PensionReforms' summary and comments
Regular PensionReforms' readers will have noticed that different countries organise their retirement income systems in very varied ways.  The mixes between public and private; between compulsory, incentivised and voluntary; between personal and workplace-based arrangements; between pension and lump sum; between Defined Benefit and Defined Contribution are literally infinite.

This variety makes cross-country comparisons extremely difficult.  In fact, PensionReforms thinks that international comparisons have very limited value and in many cases are actively misleading.  Even if the country summaries are accurate, putting just two of them side-by-side is difficult.  That does not seem to limit the multi-country comparisons available - see here for an example.  The Melbourne Mercer Global Pension Index (MMGPI) tries to solve this by grading the components of each country's overall arrangements and comparing the single figure outcomes.

"There is no perfect [retirement income] system that can be applied universally around the world.  Indeed, even comparing the diversity of retirement income systems is certain to be controversial as every system is different and has arisen from each country's particular economic, social, cultural, political and historical circumstances.  However there are certain features and characteristics of retirement income systems that are likely to lead to improved benefits, an increased likelihood of future sustainability of the system, and a greater level of confidence and trust within the community."

The report suggests that the MMGPI allows an "objective" comparison and looks at eleven countries to show how the index works.

"The results show that no country's system has an index value above 80, which we consider represents an A-grade retirement income system.  However, four countries have an index value between 65 and 80, which represents a B-grade system and - with some adjustments or improvements - these countries could be re-classified as A-grade systems."

The total score for a country under the Index derives from three major components:
§  40% for adequacy - with the following elements: benefit levels, savings, tax support, benefit design;
§  35% for sustainability - coverage, assets/funding, demography, government debt, labour force;
§ 25% for integrity - with a focus on the private sector system: prudential regulation, governance, risk protection, communication.

"The overall index value for each country represents the weighted average of the three sub-indices."  Countries that score an E (below 35 points) seemingly have:
"A poor system that may be in the early stages of development or a non-existent system."

According to the MMGPI, the eleven measured countries scored (from top to bottom):
Netherlands (76.1); Australia (74.0); Sweden (73.5); Canada (73.2); UK (63.9); US (59.8); Chile (59.6); Singapore (57.0); China (48.0); Germany (48.2) and Japan (41.5).

So, what elements do the MMGPI's authors rank in each of the three major components?

The report uses the World Bank's major reports as a framework and, effectively a model against which the individual country's systems are measured.  PensionReforms has difficulties with both the 1994 and 2005 versions of the World Bank's framework - see here and here.  So, for PensionReforms, this isn't a great start.  Anyway, the World Bank seems less confident now about the 'success' of its recommendations than it was in 1994 or 2005.  See here for self-reflection and here for an internal critique.  There is no indication in the MMGPI report of any such doubts.

Here are brief comments on each of the key measures:
. Adequacy: looks at what the World Bank now calls the "Level 0" minimum pension and net replacement rates over the whole retirement income system (public and private) for a median earner.  That favours countries with compulsory Tier 2 schemes and ignores the less than glowing report cards on compulsion (see here, here and here for examples).  PensionReforms has commented on the difficulties with net replacement projections here.  Tax breaks for saving score despite their possible ineffectiveness (see here and here for example).  A high earliest access age is also a 'positive'.  Compulsory annuities help as do high household saving rates, never mind the difficulties of their measurement - see here for an example that illustrates some of these.  Overall, a high score is given where countries force citizens to behave in particular ways; apparently, the less flexibility, the better.

. Sustainability: this allows for the country's demographic profile, State Pension Age, participation rates at older ages, the scale of private pension assets, the coverage of private pensions and the "sharing of mandatory contributions between employers and employees."  The level of government debt also plays a role.  Again, as with the "adequacy" measure, countries with compulsory Tier 2 schemes have a head start.

. Integrity: This focuses on the private retirement income system as "most countries are relying on the private system to play an increasingly important role in the provision of retirement income..." So the community has to have confidence that the private sector pension providers will deliver:
"This sub-index therefore considers the role of prudential regulation, the required governance, the level of protection available to members from a range of risks and the level of communication required to be provided to members."

PensionReforms has a number of major issues with the MMGPI.  Despite its stated intention to be as "objective as possible", it's no accident that the four countries all scoring more than 70 points have virtually compulsory private (or semi-private) retirement saving schemes.  The measurements that matter all focus extensively on the pension system (private and public) as though it were operating in a vacuum.  In fact, both public and private provision (of all kinds; not just in formal retirement income systems) are claims on tomorrow's economy.  That, more than any other single factor, will determine the sustainability of any pension commitment.  The MMGPI gives no weight to this crucial driver though does include some proxies, such as debt levels of countries.

There is also no weight given in the measures as to whether the current system is actually achieving its objectives.  The OECD's recent report on poverty amongst the over age 65s in the mid 2000s (reviewed here) highlights the proportions of the population over age 65 and not working who are in 'poverty'.  Of the eleven countries covered in the report, the OECD's report scored eight of them (the MMGPI ranking is in brackets):
-   Netherlands: 2%          (76.1)
-   Australia :   32%          (74.0)
-   Sweden:       7%          (73.5)
-   Canada:      10%          (73.2)
-   UK              12%          (63.9)
-   US             34%          (59.8)
-   Germany       9%          (48.2)
-   Japan          3%          (41.5)

Chile, Singapore and China were not measured in the OECD's report.

If the MMGPI offers a meaningful measure (and PensionReforms suggests that it does not), only the Netherlands and, possibly, Sweden might be happy about the combined measures.

Even if the MMGPI were a robust indication, it is unclear to PensionReforms what a country might do with the results.  Perhaps they may be of value to the political opposition in a country.  

In summary, PensionReforms thinks the MMGPI does not measure up to the authors' assessment that this is an "exciting" development in the international classification and measurement of pension systems. (File size 1.51 MB; 64 pp)  354