How does Australia’s pension system fare globally?

Australia’s retirement income system has beat out its global peers like the United Kingdom, Canada and New Zealand to place fifth in a global index of retirement systems, though the research has flagged some room for improvement in Australia’s system. 

The 2023 Mercer CFA Institute Global Pension Index, which ranks 47 retirement systems and covers 64 per cent of the world’s population, gave Australia a B+ grade, just behind the Netherlands, Iceland, Israel and Denmark that received an A grade. 

Australia was up one spot this year, having come sixth place in 2022.

Per the index, Australia’s B+ grade, alongside Finland and Singapore, means it has a system with a sound structure and many good features, but falls short of a “first-class and robust retirement income system that delivers good benefits, is sustainable, and has a high level of integrity” of the top-ranked countries.

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According to Dr David Knox, senior partner at Mercer and lead author of the index report, Australia is being held back from achieving an A grade status because there is no requirement that a portion of super savings be taken as an income stream.

He explained: “From the Retirement Income Review to the Retirement Income Covenant, and the work to define an objective of superannuation, there have been some excellent developments in the retirement income space. 

“But we still don’t compel Australians to take some of their super as an income stream. Retirees in A grade systems receive regular income in retirement and are therefore encouraged to spend knowing that their income will never run out. This is not yet the mindset in Australia, where we know that many retirees are underspending.”

In order to better support an ageing Australian population, which is expected to comprise over 3.5 million people aged 80 and over as outlined in the government’s 2023 Intergenerational Report, the country “must introduce a compulsory income stream for all retirees with a reasonable super balance”, Knox said. 

Margaret Franklin, CFA, president and chief executive of the CFA Institute, observed how the average age of populations around the world continues to rise in many markets, mainly more mature markets.

“Inflation and rising interest rates have created a new market dynamic that poses significant challenges to pension plans. We also see continued fracturing as it relates to globalisation. These are just a few of the increasingly complex challenges that pension funds face that impact retirees in significant ways,” Franklin said.

“More and more often, individuals will have an increasingly important role to play as it relates to their own retirement. As investment professionals, we need to help them prepare for that.”

The research also examined the growing impact of artificial intelligence (AI) to improve pension and social security systems and provide people a better quality of life in retirement. 

Knox noted it could lead to more efficient and better-informed decision-making processes, which could potentially lead to higher real investment returns to pension plan members.

He said: “AI also has the potential to improve member-engagement and help individuals make long-term decisions about their financial decisions. Both advances should improve retirement outcomes.” 

However, the report added that AI is not without risks, including modeling challenges and ethical concerns as well as the need for optimal data privacy and cyber security. 

It stated: “In developing these systems, it is essential that AI models have strong governance and clear accountability to reduce biases and unjustified responses. Safeguards are critical for pension plans to retain their members’ long-term trust.”