Australian pension system world-class, but not perfect

Australia's pension system is second only to the Netherlands, according to this year's Mercer Global Pension Index - but retirement income adequacy is still a concern.

The second-place ranking is an improvement on last year's fourth place in the Global Pension Index, and is a result of the rise in household savings in Australia and the increase in the age pension, according to Mercer senior partner and author of the report Dr David Knox.

While none of the 16 countries in the report have managed to attain Mercer's coveted 'A' rating, Knox said it was within Australia's grasp in the near future if it can "address the issue of adequacy by raising the level of compulsory savings via superannuation and continue reforms to reduce costs".

"Our superannuation system is in the midst of significant reform, some of which is likely to boost our score in the index in the future. But our current 'B' grade is an important reminder that our world-class retirement savings system is in danger of falling short of our needs unless we take action now," he said.

Other measures that must be taken include introducing a requirement that the retirement benefit only be taken as an income stream, and encouraging older workers to remain in the workforce for longer, Knox said.

One thing that we can learn from the Dutch system is its excellent communication with members, who get a projection of what their retirement benefit will be at age 65, Knox added.

Association of Superannuation Funds of Australia chief executive Pauline Vamos said Australia's improved ranking was an endorsement of the superannuation industry.

"The combination of the means-tested age pension, compulsory superannuation and voluntary contributions to superannuation provides Australia with a strong and sustainable system," said Vamos.

But she added that being number two was not good enough, and agreed with Knox that Australia had more to do when it came to addressing retirement income adequacy.

"The proposed increase in the rate of compulsory superannuation from nine to 12 per cent of wages, along with the proposed low-income earners' contribution tax rebate, have a crucial role to play in increasing the adequacy of retirement incomes, particularly for low and middle-income earners," she said.