The index has been expanded in 2016 to include two new countries – Argentina and Malaysia. These additions continue our longstanding theme of considering a variety of retirement income systems from countries with different economic, historical and political backgrounds. This approach highlights an important characteristic of the index; to enable comparisons of different systems around the world with a wide range of design features operating within different contexts.
There have also been a number of changes this year which have influenced the index value for some countries.
Changes within the OECD’s publication Pensions at a Glance 2015
One of the key questions in the adequacy sub-index is the net replacement rate (Question A2) which is sourced from the above OECD publication for most countries. It should be noted that this net replacement rate is based on universal or mandatory pension schemes, not voluntary arrangements.
The 2015 publication made a number of changes to this calculation which affected the net replacement rate for several countries. These changes include:
- The introduction of a 15% cost of converting a defined contribution benefit into an annuity. This represents an 85% conversion factor for annuities that have to be purchased compared to those that result from a no-fee defined benefit basis.
- Allowing for the actual index (such as prices) used to adjust the level of pensions rather than assuming it will always be linked to wages.
- Reductions in the assumed long-term inflation rate, real wage growth and nominal investment returns.
- No publication of the net replacement rate for median income earners in contrast to the continued publication of the net replacement rate for the average income earner. For consistency with previous reports, this required a slight adjustment to th published figures.
These changes to the underlying assumptions, particularly the first two changes, have adversely affected the results for Canada, Chile, Germany and Switzerland. Australia and the United Kingdom also had reduced replacement rates due to changes in their legislation. In Australia, it was due to the deferral of the previously planned increase in the level of compulsory employer contributions whilst for the UK it was caused by the introduction of the new State pension and the exclusion of voluntary contribution linked to auto-enrolment from the calculation.
In contrast, India saw a significant increase in their net replacement rate due to an increase in their ceiling for contributions and an OECD revision to the average wage.
View Chapter 3 (Page 16 – 20) for full details