How does being a pensioner in the UK compare to being a retiree in Australia or the Netherlands?
We’re having a look at where in the world people do well in retirement, taking into account not only the level of state pension but also how governments incentivise personal pension saving and encourage employers to contribute.
Denmark and the Netherlands come out on top
The Global Pensions Index ranks countries’ pension systems each year, rating their adequacy, sustainability and integrity. The most recent index was published in 2015, and Denmark and the Netherlands came out top, with their systems receiving an A grade, indicating ‘a first class and robust retirement income system.’
So what’s so good about the Danish and Dutch ways of doing things? Well Denmark has a public basic pension scheme, a means-tested supplementary pension and mandatory workplace schemes. In the Netherlands, there’s a flat-rate public pension and then most employees belong to workplace pensions schemes, with the amount they receive usually based on their lifetime average earnings.
Australia is in third place in the rankings, receiving a B+ score. The Australian system involves a means-tested pension from the government and mandatory employer pension contributions.
The UK gets a B grade
Where does the UK come? Well our rating isn’t too shabby. We’ve been awarded a B, so pensioners retiring here will be in a similar boat to pensioners in Sweden, Switzerland, Finland, Canada and Chile.
Scrutinising our score a little more, we’ve done well in terms of integrity, which means the researchers reckon the regulation and governance of our system is pretty good, and pension legislation keeps us well-protected from pension providers behaving badly.
We didn’t do so well in terms of adequacy and sustainability though, which means UK pensioners may struggle to make ends meet in retirement, and our system may start creaking in the long term.
Richer during retirement than while working?
The OECD’s latest figures on pensions also make happy reading for Danish pensioners. The ‘replacement rate’ measures how effectively a pension system replaces the income that people earned while working, and the OECD reckons that low earners in Denmark can receive a replacement rate of 107%, meaning that they could actually have more cash when they’re retired than while working.
The Netherlands does well here too, with a replacement rate of over 90% for average earners.
Across the OECD countries, the replacement rate averages 53% for workers with average earnings, but the UK is right down at the bottom (along with Mexico) with replacement rates of around 20-25%.
All countries face pension pressures
Writers of the Global Pensions Index recognise in the report’s preface that pension systems around the world are under increasing pressure due to ageing populations, uncertain economic conditions and record low interest rates.
They highlight the global move towards greater individual responsibility, with many governments shifting the emphasis onto defined contribution pensions - paid into by employers and workers – rather than state pension systems. This is certainly the approach the British government has been taking recently.
To improve the plight of tomorrow’s pensioners, the report writers suggest that countries will need to increase the state pension age, promote higher labour force participation amongst older people, and encourage (or even require) higher levels of private saving.
They argue that many people won’t save for the future without an element of compulsion, so auto-enrolment legislation (currently being rolled out in the UK) will become increasingly crucial. They also call on governments to improve the governance of private pension plans and introduce greater transparency to the market.