Changes from 2016 - 2017 | Melbourne Mercer Global Pension Index : Melbourne Mercer Global Pension Index

Changes from 2016 to 2017

The index has been expanded in 2017 to include three new countries – Colombia, New Zealand and Norway. 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 purpose of the Index; to enable comparisons of different systems around the world with a range of design features operating within different contexts and cultures.

Two new questions
The Index aims to maintain its relevance as many countries tackle pension reform and to broaden the application of its questions thereby encouraging a holistic view of retirement income systems which need to operate over many decades. This year, two new questions have been added.

The first is to add a new question in the sustainability sub-index relating to real economic growth. Long term real economic growth means that the country’s GDP is growing faster than inflation. This can have several benefits including higher average incomes, lower unemployment, reduced government borrowing, higher levels of saving and often improved investment returns. Most of these outcomes lead to a stronger retirement income system and a more sustainable pension system. That is, the addition of a real economic growth indicator provides for a more robust and relevant sustainability sub-index for retirement income systems around the world.

Naturally, the addition of a new indicator means that some of the other indicators within the sustainability sub-index have had their weightings reduced. The two indicators with a reduced weighting are the level of pension assets (Question S2) and the level of mandatory pension contributions that are invested for the future (Question S4). To some extent there is double counting with these two indicators as contributions that are invested naturally raise the level of pension assets.

The reduction in the weighting of these two indicators does not imply they are not important. They are both very important but so is real economic growth. The combined weighting of the assets and contribution indicators in the sustainability sub-index decreases from 35 percent to 25 percent with the economic growth indicator having a weighting of 10 percent.

This change leads to some material changes in the sustainability sub-index values. Countries that have seen a significant improvement in their value are those which have had high real economic growth during the last three years and where this is projected to continue during the next three years. These include China, India, Indonesia, Ireland and Malaysia. Conversely, countries with significant pension assets and high mandatory contributions but with much lower real economic growth have seen a decline in their sustainability sub-index value. These include Canada, Denmark and the Netherlands.

The second additional question makes some allowance for voluntary pension systems in the net replacement rate indicator within the adequacy sub-index (ie Question A2). Previously, we have only allowed for mandatory systems in the net replacement rate indicator. This new allowance for voluntary systems is restricted to countries where the coverage of the voluntary system exceeds 30 percent of the working age population. The countries that have received the largest improvement in their score for this indicator are Germany, the UK and the USA. As with the addition of the economic growth indicator, the introduction of an allowance for voluntary pension systems, where they are significant, ensures that the overall index is more comprehensive and provides an improved overall comparison.

View Chapter 3 (Page 15) for full details

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