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Australia’s retirement income system on the cusp of ‘first class’

By Jessica Penny
3 minute read

A lack of retirement income policy holds Australia back from earning an A grade, according to recent findings.

Australia’s retirement income system has received a B+ grade in the 15th annual Mercer CFA Institute Global Pension Index (MCGPI), ranking fifth out of the 47 countries studied.

Earning an overall score of 77.3 this year, Australia jumped up one spot from sixth place in 2022.

Across measures of adequacy, sustainability, and integrity, Australia received scores of 70.7, 78.4, and 86.1, respectively.

The Netherlands had the highest overall index value of 85.0, closely followed by Iceland (83.5), and Denmark (81.3). Argentina had the lowest index value (42.3), earning a D grade.

Notably, Australia was one place closer to being deemed to have a “first-class” retirement income system, with MCGPI 2023’s four frontrunners all receiving an A.

Mercer senior partner and lead author David Knox said that Australia is being held back from achieving an A grade because there is no requirement that a portion of super savings be taken as an income stream.

“From the Retirement Income Review to the Retirement Income Covenant, and the work to define an objective of superannuation, there have been some excellent developments in the retirement income space,” he explained.

“But we still don’t compel Australians to take some of their super as an income stream.”

According to Mr Knox, A grade systems are characterised by retirees that receive regular income in retirement and are therefore encouraged to spend knowing that their income won’t run out.

“This is not yet the mindset in Australia, where we know that many retirees are underspending.”

“If we are to be among the best retirement income systems in the world and better support ageing Australians to live a life of dignity and confidence, we must introduce a compulsory income stream for all retirees with a reasonable super balance,” Dr Knox added.

In light of the study’s findings, CFA Institute president and chief executive officer Margaret Franklin highlighted that the average age of populations around the world continues to rise in many markets, particularly more mature markets.

“Inflation and rising interest rates have created a new market dynamic that poses significant challenges to pension plans. We also see continued fracturing as it relates to globalisation. These are just a few of the increasingly complex challenges that pension funds face that impact retirees in significant ways,” Ms Franklin continued.

“More and more often, individuals will have an increasingly important role to play as it relates to their own retirement.”

Falling birth rates were also noted to have placed pressure on several economies and pension systems over the longer term, negatively affecting the sustainability scores for countries like Italy and Spain.

Several Asian systems, however, including mainland China, Korea, Singapore, and Japan, have undertaken reform to improve their scores in the last five years, according to this year's findings.