GLOBAL - Denmark's pension system has supplanted the Netherlands' as the world's best retirement system, achieving an 'A' grade, according to the latest edition of the Melbourne Mercer Global Pensions Index.

The annual survey, expanded to 18 countries this year through the inclusion of South Korea and Denmark, saw its list of 10 leading countries remain largely intact.

Netherlands, Australia, Sweden, Switzerland and Canada - 2011's Top 5 - retained places two through six, with the UK, Chile, the US and Poland rounding out the ranking.

Danish industry association Forsikring & Pension (F&P) said it was pleased Denmark had come first in the report, but warned politicians to keep their hands off the pension system.

Managing director Per Bremer Rasmussen said: "For many years, we have fought hard to establish a world-class pension system, and the system requires employees to be able to see the point of putting money aside every month to save for a pension."

The report, conducted by the Australian Centre for Financial Studies, noted in its recommendations that Denmark could increase its overall score by boosting the level of household saving.

The highest possible score for this sub-category was 20; Denmark achieved -9.

The report's author, Australian academic David Knox, said a number of countries were under "increasing stress" due to ageing populations and low investment returns.

"Reform is needed to ensure adequate benefits are provided over the long term in a sustainable manner," he said.

Despite coming first, Denmark's leading score of 82.9 showed it grade lower on integrity than the Netherlands - with the Dutch achieving an overall score of 78.9 and an integrity score above 90 - whereas Denmark pulled ahead on both sustainability and adequacy.

However, when assessed on the gap between life expectancy and state pension age at present and in 2035, Denmark scored the highest marks of the eight European countries, marginally ahead of Poland with 7.

The country is one of the few to currently link population longevity to increases in retirement age, resulting in a predicted pension age of 69 by 2050.

The UK was the only country among the 10 leaders to see its grade change year-on-year, despite increases in adequacy and integrity - comprising 40% and 25% of the grade, respectively.

The country remained above average in both categories, whereas its sustainability rating declined by nearly 10% to 46.5, falling below the average score of 52.1.

As a result, the country joined Chile as being graded C+, ahead of the US and Poland with a C.

Germany and France were the worst rated European nations, scoring 55.3 and 54.7, respectively, despite higher-than-average adequacy ratings for their pension systems.

However, both countries were marked down in sustainability, ahead of only China, Japan and Brazil.

Denmark claimed the number one spot, the first time a country has scored above 80 in the report's four years of publication, despite its pension funds' asset allocation investing less than 20% in growth assets.

According to the index, the highest score for part of its adequacy sub-index could only be achieved with an allocation of 40-60%.

None of the three highest-ranking countries of Denmark, Netherlands or Australia met the criterion.

The report criticised Australia's atypically high exposure to growth assets, accounting for more than 60% of investments, due to the investment risk this posed for the country's predominantly defined contribution (DC) member base.

It estimated that allocation to growth assets in the Netherlands fell between 21% and 30% and accounted for only 11-20% in Denmark, on average.

"There is no single answer to the best asset allocation for every country," Knox said.  "However, a diverse range of assets across the system is likely to provide a better outcome than heavy concentration in bonds or equities."

Commenting further on the results, Bremer Rasmussen of Denmark's F&P called for an apolitical pension system.

"The best thing politicians can do is create stability for pension saving by keeping their fingers out of it," he said.

He added that the study highlighted a few areas where the Danish pension system could improve, including the fact that more should be done to get older people to work for longer.

But these things were mostly already being dealt with as part of the pension reform and the indexation of the retirement age, he said.

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