In 2009, we issued the first Melbourne Mercer Global Pension Index, which compared and ranked 11 pension system around the world. Although it had a modest and uncertain beginning, this benchmarking exercise has continued to grow so that the 2024 Mercer CFA Institute Global Pension Index (MCGPI) considers 48 pension systems covering two-thirds of the world’s population.
Its growth and relevance have grown way beyond my initial expectations. Of course, one of the challenges has been to frame questions that are relevant to all pension systems given the huge diversity, and ask questions that will be understood by all, even when English is not the first language. Notwithstanding the differences, the primary purpose of pensions is similar and so we have been able to learn about challenges and solutions from each system.
The changes since inception
As I review our reports over the last 16 years prior to my retirement in 2025, there are several key trends and developments that will continue to influence the ever expanding global pension industry.
One of the key changes has been the global trend away from defined benefit (DB) employer-sponsored schemes to defined contribution (DC) arrangements where individuals bear most of the risks. Although Australia may have been ahead of this development with the introduction of compulsory superannuation in 1992, the world is following. Even the Netherlands, which again topped the MCGPI this year, is reforming its very well regarded pension system from DB to a collective DC arrangement.
In 2023 the OECD reported that
“More than 50% of pension assets were held in (occupational) DC plans or personal plans in 19 out of the 21 reporting OECD economies.”
This movement from DB to DC has also influenced some of the questions we have asked in the Index. For example, 16 years ago we were concerned with the separation of pension assets from the employer, the level of in-house assets held by a private sector pension plan and the minimum level of funding required for DB funds.
While these topics remain in the MCGPI, we are now more focused on the requirements relating to disclosure and transparency. That is, if individuals are now bearing the risks and more responsibility, it is critical that they have access to appropriate information. Hence our questions now explore the requirements for the pension plan’s annual report, including investment performance, and the contents of the member’s annual statement including income projections (not yet required in Australia) and showing the level of fees deducted from the account.
During this 16-year period, we have also strengthened the questions relating to the governance of pension plans as this topic has received increased focus around the world. Since 2009, we have added questions relating to codes of personal conduct, ESG, conflict of interest policies, anti-bribery and corruption policies, cyber security, and the reporting of data breaches. In essence, each of these additions have encouraged governments and policy makers to strengthen the governance of pension plans.
However, it is not just the structure and operations of pension and superannuation plans that have changed during this period. The world’s demography has changed significantly.
Fertility rates have fallen considerably, and this trend is likely to continue. The average fertility rate in the 16 nations in the 2011 Index was 1.75, even then below the required fertility rate of 2.1 for a stable population. By 2024, the average fertility rate for these nations was 1.45. Australia’s fertility rate in 2023 was 1.50, the lowest ever recorded.
While the world is aging faster than previously expected, there is also clear evidence that more people are working longer. For example, the average labour force participation rate for those aged 55-64 in the original 11 nations in 2009 was 59.6%. By 2024, this average had increased to 70.6%. Interestingly, 5% of the Australian labour force is already over age 65. This has implications for employers as well as the rules relating to the Age Pension.
Notwithstanding the increased participation in the workforce at older ages, the ageing population will place increased pressure on pension systems around the world. Hence, we are likely to see some governments increasing normal retirement ages while others will increase the eligibility age for the state pension. In some cases, future benefits may even be reduced.
Another global development has been the increased focus on the gender pension gap. It is clear that in most pension systems, including Australia, the average retirement benefit for women is much lower than the average male benefit. Hence, in recent years we have added questions relating to the availability of additional retirement benefits for those on paid parental leave or those caring for young children, as well as the requirement to use unisex lifetime annuity rates.
How Australia fares
For most years of the Index, the Australian retirement income system has ranked in the top quartile of pension systems around the world given our relatively high level and affordable Age Pension, good coverage of the superannuation system and strong regulation. However, Australia has never attained the coveted A grade. Without a requirement to take part, but not all, of future retirement benefits as an income stream, Australia is likely to retain its current B+ grade. Such income `products could include longevity products as well as account-based pensions with minimum and maximum drawdown rates. In addition, the introduction of compulsory income projections on annual member statements would highlight the need to focus on income streams.
The government has made an important move to reduce the gender super gap by paying SG on government-funded paid parental leave. But it could go further. For example, by introducing a government superannuation contribution for those caring for young children and requiring unisex lifetime annuities, as occurs in Europe.
In its 16-year history, the Index has benchmarked pension systems around the world with objective data and has recommended improvements for every system. There is no perfect system! Recently the OECD commented that:
“The pension policy debate in OECD countries has switched from pandemic responses back to a focus on more long-term structural issues. The question of how to address the impact of population ageing on pension systems has moved back to centre stage.”
By considering the policies, benefit designs and regulations of the better systems in the MCGPI, every system can improve the financial outcomes of future retirees.
Dr. David Knox is a Senior Partner and Senior Actuary at Mercer Australia. This article is general information and not investment advice, and does not consider the circumstances of any person.