deliver adequate retirement income to pensioners.

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 report found 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.

Mercer senior partner and author of the report, Dr David Knox, says: “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.  Reform is needed to ensure that adequate benefits are provided over the long term in a sustainable manner.” 

 Glyn Bradley, associate at Mercer says: “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 per cent contributions at first, rising to 8 per cent from 2018. By contrast, the Australian Government is raising mandatory contributions from 9 to 12 per cent 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, 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.”

Country rankings

Grade A                  Denmark

Grade B+                  Netherlands, Australia

Grade B                  Sweden, Switzerland, Canada

Grade C+                  UK, Chile

Grade C                  USA, Poland, Brazil, Germany, Singapore, France

Grade D                  China, South Korea, Japan, India