According to Mercer CFA Institute’s Global Retirement Index this year
Iceland, Denmark and Israel followed the Netherlands, so these are the four best pension systems globally. Out of the 48 countries examined, they were the only ones to receive an “A” grade.
According to the report, the world’s 10 best pension systems are located in the following countries:
In the Netherlands, it was announced just last summer that the private pension system there would be reformed and benefits would no longer be guaranteed. Instead, both future and already accrued pensions are transferred from payments to fixed contributions. In this new system, pension funds segregate assets into individual funds, and payouts are determined by contributions and market conditions.
This is consistent with the findings of the current report, which there has been a worldwide shift about defined benefit programs (DB), which pay a guaranteed pension upon retirement, towards defined contribution (DC) pension programswhere people have individual savings accounts into which they deposit money throughout their careers.
Defined benefit vs defined contribution – What’s the difference?
Defined contribution pension programs (defined contribution, DC) fix the level of contributions, mostly determined at a certain level of income. Here, the amount of the final payment depends at least as much on the return on the investment. On the other hand, in defined benefit programs (defined benefit, DB), the amount of payment is fixed, usually with a formula based on income and years spent at work. To put it simply, the contribution payment for the former and the annuity payment for the latter are fixed.
Source: CFA Mercer Pension Index 2024
The report, which assesses pension systems based on their adequacy, sustainability and integrity, finds that while the best are performing well, pensions around the world are threatened by demographic challenges.
We simply don’t have children and live longer…When you combine an aging population and fewer taxpayers with the expectations of public debt and public pensions, something has to be done somewhere.
David Knox, senior partner at Mercer and lead author of the report, said in an interview.
Rising life expectancy and declining fertility rates, together with high interest rates and rising costs of care, have increased pressure on government budgets to support pension schemes, the report said, adding that this had helped to index scores were lower overall this year.
The United States ranked 29th, the United Kingdom 11th, and Japan 36th. India received the lowest rating of “D”, behind South Africa, Turkey, the Philippines and Argentina, which received the same rating. Australia, whose pension system is highly regarded around the world, slipped behind Singapore to sixth place.
China ranked 31st, but Mercer said the country’s recent pension reforms were not reflected in this year’s index score. Mexico, India and France have also made recent changes.
The UN said earlier this year that every fourth country has already passed its population peakas falling birth rates contribute to slowing growth. Due to demographic changes countries should take a more flexible approach to retirement rather than set a fixed age to stop working, Knox said.
People should be encouraged to work part-time to top up their pensions, which will require a change in the way governments, employers and workers think.
The report also contains a number of proposals for more sustainable pension systems, such as
- Increasing the involvement of employees and private entrepreneurs in the voluntary pension system is one automatic entrysel.
- Raising the state pension age and/or retirement age in line with increasing health-adjusted life expectancy, now and in the future, thereby reducing the costs of publicly funded pension systems.
- Promoting higher labor market participation of older age groupswhich increases savings available for retirement and limits the continued increase in the length of retirement.
- Encouraging higher levels of private savings within and outside the pension system, in order to reduce future dependence on the state pension.
- From the retirement savings system reducing pre-retirement attritionthereby ensuring that the saved funds – often together with the related tax subsidy – are used to ensure retirement income (this is, by the way, exactly the opposite of what the Hungarian government wants with regard to the premature use of voluntary fund savings).
This article does not constitute investment advice or investment recommendation. Detailed legal information
