Top Pension Systems in the World

The quality of pension systems available to workers varies greatly across the globe. The Netherlands has the best, while the U.S. isn't even close to the top, according to the Melbourne Mercer Global Pension Index 2018.

The index, published by the Australian Centre for Financial Studies in collaboration with global consultant Mercer, examines the pension systems of countries across the Americas, Europe, and Asia Pacific and makes recommendations for how they can improve. Here, we take a look at the results of the latest index, released in October 2018, which ranked the pension systems of 34 countries, representing 60% of the world's population.

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 value signifying more favorable pension systems.

The average score for the 34 countries included in the 2018 index was 60.5. The top three countries with the highest overall index grade were:

1. Netherlands

With an index value of 80.3, the Netherlands received the highest score for 2018, edging out Denmark which took the top spot in 2017.

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 improve with:

• Increasing household savings and reducing household debt
• Increasing workforce participation among older workers as life expectancies rise

2. Denmark

Denmark lost the top spot by a narrow margin, coming in second with an overall score of 80.2.

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 expectancies rise

3. Finland

Finland ranked third with an overall index value of 74.5 in 2018. Its pension system includes a basic state pension and a range of statutory earnings-related schemes. Here's what Finland could do to improve its overall index value:

• Continue to raise the minimum pension for low-income retirees
• Continue to increase the level of mandatory contributions that are set aside for the future
• Introduce measures to protect the interests of both spouses in a divorce
• Increase workforce participation among older workers as life expectancies rise

The U.S. ranked in the lower half of the index, coming in at 19 with a score of 58.8. The U.S. retirement income system includes Social Security and has voluntary private pensions, which can be occupational or personal.

The index had numerous recommendations for what the U.S. system could do to improve its overall index value:

• Raise the minimum pension for low-income retirees
• Adjust the level of mandatory contribution for median-income earners
• Improve the vesting of benefits and maintaining the value of benefits through to retirement
• Limit access to funds before retirement
• Require that part of the retirement benefit be taken as an income stream
• Increase Social Security funding
• Raise the state and private pension age to receive benefits
• Provide incentives to delay retirement and increase workforce participation among older workers
• Provide access to group retirement plans for workers who don’t have an employer-sponsored plan

The following chart shows the 34 countries included in the index and how their pension systems scored and ranked in 2018:

The Melbourne Mercer Global Pension Index is calculated using the weighted average of three sub-indices. The average sub-index scores for all 34 countries were 61.1 for adequacy, 52 for integrity, and 71.6 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 poor and median-income earners. Additionally, the adequacy measure considers the system's efficacy and the country's household savings rate, household debt, and rate of home ownership.

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, the length of expected retirement now and in the future, the labor force participation rate of older workers, 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 Melbourne Mercer 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.