Best Countries for Pensions and Retirement

The quality of pension systems available to workers varies greatly across the globe. The Netherlands has the best system, while the U.S. isn't even close to the top, according to the Mercer CFA Institute Global Pension Index 2020 (formerly the Melbourne Mercer Global Pension Index).

The Index is sponsored by CFA Institute and is published in collaboration with the Monash Centre for Financial Studies (MCFS) and global consultant Mercer. It compares 39 retirement income systems, covering a wide variety of pension policies and practices, in addition to suggesting ways that each system can be improved to provide more adequate retirement benefits.

Pensions are a unique and valuable type of retirement plan, in which an employer makes contributions to a pool of funds and invests it on the employee's behalf, with the earnings on said investments generating income to the worker upon retirement. In the U.S., more and more employers in the private sector have switched from traditional pension plans to 401(k)s.

Here, we analyze the results of the latest index, released in Oct. 2020, which ranked the pension systems of 39 countries representing more than two-thirds of the world's population.

The Top 3 Pension Systems

The index compares retirement income systems and rates each based on its adequacy, sustainability, and integrity. The index value for each country is represented by a value between zero and 100, with higher values signifying more favorable pension systems.

The top three countries with the highest overall index grade were:

1. Netherlands

With an index value of 82.6, the Netherlands received the highest score for 2020, ranking first for the third year in a row.

Its retirement income system uses a flat-rate public pension and a semi-mandatory occupational pension linked to earnings and industrial agreements. Most of the Netherlands' employees are members of these occupational plans, which are industry-wide defined-benefit plans. Earnings are based on a lifetime average. The index found that the overall index value could be improved by:

• Increasing household savings and reducing household debt
• Increasing workforce participation among older workers as life expectancy rises

2. Denmark

Denmark came in a close second with an overall score of 81.4.

Denmark has a public basic pension scheme, a supplementary pension benefit tied to income, a fully funded defined-contribution plan, and mandatory occupational schemes. The index noted that Denmark's score could be improved by:

• Increasing household savings and reducing household debt
• Introducing measures to protect the interests of both spouses in a divorce
• Increasing workforce participation among older workers as life expectancy rises

3. Israel

Israel ranked third with an overall index value of 74.7 in 2020. Israel's retirement income system is comprised of a universal state pension and private pensions with compulsory employee and employer contributions. In most cases, annuities are paid from the private pension system. Here's what Israel could do to improve its overall index value:

• Increase the level of assets held in private pension arrangements, lowering the reliance on the public system
• Reduce the government debt as a percentage of GDP
• Introduce protection for members of private pension plans in the event of mismanagement or fraud

How the U.S. Scored

The U.S. had a score of 60.3 in 2020, which is slightly worse than its score in 2019 (60.6). The U.S. retirement income system includes Social Security and has voluntary private pensions, which can be occupational or personal.

How All Countries Ranked

The following chart shows the 39 countries included in the index and how their pension systems scored and ranked in 2020:

Index Scoring Explained

The Mercer CFA Institute Global Pension Index is calculated using the weighted average of three sub-indices. The average sub-index scores for all 37 countries were 60.6 for adequacy, 69.7 for integrity, and 50.4 for sustainability. This is what each sub-index takes into consideration:

Adequacy Sub-Index

The adequacy sub-index, which represents 40% of a country's overall index value, looks at how a country's pension system benefits the poor and a range of income earners. Additionally, the adequacy measure considers the system's efficacy and the country's household savings rate and rate of homeownership.

Sustainability Sub-Index

The sustainability index, which represents 35% of a country's overall index score, considers factors that can affect how sustainable a country's retirement fund system. Indicators include the level of coverage of private pension plans, government debt, and economic growth.

Integrity Sub-Index

The integrity sub-index makes up 25% of a country's overall index value. It examines the communication, costs, governance, regulation, and protection of pension plans within that country. It also considers the quality of the country's private sector pensions because, without them, the government becomes the only pension provider.

The Bottom Line

The Mercer CFA Institute Global Pension Index includes recommendations to improve each country's retirement-income systems, acknowledging that no universal solution exists because each system has evolved from unique economic, social, cultural, political, and historical circumstances.

Common challenges in pension systems around the world include the need to increase the average retirement age to reflect increasing life expectancy, encourage more savings, and increase access to private pensions for the self-employed. Pension systems globally should also limit access to funds before retirement and improve transparency to improve participants' understanding and confidence.