UK slips two places on Melbourne Mercer Global Pensions Index

UK awarded C+ in independent pensions report as the gap between the pace of demographic change and policy weighs on assessments of the UK's retirement preparations.

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The eighth annual Melbourne Mercer Global Pension Index (MMGPI), published by the Victorian Government of Australia and the Australian Centre for Financial Studies, has objectively ranked the UK as having the eleventh best pension system globally for adequacy, sustainability and integrity.This latest ranking is two positions below the UK’s ninth placing last year, meaning it is now positioned behind Singapore and Ireland.

Risks to UK pensions provision

The MMGPI, which covers close to 60 per cent of the world’s population, ranks both publicly funded and private components of 27 countries’ pension systems. It analyses the impact of rapidly ageing populations and how fit countries’ retirement systems are for dealing with the financial pressures of this.The UK scored 60.1 out of 100 on the index, down from 65.0 in 2015. This C+ grading on the MMGPI means although the UK pensions approach has some positive features, it also contains major risks that need to be addressed.Specifically for the UK, the major shortcomings are due to the reduction in its net replacement rate and a cut in pension income an employee can expect from both the state and occupational schemes.

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The author of the report and senior partner at Mercer, Dr David Knox, says: “The impact of longer life expectancies, combined with global declining birth rates, is much more significant than has been recognised by many governments and communities.“Without changes to retirement ages and ages for eligibility to access social security and private pensions, there will be increasing pressure on global retirement systems to the detriment of the financial security provided to older members of our society.“It is a political imperative that all countries, regardless of their size, and current standing on the MMGPI, implement the necessary policy changes to withstand future challenges presented by the globally ageing population.”

Demographic and pensions trends

Explaining the findings further in relation to the UK, Mark Condron, senior partner at Mercer and its UK retirement business leader, said: “The 2016 state pension reforms are expected to provide less generous state pensions for many workers, compared to the historic earnings-related system.“In some ways the challenges for many UK businesses mirror those of the government and wider society. Large historic entitlements have built up for current pensioners.“In contrast, members of the proportionately smaller active workforce are not on track to build up the same pension pots. With many employees unable to retire as a result, businesses need to prepare for a wider demographic in the workforce by ensuring pensions and savings offerings cater for them all.”However, Mr Condron believes the UK’s relatively average assessment will be short-lived as the full benefits of auto-enrolment filter through. “The ranking is expected to improve over the years as the implementation of auto-enrolment reaches its final stage,” he said.

Improving UK pensions

The report suggests that along with auto-enrolment, the British system could gain a higher rank by:
  • increasing the level of contributions to occupational pension schemes
  • further increasing the coverage of employees in occupational pension schemes
  • raising the level of household savings
  • accelerating the intended increases in the state pension age (the current first independent State Pension age review, headed by John Cridland, will shape future policy in this area)
  • restoring the requirement to take part of the retirement saving as an income stream
  • raising the minimum pension for low-income pensioners.
Top of the index this year are Denmark, the Netherlands, and Australia respectively.

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