The UK has moved up a global league of pension providers, with high scores for both integrity and adequacy of its state and private system.
It now sits 9th in Mercer CFA Institute Global Pension Index, with a rating of ‘B’. Over the past year its overall score has increased from 64.9 to 71.6. However it scored less when it came to the issue of the retirement gender gap – although this was a systemic weakness with all other countries too.
Iceland is rated as having the best pension system in the world, although this is the first time it has been included in this survey. The Netherlands, and Denmark took second and third place respectively.
This index is a comprehensive study of global pension systems, accounting for two-thirds (65 per cent) of the world’s population. It benchmarks retirement income systems around the world highlighting some shortcomings in each system and suggests possible areas of reform that would provide more adequate and sustainable retirement benefits. The top three systems, all receiving an A-grade, are sustainable and well-governed systems, providing strong benefits to individuals.
The considerable increase in the UK index score was driven by a strong improvement in the adequacy value – which went from 59.2 in 2020 to 73.9 this year. The impact of auto enrolment, in turn improving the net replacement rate as calculated by the OECD, was the key factor behind this increase. However, the compilers of this report said there remains room for improvement in areas such as the gender pensions gap and pensions adequacy for lower paid workers.
Mercer partner and trustee leader Tess Page says: “The UK pensions system is in a much improved position from last year. We have benefitted from auto-enrolment pushing up savings rates, as well as mostly helpful policy and regulatory changes.
“However, many members still face a cliff edge at retirement and, as ‘generation DC’ approaches pensions age, this issue is only expected to accelerate. There are a number of actions that employers, trustees, and the government could take to help improve the UK system and deliver better long-term retirement outcomes. A great start would be further increasing auto-enrolment contributions and coverage – notably to better serve those who are self-employed.”
She adds: “One real bright spot of opportunity, as highlighted in our recent survey with the CBI, is the UK’s leadership on managing pension scheme climate change risk.
“By managing climate risk, it provides a path to sustainable investment returns and helps with scheme member engagement. That said, so far it has been a little too much talk and not enough action. Many pension schemes do not know where to begin, but there are small changes that can be effective such as basic assessments to evaluate what actions will ensure most impact.”
The MCGPI’s analysis highlighted that there was no single cause of the gender pension gap, despite all regions having significant differences in the level of retirement income across genders.
The UK and Denmark have broadly similar employment rates for men and women, but quite different gender pension gaps. The UK’s gender pension gap stands at 40.5 per cent raising some concern about pension design and socio-economic inequality.
While employment issues are major contributors and are well known – more female part-time workers, periods out of the workforce for caring responsibilities and lower average salaries, for example – the study found that pension design flaws were aggravating the issue. This includes non-mandatory accrual of pension benefits during parental leave, absence of pension credits while caring for young children or elderly parents in most systems, and the lack of indexation of pensions during retirement, which have a larger impact on women due to longer life expectancy.
Israel’s pension system was rated fourth by this index, followed by Norway and then Australia. Finland and Sweden were next followed by the UK. Singapore was the final country making it into the top 10.
France was 21st, Germany was 14th and the United States was 19th in the list.
