UK drops one place to 15th in Mercer’s Global Pension Index

The UK’s pension system fell one place to rank 15th in the Mercer CFA Institute Global Pension Index with an overall score of 64.9.

Although it dropped a place, its score increased slightly over the year, from 64.4 to 64.9, due to “a number of small changes in the sustainability sub-index”, according to Mercer.

The index is measured using three categories – adequacy, sustainability, and integrity, weighted 40 per cent, 35 per cent and 25 per cent, respectively.

The UK scored highly for integrity, with a score of 83.7, but performed poorly on adequacy and sustainability, with scores of 59.2 and 58, respectively.

Its score for adequacy was below the average of 60.9 of the 39 pension systems assessed.

Adequacy is calculated on benefits, system design, savings, government support, home ownership and growth assets, with Netherlands achieving first place in this category with 81.5.

Sustainability is measured on pension coverage, total assets, demography, public expenditure, government debt and economic growth, with Denmark coming out on top with a score of 82.6.

Integrity is calculated on regulation, governance, protection, communication and operating costs. Finland scored highest on integrity with a score of 93.5.

“There are numerous levers the government could pull to improve the UK pensions system, though first a fundamental debate is needed to agree the optimal balance between security, adequacy and affordability,” commented Mercer UK head of wealth, Benoit Hudon.

“It is almost impossible for any national pensions system to achieve these three objectives fully and simultaneously. However, we believe too much focus has been put on security at the expense of adequacy and affordability, leaving pensions savers with low investment returns.

“We need to rethink what represents an acceptable level of risk into our pension system.”

As reported in our sister publication, European Pensions, the Netherlands’ pension system retained its first place ranking with an overall score of 82.6.

Denmark was ranked second with a score of 81.4, while Finland came fifth with a score of 72.9.

European pension systems faired reasonably well on the whole, with five participants in the top 10.

Italy scored lowest of the European nations assessed (29th), with an overall score of 51.9 and the lowest score of any nation in the index for sustainability (18.8).

Austria narrowly beat Italy to 28th place with an overall score of 52.1.

Other European nations on the list included Sweden and Norway (joint sixth), Germany (11th), Switzerland (12th), Ireland (14th) and Belgium (16th).

In the index, Mercer acknowledged the impact that Covid-19 had had on pension systems, highlighting that the average sustainability score fell by 1.2 in 2020 due to the negative economic growth experienced in most economies.

It noted that the pandemics impact on future pension provision will be negative due to reduced contributions, lower investment returns and higher government debt.

“Inevitably, this will impact future pensions, meaning some people will have to work longer while others will have to settle for a lower standard of living in retirement,” commented Mercer senior partner, Dr David Knox.

“It is critical that governments reflect on the strengths and weaknesses of their systems to ensure better long-term outcomes for retirees.”

Monash Centre for Financial Studies director, Professor Deep Kapur, added: “The outlook for investment returns is muted while volatility may be elevated, adding to the normal challenges of risk management in a pension portfolio.

“Additionally, some governments have allowed temporary access to saved pensions or reduced the level of compulsory contribution rates to improve liquidity positions of households.

“These developments will likely have a material impact on the adequacy, sustainability and integrity of pension systems, thereby influencing the evolution of the Global Pension Index in the coming years.”

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