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The Actuary The magazine of the Institute & Faculty of Actuaries

UK pension system retains sixth place ranking

The static ranking masks improvements in the UK's overall index score which have resulted from increases (relative to pay) in people's projected pensions, improved population coverage of pension schemes and increased savings rates.

According to the 2011 Melbourne Mercer Global Pension Index, however, further reform is still required to ensure that the UK can withstand the pressures of its ageing population and ensure sufficient retirement savings for its population.

The report outlines that many of the world's retirement systems are under significant stress with even the world's most advanced systems requiring ongoing reform to ensure they're robust enough to support a rapidly ageing population. The index also highlights that currently there is no perfect national retirement income system. No country received an A grade, but six countries received a B (sound structure with many good features but room for improvement) including the UK. Ten countries received either a C (major risks or shortcomings) or a D (major weaknesses and omissions). The index also provides an insight into how countries are grappling with the economic and social challenges if an ageing population.

Senior partner at Mercer, and author of the report, Dr David Knox, said: "Given the current economic situation, the risk of governments not being able to financially support their ageing population is becoming more of a reality. Significant pension reform needs to be made now. The best pension systems adopt a multi-pillar approach to spread these long tem risks between governments, employers and individuals."

He continued: "Such an approach is also particularly relevant in periods of economic uncertainty such as we now face. Each country has to consider its own social, economic, political, cultural and historical circumstances, but despite the differences in the history and development of each country's system there are some common challenges around the world."

Glyn Bradley, an actuary at Mercer's UK business, explained: "The index recognises each country's strengths and weaknesses. The UK is amongst the leading countries in certain area, with high marks for the integrity of our system, but falling behind on adequacy and sustainability."

According to the report, the UK's index value rose from 63.7 in 2010 to 66.0 in 2011. The UK's position has improved due to developments in three key areas. Firstly, according to the Economist Intelligence Unit, the net household saving rate for the UK rose from 0.5% to 2.7% in response to a more uncertain job market. Secondly, the OECD has changed the way it calculates pension scheme coverage and, as a result, the percentage of people in the UK with pension provision has changed from 59.1% of the employed workforce to an estimated 58.2% of the working age population. The change in definition encompasses more people and provides a more appropriate measure of the numbers with access to pension schemes, dramatically increasing the UK's score relative to other countries. Finally, according to the OECD, the target net pension replacement rate for a median income earner in the UK increased from 44.3% to 48.0% of their pre-retirement take-home pay, largely due to an expected greater than prices linked indexation of the basic state pension.

Mr Bradley continued: "The UK is making real progress in developing a solid, sustainable pensions system, but more needs to be done if we want to consider our system best in class. Reforms identified by the index that would improve the UK's position are raising the minimum pension workers on low incomes can expect to receive; increasing the number of employees in occupational pension schemes and raising the level of household savings."