How can UK climb up global pension rankings?

The UK jumped up one spot compared to its developed counterparts over the past year, while the Netherlands and Denmark came in first and second place respectively, scoring the coveted A-grade for their retirement systems.

The survey of 37 nations, which for the first time included the Philippines, Thailand and Turkey, covering almost two-thirds of the world’s population, used 40 metrics to assess whether a system leads to improved financial outcomes for retirees, whether it is sustainable and whether it has the trust and confidence of the community.

We can take comfort from a strong ranking for integrity; this reflects improvements in governance standards. However, our mediocre scores for adequacy and sustainability expose long-standing weaknesses in the UK pension system

Lesley Carline, PMI

While the UK scored highly on integrity – the level of trust in the system’s ability to deliver – its rank was dragged down by its adequacy and sustainability.

Benoit Hudon, head of wealth at Mercer UK, said a lack of understanding of what employees will receive in retirement and what they will actually need in retirement has led to a gap in retirement savings.

He said: “This begs the question as to whether employers should play a greater role, both in educating and supporting their workforce.”

He added: “Taking a more active role in securing employees’ retirement could support engagement and productivity, and help to attract top talent.”

Onus on UK employers to improve pensions

With very little improvement made in strengthening the adequacy of the UK’s retirement system over the past year, employers may have to play a bigger role in helping to close the retirement savings gap.

The report recommended encouraging or requiring an increased level of savings for the future by gradually raising the state pension age, enabling or persuading people to work longer and increasing contributions to workplace pensions.

Similarly, Lesley Carline, president of the Pensions Management Institute, commented that while there have been improvements to the UK pension system in recent years, the UK’s rank is a stark reminder that there is still much to be done. 

She said: “We can take comfort from a strong ranking for integrity; this reflects improvements in governance standards… however, our mediocre scores for adequacy and sustainability expose long-standing weaknesses in the UK pension system.”

She continued: “In an environment now dominated by DC provision, overall contribution rates remain too low. 

“Additionally, the public’s poor understanding of decumulation options does not allow informed decisions to be made.”

She added: “For those savers looking for help meanwhile, both employers and their employee benefits consultants are understandably reluctant to provide guidance which might be interpreted as regulated advice, something causing great consternation particularly where scams are involved and they find their hands tied. 

“We should now be focusing on a system which operates through effective defaults throughout scheme membership as a way of avoiding this.”

Planning for the future pays off

The index calculates the level of retirement income a country will produce on average, compared with a range of income levels based on OECD data.

While Thailand had the lowest overall score at 39.4, the study also used a sustainability sub-index measuring the likelihood a current system will be able to provide benefits into the future. Low scorers on these issues were not limited to developing countries, with Italy and Austria scoring only 19 and 22.9 respectively.

The Netherlands had the highest overall index value at 81, and has consistently held first or second position for 10 out of the past 11 reports, but it does not top the tables in every sense. For example, Denmark achieved the highest score for the sustainability sub-index at 82.

While some measures contributing to the sub-index scores might be too difficult to change, others can be influenced to strengthen the long-term effectiveness of a system, according to the report.

Deep Kapur, director of the Monash Centre for Financial Studies, said: “Although some systems are still anchored by defined benefit schemes that may practice liability-driven investment strategies, defined contribution plans are playing an increasingly important role in the accumulation of individuals’ retirement savings. 

“Maximising risk-adjusted investment returns for DC plans by diversifying the assets held by a pension fund is critical.”

He added: “It’s essential the state pension or retirement age is reconsidered in line with increasing longevity – a step some governments have already taken – to reduce the costs of publicly financed pension benefits.”

The report also highlighted that as the wealth of an individual grows, whether through home ownership, investment portfolios or their retirement savings, so does their comfort with amassing debt. 

David Knox, senior partner at Mercer in Australia and the author of the study, said: “The evidence suggests that on a global basis, for every extra dollar a person has in pension assets, their net household debt rises by just under 50 cents.”

While each pension system is unique, this suggests that there are general improvements that can be made to the challenges all countries are facing.

Mr Knox continued: “Systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens.

“It’s imperative that policymakers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future.”