How to convert retirement savings to retirement income is a question being asked more frequently as demographic and economic pressures on global governments increase.
Whilst Australia’s retirement income system consistently ranks very highly in world rankings, it is still very much a retirement saving system with work to be done to establish a retirement income system.
The latest research from The Orford Initiative at Melbourne Business School takes a closer look at six highly rated retirement systems with an interest in understanding how they provide retirement incomes for their citizens and what Australia might learn from them.
Best countries for retirees
Denmark and The Netherlands are consistently ranked as the countries with the best pension systems. The Mercer Global Pension Index rates them both as having a “first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity”.
The other four countries regularly rated well by Mercer and which have lifetime income streams playing a significant role are: Switzerland, Sweden, Singapore, and Chile.
The research included an overview of each country’s retirement system and interviews with local retirement income experts to get an understanding of the level of demand for retirement products, the role of annuities and an overview of the competitive landscape and challenges.
The history of the respective retirement income systems and the attitudes of the citizens to items such as trust, risk, and the importance of the collective versus the individual were all important factors, and common strengths and challenges were found.
One feature that came through strongly was the role of communication in educating people on the benefits of annuities and the importance of incomes streams in retirement.
Of course, regulation plays a big part with all six countries using combinations of compulsion and incentives.
All these countries are not without their challenges. The current low-interest rate environment is putting pleasure on these retirement income systems and there is increased recognition that their systems are not treating all groups of citizens equally with growing numbers being outside the system completely.
A common challenge for the pension systems reviewed is increasing the retirement age to reflect increasing life expectancy.
What can we learn?
Three key implications are drawn to assist emulating the advances that have been made abroad.
- The role of government regulation, from compulsory annuitisation to softer nudges of tax incentives and default products.
- The importance of broad communication efforts from industry and government to enhance public uptake.
- The need to consider the people, culture and context when framing any discussion about annuities and lifetime income products.
Although many regard Australia as one of the best places for a comfortable retirement, research shows that many Australians have inadequate retirement savings. As our country manages an ageing population with ever-greater longevity, we should be prioritising redesigning retirement in Australia to a retirement income system that can help retirees deal with the fear of outliving their savings and leading a comfortable retirement.
The Orford Initiative at Melbourne Business School Report provides significant and useful detail on Annuities Across International Retirement Contexts.
 The Mercer Global Pension Index is produced by Mercer each year. The 2020 edition has recently been published but Melbourne Business School research was completed earlier this year and used the 2019 edition results.