Life After Full-time Work Blog

And how do you judge something like that?

Usually I write about matters relevant to individuals or couples, but this blog post is an exception. It deals, not with the ground-level individual view, but with the perspective from 30,000 feet, looking at a comparison of pension systems around the world. That comparison has been made in the outstanding Mercer CFA Institute Global Pension Index 2023  report, the latest update in an annual series going back many, many years. (I remember its early days – this is the 15th edition – when Mercer’s Dr David Knox introduced it, and I’m delighted to find that David is now a Member of the Order of Australia.)

Of course national pension systems differ in many ways, so there’s no objective way to rank them: there’s no system that’s demonstrably superior to all others in every possible way. But it’s possible to devise very sensible subjective systems, and try to assign ranks, or points, to each system along a number of comparative dimensions. And that, I believe, has been achieved, not only this year, but throughout the history of the report, by David and his team.

Before giving you the results, let me tell you what the overall analysis looks at.

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The big picture is to look at three aspects of each system (and there are now 47 pension system examined). There are more than 50 dimensions along which each system is assessed, a score being assigned in each case, and then the dimensions are combined into three main aspects, so that each system has a score for each aspect. Finally, the aspects are combined into an overall score for each system by giving them weights. And, depending on the overall scores, the systems are given a letter grade: A (there’s no A+), B+, B, C+, C, D or E.

The first main aspect is Adequacy.

They consider many angles for adequacy: what is the base (or safety-net) level of income, and what is the net replacement rate (meaning, how much of working income is replaced as retirement income) at income levels ranging from 50% to 150% of the national average wage. In turn, this requires assessment of not only any “universal” plan that is part of a national system, but also various aspects of plan design, portability, preservation, taxation support, and so on, for workplace plans and for personal saving, and even the proportion of retirement assets invested in growth-seeking investments. Yes, you can already see that some subjective judgement goes into these assessments.

The second main aspect is Sustainability.

Are current plans financially viable, that us, likely to be able to continue unchanged through time? What is the ratio of retirees to contributors (the old age dependency ratio), how is this projected to change in the absence of changes to the retirement age, to what extent are benefits funded in advance and accumulated (as opposed to pay-as-you-go syetems where incoming contributions are immediately paid out to retirees)? What is the level of government debt, and how much government spending goes toward retirement? And even: how are ESG (environmental, social and governance) perspectives taken into account in investment policies? Again, the difficulty of assigning measures and relative importance to these factors is obvious.

The third main aspect is Integrity.

This focuses mainly on funded plans that are normally found in the private sector. What are legislative requirements (rather than best practice) on governance, protection from risk and member communication? The Worldwide Governance Indicators published by the World Bank are used as part of the inputs. And, to estimate whether pension costs are reasonable, proxy measures related to industry structure and scale are used. Yet again, difficult and inexact and somewhat arbitrary measures.

Throughout, international data are used, followed up by answers to a questionnaire designed to achieve relatively objective understandings of each system’s operations and outcomes. When a country has multiple systems, either the most common system or an average of all systems is used.

Are you exhausted at this point? Yes, there’s a colossal amount of work involved – for which we should be grateful. The fact that this attempt is being made to place very approximate numbers on almost unmeasurable aspects is, to my mind, extremely praiseworthy. Of course newspapers publish headline reports on the main findings; but I thought you’d be interested to go a bit deeper so as to have some idea of what tough going it all is.

The report actually takes the very helpful step of explaining each of the sub-indices and calculations involved, over several pages. This is helpful in two ways. One is for the reader, to help you understand many of the details and how the numbers are obtained and injected into the calculations. The other, by essentially getting you into the heads of the designers of these sub-indices, undoubtedly helps build credibility: you see the issues and how they’re being dealt with, and – yes – you approve. In fact, you are even shown the score for each system for each indicator in each sub-index, and also the weights given to each indicator to come up with the system’s score for that sub-index. You can’t ask for more disclosure than that.

The final steps, after all of this, are actually simple and straightforward.

The Adequacy, Sustainability and Integrity sub-indices (each of which is designed to have a maximum score of 100) are weighted 40%, 35% and 25% to come up with an overall score (which, of course, then also has a maximum value of 100). My way to interpret these overall scores is to say: that’s the degree of perfection that the system scores.

And then the letter grade. The A grade means greater than 80 (so, in my interpretation, less than perfect, but more than 80% there); B+ is 75-80; B is 65-75; C+ is 60-65; C is 50-60; D is 35-50; and E is less than 35.

The report describes the A grade as “a first-class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity.” B+ and B are described as “a system that has a sound structure, with many good features but has some areas for improvement that differentiate it from an A-grade system.”  C+ and C are described as “a system that has some good features but also has major risks and/or shortcomings that should be addressed; without these improvements, its efficacy and/or long-term sustainability can be questioned.” D is described as “a system that has some desirable features but also has major weaknesses and/or omissions that need to be addressed; without these improvements, its efficacy and sustainability are in doubt.” And E is described as “a poor system that may be in the early stages of development or nonexistent.” I’m glad to see that no system (at any rate, this year) has an E rating.

In an appendix the report shows the overall score awarded to each system since the reports started in 2009, if you want to look for trends.

Yes, an outstanding piece of work.

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Added observations before the results.

I’ve already said that there’s some subjectivity in creating the indicators or questions used in each assessment. But then each indicator is scored objectively using the available data. If there’s anyone whose judgement I trust in making those subjective calls, it’s David, given his enormous knowledge of what’s available.

Another nice consequence of making these assessments is that it then becomes possible to see where and how each retirement system can be improved, and so the report contains recommendations for those improvements. But that’s too much to go into here. If you’d like to take a look at the whole report, you can download it from both the Mercer and CFA Institute websites (and I included a link to the Mercer website at the start).

This year’s feature chapter is on the growing impact of artificial intelligence on pension systems and their members.

And finally … I love the fact that the report has clearly been assembled by mathematicians, because, even though some of the numbers are no more than intelligent guesswork, when you combine them they inevitably result in decimals, and the authors are unable to resist the temptation of showing the first decimal place in the results, though clearly that degree of precision is unjustified. OK, confession: I would have done exactly the same thing! And in the report the authors note that they are not willing to say that, if two systems are within 2-3 points of each other, one is definitely better than the other. But if the difference is at least 5 points, then yes, there really is superiority.

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Ta-da! The results!

The winner is … Drumroll … The Netherlands! With 85.0 points overall, and greater than 80 points for each of the three sub-indices.

The runner-up is … Drumroll … Iceland! With 83.5 points overall, and at least 80 points for each of the three sub-indices.

In third place … Drumroll … Denmark! With 81.3 points overall, and greater than 80 points for two of the three sub-indices.

Honorable mention … Drumroll … Israel! With 80.8 points, and greater than 80 points for two of the three sub-indices.

The systems in Australia, Finland and Singapore got B+ grades. And a B grade was awarded to the systems in Norway, Sweden, UK, Switzerland, Canada, Ireland, Chile, Uruguay, Belgium, New Zealand, Portugal and Germany.

For the other 28 pension systems, check pages 9-12 of the report.

Some other results interested me.

The highest score for the Adequacy sub-index was achieved by Portugal, with 86.7. The lowest was South Korea, with 39.0.

The highest score for the Sustainability sub-index was achieved by Iceland, with 83.8. The lowest was Austria, with 22.6.

The highest score for the Integrity sub-index was achieved by Finland, with 90.9. The lowest was The Phillipines, with 25.7.

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Takeaway

A wealth of information is contained in the annual Global Pension Index report, with each of 47 pension systems rated on multiple aspects, and the system in The Netherlands coming out on top in 2023.

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