The top pension systems in the world, Europe on top

A new study by Mercer and Monash Business School has looked into the quality of 37 retirement systems around the world, covering almost two-thirds of the globe’s population. The Netherlands can pride itself as the globe’s best pension system, followed by Denmark and Australia. 

Now in its eleventh year, the index looks at more than 40 indicators of a good performing pension systems, grouped into three main dimensions: adequacy, sustainability and integrity. Adequacy assesses how generous systems are in providing benefits to retirees. Sustainability on the other hand scores how sustainable the system is over the long term, measuring factors such as the length of expected retirement now and in the future, the labour force participation rate of older workers, and government debt. 

The integrity score examines the communication, costs, governance, regulation, and protection of pension plans. It also considers the quality of the country's private sector pensions because, without them, the government becomes the only pension provider.

For the second year running, the Netherlands’ $1.5 trillion pension industry has been named the best in the world. Although the country loses out to leaders in each of the three dimensions – Ireland for adequacy, Denmark for sustainability, and Finland for integrity – the country scores high on all three aspects and maintains its position just ahead of Denmark. 

For the Dutch, the news does not come as a major surprise. Their retirement income system has consistently held the first or second place for ten out of the last eleven studies by Mercer and Monash Business School.

Despite a major political debate in the country on the future of the country’s pensions system, globally it is regarded as “first class and robust”, able to “deliver good benefits against a high degree of integrity.” 

The Dutch retirement income system is made up of a flat-rate public pension and a quasi-mandatory earnings-related occupational pension linked to industrial agreements. This to an extent explains why the country’s pension players are relatively large and are punching above their weight on the global stage. Both ABP (the pension fund for government and education employees) and PFZW (a fund for healthcare professionals) rank among the world’s ten largest (superannuation) funds. 

The globe’s largest pension system, the US, is meanwhile facing “major risks” that should be addressed. The US falls below the global average in two of the three dimensions: adequacy and integrity. 

Consistent with previous editions of the ranking, European countries fare well in the top ten. Denmark ranks second, while fellow-Nordic countries Finland, Sweden and Norway rank fourth, fifth and sixth respectively. Third-placed Australia, and New Zealand (#9) and Canada (#10) round out the top ten. 

According to David Knox from Mercer, author of the study, systems around the world are facing unprecedented life expectancy and rising pressure on public resources to support the health and welfare of older citizens. “It is therefore imperative that policy makers reflect on the strengths and weaknesses of their systems to ensure stronger long-term outcomes for the retirees of the future. Also, it is essential the state pension or retirement age is reconsidered in line with increasing longevity – a step some governments have already taken – to reduce the costs of publicly financed pension benefits.”