Retirement is something most working people around the world look forward to. It means complete freedom to pursue personal interests, to live out goals and dreams. It means no more 9-5, or having to wear a suit and tie. Trouble is, with economic conditions becoming increasingly uncertain and people's life expectancies on the rise, pension providers around the world are under increasing pressure. The dream retirement of yesterday, in other words, is becoming more and more elusive.
Still, the top pension providers continue to offer the best deal they can. Thanks to the Melbourne Mercer Pension Index, we can see how the 10 top-ranked countries meet three key criteria in achieving their high quality pension programs. The scores are based on the following:
Adequacy: This looks at how that country's pension system benefits the poor and median-income earners, and its overall efficiency. The adequacy measure also looks at the overall saving rate and the home ownership rate within the country – two key factors that provide financial security to people in retirement. The adequacy measure represents 40% of the country's overall index value.
Integrity: This looks at the regulation, protection, communication, and costs of the pension plans in each country. It also looks at the quality of private sector pensions in the country, as those can help ease reliance on the government as the sole pension provider, resulting in a stronger national pension system. The integrity score represents 25% of the country's overall index value.
Sustainability: This looks at various factors that might affect how sustainable a country's retirement fund is. These can include the links between the private pension market and the economy, the amount of funding within the private pension market, the expected retirement length, the current levels of government debt, and the number of older workers who currently participate in pension schemes. The sustainability measure represents 35% of the county's overall index value.
10 Poland: Overall Index Value = 58.2
Overall Index Value = 58.2 (Adequacy = 63.6, Integrity = 70.1, Sustainability = 43.4)
Poland's pension system was changed in 1999, and is currently moving from a pay as you go scheme to a funded approach. It includes a minimum pension, along with an earnings-related scheme which can then be supplemented with voluntary employer-sponsored retirement funds and individual retirement funds. The positives of the Polish pension system lie in the high level of savings amongst the general population and the healthy private pensions market in the country.
9 USA: Overall Index Value = 59
Overall Index Value = 59 (Adequacy = 58.3, Integrity = 61.1, Sustainability = 58.4)
The retirement fund in the USA is government supported and offers progressive benefits based on a person's lifetime earnings, combined with an income-tied top up benefit and a selection of voluntary private pensions. The private retirement funds in the country are very generous and offer employees great returns after they leave the workforce. They're also highly flexible, and allow employees to withdraw money from their pension fund at any point and pay it back in later on.
8 Chile: Overall Index Value = 63.3
Overall Index Value = 63.3 (Adequacy = 50.1, Integrity = 78.4, Sustainability = 67.7)
Chile's pension system includes a compulsory privately managed employee contribution system and a range of supplementary schemes which are funded by employers. It is one of the few countries in the world that have moved from a pay as you go plan to a funded system operated by private pension companies. Although Chile's pension system has relatively low coverage, it does have one of the best annuity markets in the world, which provides pensioners with high payouts compared with other countries’ pension systems.
7 United Kingdom: Overall Index Value = 64.8
Overall Index Value = 64.8 (Adequacy = 68.1, Integrity = 85, Sustainability = 46.5)
The retirement fund in the UK is made up of a flat basic pension, which is then supported by income tested pension credits and a pension linked to revalued average lifetime earnings. The big positives for the United Kingdom's pension scheme include relatively high projected pensions, high population coverage, and a large amount of savings amongst the population.
6 Canada: Overall Index Value = 69.2
Overall Index Value = 69.2 (Adequacy = 74.2, Integrity = 79.3, Sustainability =56.3)
Canada's pension system has a universal flat pension rate which is combined with an income-tied pension, a retirement fund based on revalued average lifetime earnings, a selection of voluntary occupational schemes, and a selection of voluntary individual retirement funds. The main benefit of Canada's pension system is the range of access, with most workplaces in the country providing employees with a low cost pension scheme managed by trustees.
5 Switzerland: Overall Index Value = 73.3
Overall Index Value = 73.3 (Adequacy = 71.3, Integrity = 84.1, Sustainability = 67.9)
The pension scheme in Switzerland includes a basic earnings-related public pension, a compulsory occupational pension with increasing age-based contributions, and a range of voluntary pension plans that are provided by authorised banking foundations and insurance companies. A major plus for the retirement fund in Switzerland is that it's very well regulated and offers stable, secure returns to pensioners in the country.
4 Sweden: Overall Index Value = 73.4
Overall Index Value = 73.4 (Adequacy = 68, Integrity = 82.5, Sustainability = 73.3)
Like Poland, Sweden's pension system was recently reformed in 1999 into an earnings based system, and is currently moving from a pay as you go system (which involves taxing the current workforce and then using these funds to support the pensions of retirees) to a funded scheme. People in the country can also participate in an income tested top-up benefit, which ensures that they get a minimum guaranteed pension. The main positive of Sweden's pension system is that payouts move in line with the economy, while also having a limit on how low they can fall. This makes it one of the most sustainable pension systems in the world, and also ensures that pensioners receive fair payouts during tough economic times.
3 Australia: Overall Index Value = 75.7
Overall Index Value = 75.7 (Adequacy = 73.5, Integrity = 83.2, Sustainability = 73)
Australia's pension system has three main parts; an income-tied, age based pension that is funded by the government, a compulsory contribution from employers into a private retirement fund, and voluntary contributions into a private retirement fund from either individuals or companies. The strength of Australia's pension system lies in its strong regulatory requirements, the high participation rate, and a large amount of savings amongst the population. Since 2010, Australia's overall index value has increased year on year, which puts it in a very strong and sustainable position.
2 Netherlands: Overall Index Value = 78.9
Overall Index Value = 78.9 (Adequacy = 77, Integrity = 90.3, Sustainability = 73)
The retirement fund system in the Netherlands includes a flat rate public retirement fund and a semi-mandatory earnings-related occupational pension system linked to corporate agreements. The majority of employees in the country participate in occupational pensions plans which payout based on the lifetime average earnings of each employee. Since it has strong employee participation, the Dutch pension system has strong economies of scale, which allows employees in the country to pay very low charges compared with other pension systems in the world.
1 Denmark: Overall Index Value = 82.9
Overall Index Value = 82.9 (Adequacy = 78.1, Integrity = 86.4, Sustainability = 86)
Denmark is the world's leading pension provider, their system comprising of a basic public retirement fund, a supplementary retirement fund tied to income, a fully funded pension contribution plan, and a range of mandatory private pension plans. Its number one ranking is due to the large amount of investment into the pension system, how well their private pension system is regulated, and the fact that it provides adequate benefits to a large proportion of residents in the country.