The UK pension system has benefitted from reforms such as the introduction of NEST to rise up the Allianz Global Investors Pension Sustainability Index (PSI) from 12th in 2011 to tenth in 2014.
This is the first time the UK has been in the top ten since the index assumed its current format in 2009.
Andreas Hilka, head of pensions Europe at Allianz Global Investors, says: “With the introduction of NEST, a simple yet sophisticated auto-enrolment scheme, the UK took an important step towards enlarging the share of people saving for their retirement. Further reform is clearly on the agenda, as the overhaul of the annuities market and the decision to cap auto-enrolment charges show.
“The greater financial freedom announced in the recent Budget, removing the tax incentives nudging retirees towards purchasing an annuity may also act as a catalyst for a more efficient pension system. By allowing greater choice, retirees can choose from a far wider range of income generating products to suit their circumstances and preferences – a change to be welcomed. That said, it will be important to ensure that savers have access to all the information, tools and advice they need to mitigate against them falling into economic hardship at the end of their lives, ensuring that these newly empowered investors are also educated investors.”
Australia takes the top spot in the latest PSI rankings, with its two-tiered system of lean public and highly developed funded pensions putting the country under the least pressure to reform. Australia’s success is followed in order by Sweden, New Zealand, Norway and the Netherlands.
The western European countries benefit from their comprehensive pension systems based on strong, funded pillars. Sweden and Norway benefited from their comparatively solid public finance situation, with Norway’s high legal retirement age and moderate aging demographic also helping the country to a high ranking.
PSI 2014: The Top Ten
1. Australia
2. Sweden
3. New Zealand
4. Norway
5. Netherlands
6. Demark
7. Switzerland
8. United States
9. Latvia
10. United Kingdom
The 2014 Index found the pension systems of Thailand, Brazil and Japan were the least sustainable in the long run, though for different reasons. Thailand has an extremely low retirement age, only sporadic coverage, and is aging rapidly. Brazil is also aging quickly, and its pension system has a high replacement rate which, combined with early retirement options, will be unsustainable in the long run. Japan comes in at the low end of the rankings because of its very old population and very high sovereign debt level, making its pension system too expensive and the need for reform an ongoing concern.
Greece, which ranked worst in the 2011 PSI, was able to improve due to the drastic reforms stipulated by the International Monetary Fund (IMF) and European Central Bank (ECB) austerity packages, succeeding on cutting back its pension expenditure. Nevertheless, the high debt level and an old-age dependency ratio well above the European average remain a challenge for the Greek system.
More broadly, pensions continue to weigh on Europe’s public finances. In 2010, the burden of Europe’s pension systems on public finances was already 11.3 per cent of GDP. In Western Europe, the burden of this expenditure is expected to amount to 12.8 per cent of GDP by 2050. Similar future liabilities can be observed in Japan and Brazil.
