Both Michael Littlewood and I share misgivings about the Mercer Global Pension index methodology and weightings ( see below the link ) but MCP provides another view of pensions globally and where NZ sits comparatively in their formula .
43 retirement income systems are measured, NZ slipping from its 10th-15th position and scored a B rating.
For those wanting an analysis of above, the 2 articles below the link , provide in depth reading
Pension Reforms’ NZ Michael Littlewood principal editor published this summary and comments in 2019
The latest version of the Melbourne Global Pension Index (MGPI) has been released
Pension Reforms last reported on the Index in 2009 . At that time, the MGPI covered 11 countries. It now includes 37 countries, measuring their overall retirement income arrangements across more than 40 ‘indicators’ grouped under three major headings, weighted as follows – ‘adequacy’ (40%), ‘sustainability (35%) and ‘integrity (25%).
Given ageing populations, and the current economic environment, “Now, more than ever before, it is important to understand the features of the better pension systems.” But, as Pension Reforms has noted on a number of occasions, international comparisons aren’t easy. The ‘systems may have common aims but they are all organised so differently. Also, the very definition of ‘better’ must necessarily be in the eye of the beholder. Should the measure be higher retirement replacement incomes relative to pre-retirement incomes, or higher quality of post-retirement life? The same question should also be asked of pre-retirement life – is it really in the best interests of those in the lowest income groups to be giving up current consumption in favour of a retirement saving accumulation?
“Furthermore, any comparison of systems is likely to be controversial as each system has evolved from that country’s particular economic, social, cultural, political and historical circumstances. This means there is no single system that can be transplanted from one country and applied, without change, to another country.”
That said, the report suggests that countries can learn from others and that may “… lead to improved financial benefits for the older members of society, an increased likelihood of future sustainability of the system, and a greater level of community trust and confidence.”
In order to arrive at a single index for a country’s overall system, the MGPI takes a weighted average of “40 per cent for the adequacy sub-index, 35 per cent for the sustainability sub-index and 25 per cent for the integrity sub-index. “These weightings have remained unchanged since the MGPI started in 2009.
The report notes that the 37 retirement income systems represent “…more than 63 per cent of the world’s population [and show] great diversity between the systems around the world with scores ranging from 39.4 for Thailand to 81.0 for the Netherlands.”
The 2019 MGPI suggests that “…the Netherlands and Denmark have the best systems with both receiving an A-grade in 2019” while none have an ‘E-grade system’. But, the report suggests, a system with an index of five or more points higher than another is “a better retirement income system”. The report then makes some specific suggestions “…to improve each retirement income system.”
A range of potential reforms have international application. These include:
- increasing the state pension age and/or retirement age;
- increasing labour force participation at older ages;
- “encourage or require higher levels of private saving, both within and beyond the pension system, to reduce the future dependence on the public pension while also adjusting the expectations of many workers”;
- increasing participation rates in private saving arrangements;
- reducing “the leakage from the retirement savings system prior to retirement”;
- ensuring the preservation of the real value of pensions in the context of “long-term sustainability”;
- “improve the governance of private pension plans and introduce greater transparency to improve the confidence of plan members.”
As Pension Reforms pointed out in its review of the first (2009) publication , the fact that the MGPI uses the World Bank’s major reports as its model begs some significant questions. Our comments on each of the three indices used in the 2019 edition of the MGPI continue to apply.
Pension Reforms continues to have a number of major issues with the MGPI. Despite its stated intention to be as “objective as possible”, it’s no accident that the three countries all scoring more than 75 points (Netherlands, Denmark and Australia) have compulsory private (or semi-private) retirement saving schemes.
The measurements that matter all focus extensively on the pension system (private and public) as though it were operating in a vacuum. In fact, both public and private provision (of all kinds; not just in formal retirement income systems) are claims on tomorrow’s economy. That, more than any other single factor, will determine the sustainability of any pension commitment. The MGPI gives no weight to this crucial driver though does include some potential proxies, such as debt levels of countries.
That last point (debt levels) raises an interesting point that the report analyses: there is a strong relationship between “…the levels of pension assets and net household debt for each system, both expressed as a percentage of GDP. The relationship is strong, with a correlation of 74.4 per cent. “The report suggests this may be because “…consumers feel more financially secure and confident as the wealth of their homes, investment portfolios or accrued pension benefits rise. In short, if your wealth increases, you are more willing to spend and/or enter into debt.”
Across the report’s 37 countries, the data suggest that for “…every extra dollar in pension assets net household debt increases by [$0.466] on average. Multivariate regression also confirms the very strong relationship, even after allowing for the level of economic development in each country.”
Pension Reforms notes that the mere presence of a ‘private’ retirement savings industry is probably, at least in part, a genesis of this relationship. A privately managed, pre-funded savings system needs assets for those savings to buy so any compulsory system in fact acts as a driver for debt issuance. Financial advisers and fund managers are trained to allocate savings to ‘conservative, balanced and growth’ investment strategies. Indeed, the rules governing compulsory Tier 2 schemes and even pre-funded Tier 3 schemes, usually require the purchase of debt securities. The rise in overall debt may simply reflect that the level of savings capital is ‘too high’, and so that may become a self-fulfilling prophecy – it’s a reflection, at least in part, of distortions created by the pressure of savings.
Pension Reforms suggests another likely explanation – governments have a major say in public policy issues that establish and then regulate ‘retirement income systems. Those tell citizens what they can and can’t do; what they must or must not do. Assuming a highly-regulated civil society (not a given in many of the countries covered in this report), that sets the floor.
Unfortunately, citizens have their own ideas about what they need to do, in this respect, about their financial preparation for retirement. Governments may set the structure of retirement income provision but have much less influence on the overall quantum. The things that governments can control (Tier 1, Tier 2 and the tax and regulatory aspects of Tier 3) have knock-on effects for things that governments can’t control such as housing, labour force participation, debt levels and other investments (outside the ‘retirement income system’).
2009: Melbourne Mercer Global Pension Index (2009)
Pension Reforms’ summary and comments
Regular Pension Reforms’ readers will have noticed that different countries organise their retirement income systems in very varied ways. The mixes between public and private; between compulsory, incentivised and voluntary; between personal and workplace-based arrangements; between pension and lump sum; between Defined Benefit and Defined Contribution are literally infinite.
This variety makes cross-country comparisons extremely difficult. In fact, Pension Reforms thinks that international comparisons have very limited value and in many cases are actively misleading. Even if the country summaries are accurate, putting just two of them side-by-side is difficult. That does not seem to limit the multi-country comparisons available – see here for an example. The Melbourne Mercer Global Pension Index (MMGPI) tries to solve this by grading the components of each country’s overall arrangements and comparing the single figure outcomes.
“There is no perfect [retirement income] system that can be applied universally around the world. Indeed, even comparing the diversity of retirement income systems is certain to be controversial as every system is different and has arisen from each country’s particular economic, social, cultural, political and historical circumstances. However there are certain features and characteristics of retirement income systems that are likely to lead to improved benefits, an increased likelihood of future sustainability of the system, and a greater level of confidence and trust within the community.”
The report suggests that the MMGPI allows an “objective” comparison and looks at 11 countries to show how the index works.
“The results show that no country’s system has an index value above 80, which we consider represents an A-grade retirement income system. However, four countries have an index value between 65 and 80, which represents a B-grade system and — with some adjustments or improvements — these countries could be re-classified as A-grade systems.”
The total score for a country under the Index derives from three major components:
40% for adequacy – with the following elements: benefit levels, savings, tax support, benefit design;
35% for sustainability – coverage, assets/funding, demography, government debt, labour force;
25% for integrity – with a focus on the private sector system: prudential regulation, governance, risk protection, communication.
“The overall index value for each country represents the weighted average of the three sub-indices.” Countries that score an E (below 35 points) seemingly have:
“A poor system that may be in the early stages of development or a non-existent system.”
According to the MMGPI, the 11 measured countries scored (from top to bottom):
Netherlands (76.1); Australia (74.0); Sweden (73.5); Canada (73.2); UK (63.9); US (59.8); Chile (59.6); Singapore (57.0); China (48.0); Germany (48.2) and Japan (41.5).
So, what elements do the MMGPI’s authors rank in each of the three major components?
The report uses the World Bank’s major reports as a framework and, effectively a model against which the individual country’s systems are measured. PensionReforms has difficulties with both the 1994 and 2005 versions of the World Bank’s framework – see here and here. So, for PensionReforms, this isn’t a great start.
Anyway, the World Bank seems less confident now about the ‘success’ of its recommendations than it was in 1994 or 2005. See here for self-reflection and here for an internal critique. There is no indication in the MMGPI report of any such doubts.
Here are brief comments on each of the key measures:
• Adequacy: looks at what the World Bank now calls the ‘Level Zero’ minimum pension and net replacement rates over the whole retirement income system (public and private) for a median earner. That favours countries with compulsory Tier 2 schemes and ignores the less than glowing report cards on compulsion (see here, here and here for examples). PensionReforms has commented on the difficulties with net replacement projections here.
Tax breaks for saving score despite their possible ineffectiveness (see here and here for example).
A high earliest access age is also a ‘positive’. Compulsory annuities help as do high household saving rates, never mind the difficulties of their measurement – see here for an example that illustrates some of these.
Overall, a high score is given where countries force citizens to behave in particular ways; apparently, the less flexibility, the better.
• Sustainability: this allows for the country’s demographic profile, State Pension Age, participation rates at older ages, the scale of private pension assets, the coverage of private pensions and the “sharing of mandatory contributions between employers and employees.” The level of government debt also plays a role. Again, as with the “adequacy” measure, countries with compulsory Tier 2 schemes have a head start.
• Integrity: This focuses on the private retirement income system as “most countries are relying on the private system to play an increasingly important role in the provision of retirement income…” So the community has to have confidence that the private sector pension providers will deliver:
“This sub-index therefore considers the role of prudential regulation, the required governance, the level of protection available to members from a range of risks and the level of communication required to be provided to members.”
PensionReforms has a number of major issues with the MMGPI. Despite its stated intention to be as “objective as possible”, it’s no accident that the four countries all scoring more than 70 points have compulsory private (or semi-private) retirement saving schemes.
The measurements that matter all focus extensively on the pension system (private and public) as though it were operating in a vacuum. In fact, both public and private provision (of all kinds; not just in formal retirement income systems) are claims on tomorrow’s economy. That, more than any other single factor, will determine the sustainability of any pension commitment. The MMGPI gives no weight to this crucial driver though does include some proxies, such as debt levels of countries.
There is also no weight given in the measures as to whether the current system is actually achieving its objectives. The OECD’s recent report on poverty amongst the over age 65s in the mid 2000s (reviewed here) highlights the proportions of the population over age 65 and not working who are in ‘poverty’. Of the eleven countries covered in the report, the OECD’s report scored eight of them (the percentage figures are the proportions in poverty; the MMGPI’s ranking is in brackets):
Netherlands: 2% (76.1)
Australia : 32% (74.0)
Sweden: 7% (73.5)
Canada: 10% (73.2)
UK 12.0% (63.9)
US 34% (59.8)
Germany 9% (48.2)
Japan 3% (41.5)
Chile, Singapore and China were not measured in the OECD’s report.
If the MMGPI offers a meaningful measure (and Pension Reforms suggests that it does not), only the Netherlands and, possibly, Sweden might be happy about the combined measures.
Even if the MMGPI were a robust indication, it is unclear to Pension Reforms what a country might do with the results. Perhaps they may be of value to the political opposition in a country.
In summary, Pension Reforms thinks the MMGPI does not measure up to the authors’ assessment that this is an “exciting” development in the international classification and measurement of pension systems.