Background to the Approach Used | Melbourne Mercer Global Pension Index : Melbourne Mercer Global Pension Index


Background to the Approach Used


The structure and characteristics of pension systems around the world exhibit great diversity with a wide range of features and norms.   Comparisons are not straightforward.

In addition, the lack of readily available and comparable data in respect of many countries provides additional challenges for such a comparison.

For this reason, this report uses a wide variety of data sources drawing on publicly available data, where possible.

These challenges of data and benchmarking should not, however, prevent the comparison of retirement income systems. Within the context of our ageing populations and the current economic environment, it is too important to ignore. Furthermore, there is no doubt that policies and practices adopted in some countries provide valuable lessons, experience or ideas for the development or reform of pension systems in other countries.

This edition of the Index compares the retirement income systems of 27 countries, highlighting both the considerable diversity and the positive features present in many systems. Notwithstanding these highlights, the study also confirms that no pension system is perfect and that every system has some shortcomings. In Chapter 5, suggestions are made for improving the efficacy of each country’s retirement income system. In that respect it is hoped this study will act as a stimulus for each country in the study (and indeed, other countries as well) to review their retirement income system and to consider making improvements so that future retirement incomes for their citizens can be improved.

In its influential report “Averting the Old Age Crisis”, the World Bank (1994) recommended a multi-pillar system for the provision of old-age income security, comprising:

  • Pillar 1: A mandatory publicly managed tax-financed public pension
  • Pillar 2: Mandatory privately managed, fully funded benefits
  • Pillar 3: Voluntary privately managed fully funded personal savings

Subsequently, the World Bank (2008) extended this three-pillar system to the following five-pillar approach:

  • Pillar 0: A non-contributory basic pension from public finances that may be universal or means-tested
  • Pillar 1: A mandated public pension plan that is publicly managed with contributions linked to earnings
  • Pillar 2: Mandated and fully funded occupational or personal pension plans with financial assets
  • Pillar 3: Voluntary and fully funded occupational or personal pension plans with financial assets
  • Pillar 4: A voluntary system outside the pension system with access to a range of financial and non-financial assets and informal support

In effect, the original first pillar was split into a “zero pillar” and a mandatory “first pillar”. A new “fourth pillar” was also added and includes access to informal support and formal social programs. The addition of the new Pillar 4 recognises the important role that these non-pension assets play in providing financial support to individuals or households during retirement.

This five-pillar approach provides a good basis for comparing retirement income systems around the world. Hence the range of indicators used in this report considers features or results associated with each pillar.

The ‘best’ system for a particular country at a particular time must also take into account that country’s economic, social, cultural, political and historical context.  In addition, regulatory philosophies vary over time and between countries. There is no pension system that is perfect for every country at the same time. It is not that simple! There are, however, some characteristics of all pension systems that can be tested or compared to give us a better understanding of how each country is tackling the provision of retirement income.

The Melbourne Mercer Global Pension Index has grouped these desirable characteristics into adequacy, sustainability and integrity.


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Link to Victorian Government (Victoria Online) the Mercer Australian website Australian Centre for Financial Studies