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.
Failure to address some fundamentals around auto-enrolment coverage and savings levels and the levels of household debt, will build up over time leading to a retirement crisis for ‘generation DC' Philip Parkinson, MercerThe 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.
It cited the UK, Australian and US pensions systems as those providing “considerable flexibility” for retirees. However, the research found that, in each of these systems, “there has been recognition that this 'freedom' does not necessarily lead to the best outcome for retirees”.
The UK has attempted to answer this with the nudge toward pension guidance provided by Pension Wise, while the Australian government signed into a law a Retirement Income Covenant in 2022 which requires trustees to create a retirement income strategy, addressing how the trustee will “assist beneficiaries to achieve and balance the three objectives stated in the covenant,” the Mercer report explained.
Those three objectives are: to maximise expected retirement income over the period of retirement, to manage expected risks to the sustainability and stability of retirement income, and to have flexible access to expected funds.
How to approach flexibility in DC
Overall, the Mercer reported acknowledged the need for flexibility in DC, but recommended a list of principles be adopted.
For example, it suggested that members with small pots, of up to 50 or 75 per cent of an average full-time wage, should be allowed to take these as lump sum benefits, thereby providing an option to deal with the “relatively significant costs associated with small pensions”.
It also suggested DC retirees with pension pots above the minimum should be allowed to take up to half of their initial pot during retirement “without significant disincentives”, as this would “provide them with flexibility while also ensuring that at least half of their initial benefit provides regular income”.
Half of a pension pot should be converted into an income stream, it continued, to provide regular and “relatively stable income”. The permitted income streams should include an annuity, a pooled arrangement, or a “programmed withdrawal product” that would encourage flexibility.
The report recommended the development of default retirement products that are consistent with the previous suggestions, accounting for the many DC members who “will not be engaged”.
It also stressed the need for financial education, guidance, and independent financial advice being available to all plan members approaching and during retirement.
Finally, it suggested that any reforms should be introduced gradually, as “sudden change does not encourage community confidence as many individuals and households make plans as they approach retirement”.
Mercer’s UK head of DC Philip Parkinson said: “With the cost of living crisis front of mind, all hands including policy makers, trustees and providers need to work together with individuals to improve retirement outcomes.
“Failure to address some fundamentals around auto-enrolment coverage and savings levels and the levels of household debt, will build up over time leading to a retirement crisis for ‘generation DC’.”
Mercer senior partner Dr David Knox, the study’s lead author, stressed the need for strong retirement schemes at a time of exceptional market uncertainty.
“Individuals have been assuming more responsibility for their retirement savings for some time; amidst high levels of inflation, rising interest rates and greater uncertainty about economic conditions, they are doing so in an increasingly complex and volatile environment,” he said.
“Despite differences in social, political, historical or economic influences across geographies, many of these challenges are universal. And while the necessary reforms may take time and careful consideration, policymakers must do all they can to ensure retirement schemes are supported, developed and well-regulated.”
Benjamin Mercer is senior reporter at Pensions Expert, FTAdviser's sister publication
