When it comes to comparing national pension systems on a global basis, the United States and its Social Security program gets a very average C+ grade—and trails 18 other countries.
According to the newly released 2021 Mercer CFA Institute Global Pension Index, Iceland, Netherlands and Denmark have the best retirement income systems in the world, as the only three countries to receive an “A” grade in the report.
This edition of the Index compares 43 retirement income systems, highlighting both the considerable diversity and the features (both positive and negative) present in many systems in respect of adequacy, sustainability and integrity. Notwithstanding these highlights, the study also confirms that no pension system is perfect and that every system has some shortcomings.
Iceland, one of four new systems added to the Index this year (along with Taiwan, UAE and Uruguay), received the top overall ranking with an index score of 84.2 compared to Netherlands at 83.5 and Denmark at 82.0 (see the Top 20 below).
So what are the features of the Icelandic system that generates this result? According to the report they include:
• A relatively generous state pension;
• A private pension system that covers all employees with a high contribution rate that leads to significant assets being set aside for the future; and
• A well-governed and regulated private pension system that has good design features.
Notably, Iceland also topped the 2021 Global Retirement Index from Natixis Investment Managers—the third straight year the small Nordic island nation (population: 366,425) has topped that list. The U.S. ranked 18th in that index, one spot better than in the new Mercer CFA Institute Global Pension Index.
Pension plans face extraordinary challenges due to historically low interest rates and in some cases negative yields. The Global Pension Index report says a kaleidoscope of asset classes will be required to address these concerns in order to ultimately deliver returns for the end beneficiaries.
“Examining the strengths and weaknesses of pension systems with the purpose of delivering better retirement benefits to every individual has never been more urgent,” said Margaret Franklin, President and CEO at CFA Institute.
“We must, as investment professionals, lead the effort for greater retirement security for individuals. We must work together with public authorities to evaluate the status of pension plans in their jurisdictions, challenge the status quo where necessary, and rebuild trust in pensions across the globe through the betterment of these systems,” Franklin added.
“Despite the challenges, now is not the time to put the brakes on pension reform—in fact, it’s time to accelerate it,” said Dr. David Knox, Senior Partner at Mercer and lead author of the 2021 Mercer CFA Institute Global Pension Index. “Individuals are having to take more and more responsibility for their own retirement income, and they need strong regulation and governance to be supported and protected.”
None of the 43 systems in the Index has an E-grade system, which would be represented by an index value below 35. A score between 35 and 50, representing a D-grade system, indicates a system that has some sound features but there also exist major omissions or weaknesses. A D-grade classification may also occur in the relatively early stages of the development of a particular retirement income system.
Falling into the D-grade and representing the bottom of the rankings were Japan (49.8), Mexico (49.0), South Korea (48.3), Turkey (45.8), India (43.3), Philippines (42.7), Argentina (41.5) and Thailand (40.6).
The C+ grade the U.S. received in the report with an overall score of 61.4 is the result of scores of 60.9 for adequacy (index average 62.2); 63.6 for sustainability (51.7 average); and 59.2 for integrity (72.1 average). The 61.4 is a slight improvement on last year’s score of 60.3, which placed the U.S. 18th among 39 systems ranked in 2020.
Average female pensions much lower
This year’s report also considers the gender differences in pension outcomes that exist in every retirement income system.
The causes are many and varied and the impacts differ considerably between systems. Nevertheless it is clear that the average female pension is lower, and in some situations much lower, than the average male pension.
Such an outcome is not fair and must be addressed, the report stated, in addition to making several recommendations for employers, the pension industry and governments to consider with the goal of reducing the gender pension gap in the future.
The primary objective of the research covered by the report is to benchmark each retirement income system using more than 50 indicators. An important secondary purpose is to highlight some shortcomings in each system and to suggest possible areas of reform that would provide more adequate retirement benefits, increased sustainability and a greater community trust in the pension system.
The Top 20
- Iceland: 84.2
- Netherlands: 83.5
- Denmark: 82.0
- Israel: 77.1
- Norway: 75.2
- Australia: 75.0
- Finland: 73.3
- Sweden: 72.9
- UK: 71.6
- Singapore: 70.7
- Switzerland: 70.0
- Canada: 69.8
- Ireland: 68.3
- Germany: 67.9
- New Zealand: 67.4
- Chile: 67.0
- Belgium: 64.5
- Hong Kong: 61.8
- United States: 61.4
- Uruguay: 60.7
SEE ALSO:
• U.S. Slips in 2021 Global Retirement Index
• The ‘World’s Best Place to Retire in 2021’ is…
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
