Each year the Steering Committee reviews the feedback from the last edition and considers some proposals from Dr David Knox for amendments.
Small incremental adjustments are made, bearing in mind that for longer term evaluation, these should be minimal. Sensitivity analysis is carried out to determine whether any such changes will have a significant impact on comparative date, year on year.
The index has been expanded in 2014 to include five new countries; Austria, Finland, Ireland, Italy and South Africa. These additions continue the theme of considering a variety of retirement income systems from countries with different economic and political backgrounds. This highlights an important characteristic of the index; to enable comparisons of different systems around the world with a wide range of design features and norms. Although four of the new countries are from Europe, these systems generate quite different scores from each other, particularly when the sustainability sub-index is considered.
We have also added two new questions into the adequacy sub-index to provide greater depth.
The first new question asked about the indexation of the minimum State pension, focusing on both the regularity of any indexation and the index used. A primary objective of the State pension, as outlined in the previous chapter, is to provide a minimum level of protection and thereby alleviate poverty amongst the aged. Regular indexation of this pension is therefore an important feature to ensure that the poor are not adversely affected by price rises.
Indexation to prices is used by 15 of the 25 countries and therefore represents the most common approach. Four countries link the indexation to the movement in average wages while four countries use an indexation rate that is not required to reflect price inflation. In the other two countries, there is no State pension or support for the poor aged through other means.
The second new question related to whether contributions to pension schemes are required when the individual continues to receive income through a temporary absence from the workforce. Examples may include workers compensation, sickness, disability, parental leave or unemployment.
Not surprisingly the actual experience is very mixed. In nine countries, contributions are required to continue although they may cease after a certain period. On the other hand, 12 of the 25 countries have no provision for any contributions to be made or benefit accrual to continue. The remaining four countries require contributions to be made under some circumstances (e.g. sickness) but not in other cases.
The best systems will require contributions or benefit accrual to continue during periods when the individual receives income support so that the individual’s retirement benefit is not adversely affected during this period out of the workforce. This feature will improve the adequacy of retirement benefits received by a higher proportion of the working population.
Another important change has been in some of the source data used. The adequacy sub-index relies, in part, on OECD data provided in respect of the minimum pension and the net replacement rates. These rates are regularly updated in the Pensions at a Glance publication.
The countries with major changes in their minimum pension (expressed as a percentage of average worker earnings) have been Australia (up 4.9%), France (up 2.3%), Poland (down 2.3%) and Switzerland (down 2.5%).
The calculated net replacement rates allow for a comprehensive set of assumptions including taxation and social security contributions, as well as pension contribution rates, benefit accrual rates, retirement ages and annuity rates. As systems change, it is inevitable that these net replacement rates will also change over time. Since last year, the countries with the largest movements in their net replacement rates for the median-income earner have been Australia (up 6.4%), Chile (down 3.8%), India (down 6.1%), Singapore (down 7.7%) and Switzerland (up 10.2%).