The provision of financial security in retirement is critical for both individuals and societies as most countries are now grappling with the social, economic and financial effects of ageing populations. The major causes of this demographic shift are declining birth rates and increasing and increasing longevity. The very significant impact of this change is further explored in Chapter 4. Inevitably these developments are placing financial pressure on current retirement income systems. Yet, a comparison of the diverse systems aroud the world is not straightforward. As the OECD (2015) comments: “Retirement-income systems are diverse and often involve a number of different programmes. Classifying pension systems and different retirement-income schemes is consequentially difficult.”
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. That means there is no single system that can be transplanted from one country and applied, without change, to another country.
However there are certain features and characteristics that, across the range of systems, are likely to lead to improved financial benefits for aged individuals and households, an increased likelihood of future sustainability of the system, and a greater level of community confidence and trust.
With these desirable outcomes in mind, the Melbourne Mercer Global Pension Index uses three sub-indices – adequacy, sustainability and integrity – to measure each country’s retirement income system against more than 40 indicators. The following diagram highlights some of the topics covered in each sub-index.
The overall index value for each country’s system represents the weighted average of the three sub-indices. The weightings used are 40 percent for the adequacy sub-index, 35 percent for the sustainability sub-index and 25 percent for the integrity sub-index.
The different weightings are used to reflect the primary importance of the adequacy sub-index which represents the benefits that are currently being provided together with some important benefit design features.
The sustainability sub-index has a focus on the future and measures various indicators which will influence the likelihood that the current system will be able to provide these benefits into the future.
The integrity sub-index considers several items that influence the overall governance and operations of the system which affects the level of confidence that the citizens of each country have in their system.
This study of retirement income systems in 27 countries has confirmed that there is great diversity between the systems around the world with scores ranging from 37.7 for Argentina to 80.5 for Denmark.