World’s first global pension index ranks public and private pension systems of US and 10 other countries

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The US retirement income system ranks sixth in the world’s first global pension index that compares private and public pension systems of 11 countries across five continents. The Melbourne Mercer Global Pension Index ranks the retirement income systems of these countries based upon adequacy, sustainability and integrity.

The index, produced by Mercer and funded by the Victorian State Government of Australia, of which Melbourne is the capital city, represents the first time that the world’s retirement income systems – some of which are held up as best practice – have been compared and ranked on a basis that considers a retirement income system in its entirety.

With an aging population as a critical issue for governments around the world, this index can provide lessons and better insight into how countries are grappling with the related economic and social issues, according to Mercer.

The overall index considers results from more than 40 indicators that reflect certain features that are desirable in all retirement income systems. These characteristics have been grouped into the categories adequacy, sustainability and integrity.

“Clearly, US policymakers and the private sector are grappling with the challenge of balancing the adequacy of benefits with the sustainability of public and private pension plans a matter of special concern during a difficult global financial and economic environment,” said Arthur Noonan, a senior consultant and actuary in Mercer’s retirement, risk and finance business. “Thus, even though the sustainability of US pension plans is greater than in countries with a more rapidly aging population or more generous benefits, the funded status of US defined benefit plans remains a concern. Expense and cash funding of defined benefit plans is likely to continue at historically high levels.”

Moreover, Mr. Noonan observed, the US is challenged to improve the adequacy of pensions as its workforce reaches retirement age and as the tough economic climate causes companies to reduce or suspend 401k matching contributions and freeze or close defined benefit plans.

Mr. Noonan continued, “At a time when recovery from the recent economic turmoil places pressure on employers’ already stretched resources, and when the Federal government is also wrestling with health care reform, it is important to have a benchmark against which to measure the position of the US against other pension systems around the world. We believe the Melbourne Mercer Global Pension Index can responsibly inform the policy decisions lawmakers face relating to this country’s public and private retirement systems.”

The US ranked ninth in the adequacy of benefits – or how much income is available to a retiree. Among the factors making up the index, this is given the greatest weight. The US score of 49.2 compared with Japan’s score of 39.2, at the bottom of the ranking. The Netherlands (80.5) and Canada (76.2) scored highest in this index because of the level of minimum public pension and a relatively high net replacement rate of income for median income earners.

The overall index value for the US system could be increased by:

* raising the minimum pension for low-income pensioners

* adjusting the level of mandatory contributions to increase the net replacement for median-income earners

* introducing a minimum access age so that it is clear that benefits are preserved for retirement purposes

* introducing a requirement that part of the retirement benefit must be taken as an income stream.

The US ranked higher in the category of sustainability of its retirement system, with a score of 69.4, placing it third among the 11 countries in the Melbourne Mercer Global Pension Index. Only Sweden, with a score of 75.2 and Australia with 71.0, ranked higher. In measuring sustainability, the index considers such factors as the demographics of the population (ratio of productive workers to retirees), the funding status of pension plans relative to pension liabilities and level of government debt.

“The funding of defined benefit plans in the US remains a challenge,” Mr. Noonan noted. “Mercer estimates that the funded status of plans for the S&P 1500 companies declined from 84 percent at the end of the first quarter of 2009 to 81 percent at the end of third quarter 2009, despite strong equity market performance. We anticipate that many plan sponsors will face substantial increases in their required cash contributions in 2010. Funding issues also affect public-sector pension plans and, longer term, the funding of social security is an issue.”

The Melbourne Mercer Global Pension Index also took into consideration the integrity of private pension provisions, which is important in maintaining the community’s confidence in the system. Based on an assessment of four key areas – prudential regulation, governance, risk protection and communication – the highest-rated countries for the integrity sub-index were the Netherlands (88.2), Australia (87.8) and the UK (86.3). The US ranked seventh with a score of 63.4.

No country in the Melbourne Mercer Global Pension Index was classed as having an A-grade system (obtaining a score greater than 80), proving even the world’s most advanced pension and superannuation models still need refinement to ensure they are robust enough to support the world’s rapidly ageing population.

The countries with the lowest-ranking retirement income systems were Japan (with a score of 41.5), China (48.0) and Germany (48.2). While these countries don’t fall into the lowest grade E category, which corresponds to a score below 35, the efficacy and sustainability of their systems will be in doubt if major weaknesses are not addressed.

David Knox, PhD, worldwide partner in Mercer’s retirement, risk and finance consulting business, who oversaw the study, said that global results indicate a need to address common challenges.

“The fact that no country achieved an A-grade classification confirms that no one system is perfect or currently robust enough to withstand the challenges presented by an ageing population,” Dr. Knox said.

“The best arrangements for a particular country will depend upon its individual social, economic, political, cultural and historical context. However, by examining common and desirable characteristics of a retirement income system, lessons can be learned by governments to help them better prepare for demographic change and ensure older citizens have access to adequate incomes in retirement,” he said.

It is planned that the Melbourne Mercer Global Pension Index will be repeated annually and that future studies will be expanded to include more countries. The report is expected to generate strong interest internationally, including with organizations such as the World Bank and OECD.

http://www.mercer.com/summary.htm?idContent=1361245

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http://www.mercer.com.tw/summary.htm;jsess...Content=1360810

Table is towards the bottom.

Also note the difference in number, it's not just a 2nd vs 6th deal.

Edited November 30, 2009 by Booyah!