Melbourne Mercer deems Danish pension system best in world

Denmark has retained the only “world-class” pension system, while the Netherlands has fallen to third place behind Australia, according to the latest Melbourne Mercer Global Pension Index.

New European entrants include Finland, which came fourth and claimed the highest-ever integrity rating of 91.1, while Austria and Italy ranked 17^th and 19^th, respectively, behind France and Poland, largely due to the each country’s pension sustainability ratings.

The Index, in its sixth year and written by David Knox of the Australian Centre for Financial Studies in Melbourne, assesses pension systems on the three broad categories of adequacy, sustainability and integrity.

Italy set a record for the lowest overall sustainability rating, which takes into account coverage, contribution levels, demography and government debt, with a score of 13.4 in the category, slightly behind Austria’s 18.9.

The worst sustainability score to date was achieved in 2013 by Brazil, when it scored 26, a rating that this year improved marginally to 26.2

The final new European entrant, Ireland, ranked joint 12^th overall, the same as Germany.

Ireland earned a score of 62.2, with a higher adequacy rating than neighbouring UK but ranking significantly behind on sustainability.

Denmark saw its overall rating increase to 82.4 due to improvements across all three categories and increased its lead over both second-ranked Australia and the Netherlands, with scores of 79.9 and 79.2, respectively.

The report praised the Nordic country for improving protection of benefits in cases of fraud or provider insolvency, but noted that the better score had been influenced by several minor factors including a higher savings rate.

Australia, meanwhile, was congratulated on increasing the rate of the mandatory contribution to Superannuation funds from the current 9.5% to 12%.

However, the Australian government last month announced that the current rate would be maintained until 2021, with the increase to 12% now occurring by 2025 rather than the initially planned 2019.

The Netherlands, which saw its score increase by 0.9 points to 79.2 compared with 2013, was praised for changes to the conflicts of interest policy.

It is unclear if the research was already able to take account of the recent changes to the financial assessment framework (FTK).

Knox stressed the importance of communicating clearly and concisely with fund members, as the effectiveness of a system was undermined by lack of community trust.

He also said the increasing importance of private provision over state pension payments meant communication would be key.

“This shift means communication to members has never been more important or come under more scrutiny from members, regulators, employers, consumer groups, politicians and the media,” he said.

France and Germany both saw significant increases in their overall ratings, with France’s 4 point rise to 57.5 credited to an increase in the minimum level of pension.

Germany, which saw a slightly smaller score increase of 3.7, nevertheless saw its grade improve from a C to C+, as its score rose to 62.2 due to changes to the provision of annuities.

Ireland was told it could increase its score by introducing a minimum level of contributions to occupational pensions, a move that would be made possible through the Irish government’s potential auto-enrolment reforms.

Auto-enrolment, and the rising contribution rates, benefited the UK, which saw its score rise by 2 points to 67.6, resulting in its overtaking Singapore and remaining ninth, despite Finland’s entry into the Top 10.

Poland slipped behind France to 15^th after its score fell to 56.4 after declines in both its adequacy and sustainability ratings, while its integrity rating remained unchanged over 2013.

The report urged Poland to maintain a “significant” role for the country’s second pillar – months after the state transferred all of the second pillar’s domestic sovereign debt to the Social Insurance Institution (ZUS) – and to allow at least part of the private savings to be drawn down as an income stream.

Sweden retained its strong position in the Index, increasing its overall rating and only falling to sixth due to the addition of Finland, with Switzerland’s rating remaining constant and also falling one spot to fifth.