The Australian Centre for Financial Studies (ACFS) and Mercer released the 2015 edition of the Melbourne Mercer Global Pension Index (MMGPI) on 19 October 2015. In the overall ranking, which includes measures of adequacy, sustainability and integrity, the Australian retirement saving system was awarded a score of 79.6, which is third worldwide behind Denmark (81.7) and Netherlands (80.5).
Although the Australian system is much maligned locally for a number of reasons, this world ranking puts some objective perspective on how our system compares globally, and paints a very positive picture. The MMGPI grades 25 retirement income systems into categories ranging from A to E. The Australian score of 79.6 results in a B+ categorisation, slightly outside the A grade rating associated with a score of 80 or more – only the Danish and Dutch systems have been rated A grade in the seven year history of the index.
Australians can be proud of their retirement income system, without being complacent. There are many very positive aspects, including that it was rated number one worldwide in terms of adequacy (see below), but there are also a number of areas for possible improvement.
Australia number one for adequacy
The Australian retirement income system was ranked number one in the 2015 MMGPI adequacy sub-index with a score of 81.2. Adequacy encompasses the level of base retirement income provided (e.g. in the Australian context, the age pension safety net) and the level of replacement income in retirement for median-income earners. More specifically with regard to replacement income, the following six factors of a country’s private pension system are assessed:
- The level of tax incentives for making voluntary contributions and on investment earnings, compared to savings in a bank account.
- The minimum access age (preservation age).
- Vesting and portability issues upon change of employment.
- Compulsion to take a specified percentage of retirement benefits as an income stream.
- The ability to account for retirement savings in divorce/separation arrangements.
- Continuity of contributions when temporarily out of the workforce.
In addition, the long term investment return is considered, by reference to the level of exposure to growth assets, as well as non-retirement savings schemes and non-financial support generally for the elderly.
The Australian system scored the maximum (10) for the net replacement rate for median-income earners, vesting and portability upon change of employment and divorce/separation arrangements. It scored more than eight for the minimum access age and the proportion of total assets invested in growth assets.
However, the system scored poorly on the proportion of retirement benefits required to be taken as an income stream (2.0) and the continuity of contributions when temporarily out of the workforce (5.0).
We have encountered clients who are cynical about Australia’s superannuation system. The Melbourne Mercer Global Pension Index demonstrates that our retirement income system is very good on a world scale, almost ‘A grade’. However, the MMGPI also demonstrates there are still areas worthy of improvement, and lays down some challenges for the country’s legislators….Let’s hope they’re listing.
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