The Mercer CFA Institute Global Pension Index (the Index) has been comparing global retirement income systems for 16 years. The 2024 edition of the Index has been released, awarding an A grade to four countries: Netherlands, Iceland, Denmark and Israel. It rates these retirement income systems as first-class and robust in that they deliver good benefits, are sustainable and have high integrity.
The Index rates Australia’s retirement income system as B+, indicating a system with a sound structure and many good features but some areas for improvement to make it an A-grade system.
The overall index value is the weighted average of the three sub-indices: adequacy, sustainability and integrity. Mercer gives the highest weighting to the adequacy sub-index as adequate retirement income the primary objective of any retirement income system.
The adequacy sub-index considers the benefits of the current pension systems and assesses several important system design features, including the requirement to take part or all of the retirement benefit as an annuity or income stream.
This is where the Australian retirement income system has fallen short.
Australia’s Performance and Areas for Improvement
Dr. David Knox, Mercer senior partner and lead author of the Index Report, commented on Australia’s B grade rating on the adequacy sub-index: “All but one retirement system in the Global Pension Index’s top 10 has a focus on income in retirement. Australia is the exception. Greater encouragement of retirement income streams will give aging Australians more confidence to plan, spend, and in turn, improve their wellbeing in their golden years.”
Mercer made several recommendations that could increase the overall index value of Australia’s system:
- Moderating the assets test on the means-tested age pension to increase the net replacement rate for average income earners
- Introducing a requirement that part of the retirement benefit be taken as an income stream in most circumstances
- Introducing a government superannuation contribution to primary carers of young children
- Introducing a requirement to show retirement income projections on members’ annual statements
Sharpening the Focus on Retirement Income
The global landscape of pension systems is rapidly changing in response to increasing life expectancies, declining fertility rates, and evolving beneficiary expectations. Defined contribution (DC) pension plans have been gaining importance at the expense of occupational defined benefit (DB) plans, shifting the responsibility for complex financial decisions to retirees who often lack sufficient financial literacy.
The Index Report emphasizes that the primary purpose of a retirement income system is not merely the accumulation of wealth. It recognizes that everyone’s needs are different in retirement, even for retirees with similar retirement balances.
The purpose is retirement income, not the accumulation of wealth
The Index Report points out that the primary purpose of a retirement income system is not merely the accumulation of wealth. It recognises that everyone’s needs are different in retirement—even retirees with similar retirement balances might have different preferences and requirements.
It calls out that superannuation/pension funds play an important role to play in designing the best retirement products and makes the following recommendations:
- The focus must be on providing a regular income during the retirement years (not just a lump sum).
- Retirees need some long-term protection from future risks.
- Cognitive decline during the later years of life needs to be recognised
- Some flexibility is required in the benefits permitted
- Retirees need help, guidance and advice.
Improving Australia’s Retirement Income System
To improve the ranking of Australia’s retirement income system, the government, superannuation industry, and financial advisors must work together to increase the availability and usage of products that can provide Australians with an income for life.
As David Knox states,
A focus on retirement income is the most significant improvement we can make to our system and the lives of Australian retirees as they live longer.”