The UK has dropped two places year-on-year in the Melbourne Mercer Global Pension Index.

In its eighth annual Melbourne Mercer Global Pension Index, the UK’s pension system fell below Ireland and Singapore to eleventh place this year, from ninth place in 2015. It has been suggested that this is a result of a reduction in the net replacement rate, related to a cut in the pensions an employee can expect from both state and occupational schemes.

The UK’s grade also fell from a B grade of 65 out of 100 last year to a C+ grade with a scare of 60.1 this year. This highlights that while there are positive features present, the UK pension system also contains major risks and shortcomings that need to be addressed, according to Mercer.

Nonetheless, the UK’s ranking is expected to improve in the coming years as auto-enrolment reaches its final stage. The index report indicated that in addition to auto-enrolment, the British pension system could receive a higher ranking by: increasing the level of contributions to occupational pension schemes, increasing the coverage of employees in these schemes and restoring the requirement to take part in retirement saving as an income stream, among others.

This year’s index is the Victorian Government of Australia and the Australian Centre for Financial Studies’ eighth annual index which objectively ranks both the publicly funded and private components of 27 countries’ pension systems. The index considers the impact of the rapidly ageing populations and preparedness of countries’ retirement systems to deal with the significant financial pressures this presents.

“The 2016 state pension reforms are expected to provide less generous state pensions for many workers, compared to the historic earnings-related system,” said Mercer UK Retirement senior partner and business leader Mark Condron.

“The generous defined benefit schemes of the past also stand in sharp contrast to today’s typical defined contribution schemes, with minimal 2 per cent contributions applied under auto-enrolment requirements. Thankfully, most employers elect to offer more than this amount, which will be increasingly important to help employees build up meaningful provision for retirement.”

Condron added: “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.”

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