The UK slipped from 9th to 10th in Mercer’s latest retirement income survey, as the long-term shift from defined benefit to defined contribution leaves members facing greater retirement risks.
The Mercer CFA Institute Global Pension Index covers 44 global pension systems and evaluates them against benchmarks, providing an overall index value.
The index value is made of three components: adequacy, including such things as system design and government support; sustainability, which includes coverage, total assets and demography; and integrity, which includes regulation, governance and protection.
UK 'could do better'
The Icelandic system came first at 84.7, followed by the Netherlands at 84.6 and Denmark at 82. The UK, meanwhile, dropped from ninth to tenth since the last report, now with a score of 73.7 — albeit this was still an improvement on the 71.6 score attained in 2021, a change primarily owed to revised scoring methods.
This score was enough to earn a ‘B’ grade, indicating “a system that has sound structure” but has “some areas for improvement”. Broken down, the UK system scored ‘A’ for integrity, ‘B+’ for adequacy but only ‘C+’ for sustainability.
The report lists a number of areas on which the UK retirement system could improve. Amongst the ways to increase the index score, it suggests restoring the requirement to take part of retirement benefits as an income stream, as well as raising the minimum pension for low-income pensioners.
It also recommends increasing coverage, especially among the self-employed, as well as increasing auto-enrolment minimum contribution rates and decreasing overall household debt.
DC is a challenge
The report found that, across developed economies, the shift to DC pensions and the resultant risk incurred by individuals was increasing personal responsibility, but that “most individuals and households are not prepared to make the necessary financial decisions at retirement and to maximise their value from the available DC pension pot”.
“It is a very difficult situation, particularly as the post-retirement years require much more complex decisions than the pre-retirement years, when most individuals receive a relatively stable wage or salary and the primary purpose of the pension arrangements is to invest the funds. Of course, it can be even more difficult for those in the informal or 'gig' labor force,” the report said.
It suggested retirees - and by extension product providers and financial advisers - had five questions to answer: what is the minimum level of income, what is the likely period of retirement, what is the retiree’s risk profile; does the retiree have any significant debt, and are there any “ongoing decisions”?
“These questions have no single answers, and they will change during the period of retirement. Nevertheless, consideration of these and similar issues should help pension plans develop the most appropriate set of products for their retirees,” it said.