An elderly couple walks along a street in downtown Aeroeskoebing, Denmark
Denmark: the world's best pension system

What do Chile, Finland, Australia, Denmark and the Netherlands have in common?

The answer is that these countries are considered to have better pension systems than the UK.

A recent study comparing 25 international retirement systems placed the UK ninth — an improvement on previous years but still a long way behind Denmark, the world’s top-ranking system.

So what are the best and worst features of other global systems and what can the UK learn from them?

The best

The comprehensive survey, by Melbourne Mercer and the Australian Centre for Financial Studies, in 2014 found a handful of countries were pulling away from the pack in terms of the adequacy, sustainability and integrity of their pension systems.

Denmark was the only country out of 25 reviewed to get an “A” rating due to its well-funded pension system with good coverage, high level of assets and contributions.

The Danes were also noted for the provision of adequate benefits and a private pension system with developed regulations.

The survey, which examined pension systems covering 58 per cent of the world’s population, next ranked the Australians and the Dutch with a “B+”, which means their systems have a sound structure, with many good features but could improve.

The Australians are not only renowned for their sunny climate, but their compulsory “superannuation system”, which obliges employers to pay 9.5 per cent of an employee’s salary into a “super pot”.

One feature is the Age Pension, eligibility for which is subject to an asset test. In addition, employees can top up their “super pots” with voluntary contributions.

“Australia is clearly a country that does some things well,” says Joanne Segars, chief executive of the National Association of Pension Funds, which represents workplace pension schemes in the UK.

“There are things we can learn from Australia, for example, about defined contribution funds investment.”

The Dutch have a “flat-rate” public pension, which ranks the best globally in terms of generosity but is also strong on workplace pension provision.

One common feature is that these countries also scored highly on adequacy, which takes into account the base pension provided to the poor. On this measure, Denmark was rated more than 35 per cent and Australia about 28 per cent while both the UK and US were less than 20 per cent.

To be sustainable, Mercer considers a country should have at least 70 per cent of the working age population as members of private pension plans. Chile, Denmark, the Netherlands and Sweden have more than 75 per cent coverage whereas Australia is slightly less than 70 per cent.

In 2014, the UK was ranked second from bottom out of 25 countries for sustainability, only ahead of the US, but this was before new policy measures to improve company pension saving had come into effect.

UK strengths and weaknesses

The UK has taken big strides in recent years to improve the weak spots in its pensions system.

The state pension, which largely sees the poor relying on means-tested top ups to keep them above the poverty line in retirement, is to be replaced by a simpler state pension from 2016.


Proportion of working age population that should be enrolled in private pension plans in order to have a ‘sustainable’ system

Coverage has also been boosted significantly with more than 5m automatically enrolled into a workplace pension saving since 2012.

“One of the strengths of the UK system is automatic enrolment, which has been a huge success, with millions now enrolled in workplace pensions, but we have a long way to go with the policy,” adds Ms Segars.

Malcolm McLean, senior consultant with Barnett Waddingham, the consultants, believes one of the main advantages of the UK system is comparatively high levels of pension savings. The amount of money invested in private pension schemes “used to, and possibly still does, outweigh that across the whole of western Europe put together,” he says.

Challenges for the UK

David Knox, who wrote the Mercer report, says auto-enrolment will “certainly improve” the UK’s system as it will increase coverage and mean more contributions are being paid into the system for more people and thereby providing better benefits and improved sustainability.

However, he cautioned 2015 reforms, giving millions of pension savers full freedom to spend their pots as they wish, with no requirement to buy an annuity, may undermine efforts to improve adequacy.

“It is too early to say what the actual outcomes will be [from reforms in UK] but I would note that retirees need some flexibility in using their financial resources but retirees also need some longevity protection [which annuities do provide],” says Mr Knox.

“It is hoped that innovation will occur in the market place so that a broader range of suitable products are developed to meet the needs of retirees.”

Mr McLean believes the “ever increasing complexity” of the UK’s private pension system is a weakness.

“The UK could learn from reforms in other countries; the Swedes, for example, are scaling their retirement age to national longevity statistics, so that as a population no one is entitled to more than say 15 or 20 years of pension,” he adds.

“But not all things are changing for the better elsewhere and many countries fare much worse than us.”

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