Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 35

In super, the Danes are great, Australia a close third

Australia’s superannuation system has been judged to be the third best retirement system in the world, according to the Melbourne Mercer Global Pension Index (MMGPI) Report released this week. The 2013 Report replicates last year’s findings, with Denmark’s retirement system found to be the most robust, followed by the Netherlands and Australia.

The MMGPI Report ranks the pension systems of countries across a range of indicators to determine an overall index value for each nation. The Report now covers 20 pension systems affecting approximately 4 billion people, or some 55% of the world’s population, including China and India.  It is a collaboration between global consulting firm Mercer and the Australian Centre for Financial Studies (ACFS), with support from the Victorian Government.

How the Global Pension Index is calculated

The overall index value for each country’s system is made up of three sub-indices; Adequacy, Sustainability and Integrity.

Adequacy is 40% of the total, and represents benefits, tax support and asset allocation. Sustainability has a 35% weighting based on the likelihood that the current system will continue providing benefits into the future. It includes coverage, the level of current government debt and trends in labour force participation rates for older workers. The Integrity sub-index is worth 25% and considers governance, protection, communication and costs, all of which impact on public confidence.

An ‘A’ grade system requires an overall score above 80 and is “a first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity”.

Danes hold off the Dutch and Aussies (again)

In a repeat of last year’s podium, Denmark’s pension system had the highest overall index value ‘A’ grade at 80.2, followed by ‘B+’ grades for the Netherlands (at 78.3) and Australia (at 77.8). Switzerland and Sweden were close behind, while the UK slotted into 9th place (65.4) at the lower end of the ‘B’ grade. It was judged to have an inferior pension system to Canada, Singapore and Chile. The US fared no better, placing 11th (58.2). Japan is the only mature, developed economy with a retirement system rated ‘D’, having been given an index value of just 44.4. Japan’s low overall score was primarily due to a woeful Sustainability sub-index score of 28.9, the equal second lowest with China across the 20 nations.

When it comes to retirement, what makes the Danes great?

According to the Report’s lead author, Dr David Knox, Senior Partner at Mercer, Denmark has design features that would be the envy of most other nations:

  • a universal age pension that equates to 17% of Danish average earnings. This is reduced if an individual’s income from employment is greater than 75% of average earnings
  • in addition to the basic pension, there is an income-tested supplementary pension of up to a further 17.1% of Danish average earnings. This means that the poor receive a pension of 34.1% of average earnings
  • both pensions are adjusted in line with movements in average earnings. According to OECD tax revenue data, the average wage in Denmark for 2012 was US$49,887 versus US$48,199 for Australia
  • a nation-wide statutory fully-funded system covers all employees and provides a lifelong pension in retirement. Contributions to this system are based on hours worked per month
  • occupational schemes round out the system, with fully-funded Defined Contribution (DC) schemes enjoying almost universal coverage where end benefits are usually taken as annuities rather than as lump sums.

The level of mandatory contributions in Denmark is more than 12% for most employees, versus the current 9.25% Super Guarantee rate in Australia.

Denmark is also held in high esteem for its universal government-funded health and education systems, but it comes at a price borne by the Danish taxpayer. Danes are amongst the highest- taxed citizens in the world, with a top tax rate of 60.2% phased in at 1.1 times the average wage. Australia’s top tax rate of 47% (plus Medicare) phases in at 2.4 times our average wage.

Can Australia turn its ‘B+’ into an ‘A’?

Australia’s ‘B+’ rating indicates “a system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A grade system”. Improvements could come from:

  • increasing the labour force participation rate amongst older workers
  • increasing the age pension age as life expectancy continues to rise (note: it is already scheduled to move to 67 for those born after 1 January 1957)
  • increasing the minimum benefit access age so that preserved benefits aren’t available more than five years before age pension eligibility
  • removing legislative barriers to encourage more effective retirement income products, and
  • introducing a requirement that part of the retirement benefit must be taken as an income stream of some description.

The final two issues received much discussion at the MMGPI launch. As Dr Knox put it, “Developing effective and sustainable post-retirement solutions has to be one of the most critical challenges for policy makers and retirement industries around the globe.”

SMSFs – the $500 billion ‘joker in the pack’?

Australia’s overall index value rose 2.1 points year-on-year, mainly due to a significant jump in its Integrity sub-index, which scored the highest of any nation. A major factor was the introduction of the Stronger Super reforms that are already leading to improved governance and stronger regulation. Australia is now one of only three countries that require public offer funds to have a conflicts of interest policy in place.

However, these reforms apply primarily to ‘APRA-regulated’ funds, which account for approximately 66% of the nation’s superannuation. SMSFs are not, other than at the margin, affected by these regulatory changes. SMSFs will not have to create an operational risk reserve, nor supply members with a ‘Standard Risk Measure’ statement outlining the likely frequency of negative returns over a 20-year period. SMSFs trustees need to prepare an investment strategy but, unlike their public fund counterparts, do not need a risk management strategy nor a conflicts of interest policy. SMSF members do not have access to the Superannuation Complaints Tribunal, a government body that arbitrates on member grievances made against super funds.

It would not be unreasonable to question whether, if the SMSF sector continues to grow apace, the differing governance standards between APRA-regulated fund and SMSFs will affect Australia’s Integrity sub-index score over time, compromising Australia’s overall place in the list of elite retirement systems. Recent signs are that regulators are watching closely.

Enhanced focus on delivering sustainable incomes

The Melbourne Mercer Global Pension Index is an ambitious undertaking, but one that pays dividends in the quality of data it brings to the comparison of pension systems around the globe. The Report is now keenly anticipated by superannuation professionals and global pension managers globally. It is a key source of insight into the health and robustness of pension systems and how these systems might be improved. Australians should be justifiably proud that work of such global importance is being undertaken here.

One of the key messages from the latest report is the need to ‘start with the end in mind’. Pension systems exist to provide benefits in retirement, and the best systems deliver that goal to the greatest number by the most robust means possible. A mind-shift away from focussing primarily on capital accumulation and more toward post-retirement income generation is needed.

 

Harry Chemay is a consultant to superannuation funds, an alumnus of Monash University and a member of Finsia. Both organisations are consortium members of the Australian Centre for Financial Studies. He previously worked for Mercer.

2 Comments
Ramani Venkatramani
October 11, 2013

Our commendable position in the global stakes may be at risk in future if the dominant SMSF sector continues to lack risk management scrutiny, as ATO is not suited attitudinally or equipped. The promised financial systems review should consider the gap between the Wallis dream of self-control with a compliance tick and the reality of dominant trustee, false conflation of professionalism in another discipline for the skills need to run long term retirement vehicles and the shadowy role of advisers acting as shadow trustees. And the inevitable consequence of ageing.
In doing so, it would be good if we could strip away from the comments the self-interested lobbying by the big end of town. Those who plead for a level playing field should answer this: would they like the culpability test protection enjoyed only by APRA funds removed?
On conflict management, policy is no more guarantee of robustness than a menu is of edible food. Execution is needed, and in the alternative, execution (of those culpable).
Our system's greatest weakness (SG at 9.25%) has also acted to stifle innovation. Look at how we have left disengaged and semi-literate members to bear risks in DC that they hardly comprehend.
And the system is employee-centric, with the self-employed treated as an after thought. Not very clever for a clever country.
We have a good system but it can be made great. Those who continue the comparison deserve our gratitude.

Jonathan Steffanoni
October 11, 2013

The challenges that we face in Australia are certainly shared globally. I think we need to remember that success should be measured by the quality of living in retirement rather than the scale of assets in a system.

Public policy needs to encourage mental and physical health as we age, caring for each other in retirement and the value of retirees add to society in addition to encouraging the important role the superannuation plays in providing an income.

 

Leave a Comment:

     

RELATED ARTICLES

Designing a world-class post-retirement system

Survey of attitudes to taxing pension earnings

The state of play in the funds management industry

banner

Most viewed in recent weeks

After 30 years of investing, I prefer to skip this party

Eventually, prices become so extreme they bear no relationship to reality, and a bubble forms. I believe we are there today, not for all stocks but for many in the technology space.

Australian house prices: Part 2, the bigger picture

There is good reason to believe the negatives will continue to outweigh the positives over the next 12 to 18 months. There is more concern about house prices than the short-term indicators suggest.

How to handle the riskiest company results in history

It is better to miss a results bounce and buy after the company has delivered than it is to step on a landmine. With such uncertainty, avoid FOMO by following these result season investing tips.

Australian house prices: Part 1, how worried should we be?

Three key indicators are useful for predicting the short-term outlook for house prices, although tighter lockdowns make the outlook gloomier. There is enough doubt to create cause for concern.

Welcome to Firstlinks Edition 369

Imagine you had perfect foresight about COVID-19 at the start of the year. You correctly foresaw that the global pandemic would kill over 700,000 among 20 million infections by August. In Australia, borders would close, cities would be locked down, most mortgagors would be on income support and companies would be allowed to trade while insolvent. You then had to guess how much the stock market would fall. Would you say about 10%?

  • 6 August 2020

The rise of Afterpay and emergence of a new business model

Sometimes the simplest ideas are the best. The founders of Afterpay stumbled on the attraction for consumers of paying by instalments, and now retailers must offer the facility or lose business.

Latest Updates

Shares

The 'Heady Hundred' case for unglamorous growth

Checking global stocks with higher prices than the FANGAM stocks but weaker margins and growth identified almost 100 companies. Astonishingly, the ‘Heady Hundred’ are valued at over US$3 trillion.

Shares

Share Purchase Plans brickbats and bouquets

Many Share Purchase Plans leave large gains on the table for institutions, but some companies are handling them more equitably. As a shareholder, check if your company receives a pass or a fail.

Shares

Three new lessons about listed companies during COVID-19

Many companies have strengthened their balance sheets but their soundness can be directly correlated to the duration of the pandemic. What lessons has 2020 revealed coming into reporting season?

Investment strategies

What does the 'fear gauge' VIX really mean?

The VIX as a measure of risk has a place in equity markets in interpreting market sentiment, but it is overly simplistic to think it can represent volatility in equities as a whole. Just what is it?

Shares

Where we see growth opportunities in software stocks

Financial software companies have favourable attributes and industry tailwinds that may see investors rewarded, especially with super funds driving for greater efficiencies and better member experiences.

Retirement

Five ways to use the family home for retirement income

The family home is the bedrock on which many retirement plans sit, with special tax and social security benefits. Many products generate an income stream from the home to make retirement more comfortable.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.