As the COVID-19 pandemic puts pressure on retirement systems around the world, Australia has dropped a place in the updated Mercer CFA Institute Global Pension Index.
The Mercer CFA Institute Global Pension Index compared 39 retirement income systems, which included New Zealand which dropped from eighth to 10th.
The Netherlands (82.6 overall rating), Denmark (81.4) and Israel (74.7) were the top three, with the latter overtaking Australia.
Dr David Knox, senior partner at Mercer and lead author of the study, said each of the three countries ranked above Australia had a contribution of 12% or higher.
“Unlike the means-tested Age Pension in Australia they all have a universal state pension, which means, together higher contribution rates, their replacement rates, as calculated by the OECD [Organisation for Economic Co-operation and Development] are higher than Australia’s,” Knox said.
Each system was rated on three areas: adequacy, sustainability and integrity; Australia achieved an index value of 74.2 overall, 66.8 for adequacy, 74.6 for sustainability and 85.5 for integrity.
“In terms of adequacy we look at the minimum pension that an older but poor person might get, we look at the net replacement rate or the pension somebody might get if they had a full career,” Knox said.
“In terms of sustainability, we look at what proportion of the working age population are in the private pensions, the level of assets put aside, demographic issues, life expectancy, and even fertility rates because that’s the next generation of taxpayers.
“In terms of integrity, can the system be trusted? Is there good governance, good regulation and good protection?”
Maria Wilton, CFA Institute vice chair, said although Australia rated well for sustainability and integrity, it lagged behind in adequacy.
“We don’t perhaps rate as well [in adequacy], we do have the increased rate of the superannuation guarantee (SG) already legislated, let’s just hope that the government can hold the line on that.
Knox said the economic recession caused by the global health crisis had led to reduced pension contributions, lower investment returns and higher government debt in most countries.
“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,” Knox said.
However, early release of superannuation was not a factored in the ratings and there was a lag in the data which was from earlier in the year.
“Having said that, it’s not going to have a big impact because if you look at the total assets withdrawn, they’re around the $35 billion mark which is just over 1% of all assets so it’s not having a huge impact in terms of the assets withdrawn,” Knox said.
“It’s clearly having an impact at the individual level, but if people have less retirement dollars in super they will get an increased age pension, that way the Australian means tests work, so they’re net retired position may not be adversely affected.”
Knox said the other area that many in the industry had supported was the removal of the $450 threshold for SG contributions.
“While $450 a month doesn’t sound like a lot of money, many casuals and part-timers who earn one day a week are not getting any super on that,” Knox said.
“There are more women than men in that category, so that’s part of trying to mitigate the gender gap.”