How Do Pensions Work In Other Countries?
In this blog we compare the way the UK pensions system works with those of other countries around the world.
We look at the countries which are judged to have a better pension schemes than the UK and those where pensions are apparently worse.
An annual report compiled by Mercer compares pensions systems around the world, giving each country an overall score based on 40 indicators. The Melbourne Mercer Global Pension Index showed the UK to be ranked 9th of the major countries studied with a score of 65.4, behind Denmark, Netherlands, Australia, Switzerland, Sweden, Canada, Singapore and Chile. Denmark had the highest score of 80.2 and is widely recognised as being the world leader in pensions.
We’ll go through all of the 18 countries ranked in this blog post to see how the UK shapes up.
Countries ranked above the UK
Denmark – Score of 80.2
The pensions system in Denmark sees most Danish employees having to contribute to a DC pension scheme and they have the options of a collective earnings-related ATP or what is called an “individual special pension.” Annuities must be purchased by those in an ATP scheme.
The rest of the Danish savers have the option of taking a lump sum or else an annuity, yet 85% of Danes do end up purchasing an annuity, which generally have better pay-out rates than those in the UK.
It’s also interesting to note that around 80% of Denmark’s pensions investments is invested in bonds, with the system hardly exposed to shares.
There is also a basic public pension scheme in place for Danes.
Netherlands – Score of 78.3
It’ll be little surprise to most people in the pensions industry to learn that Holland has the second best pensions system in the world, given that the UK government has modelled its most recent pensions reforms on the land of tulips.
Most Dutch employees belong to quasi-mandatory earnings-related occupational pension schemes which are linked to industrial agreements. Instead of pension income being based on final salary, the pay-outs are based on average lifetime earnings.
The fact that almost all Dutch savers are in the same type of schemes allows for some pretty useful economies of scale benefits, which see the charges imposed on savers much lower than they are here in the UK. This allows Dutch savers to enjoy as much as 50% more from the savings than their counterparts in Britain.
It’s not all plain sailing for the Dutch, however, with Dutch youth movements strongly opposing some aspects of the pension system given that 55 out of 415 Dutch Collective Defined Contributions funds actually reduced the amounts paid out.
Australia – Score of 77.8
The pensions scene down under is on its way up. Australia saw its score in Mercer’s index rise again and the UK has already adopted one of Australia’s main pension policies – that of auto enrolment. Auto enrolment sees all Australian workers that meet some basic criteria automatically enrolled onto their company pension.
The amount of contributions paid is a lot higher down under than it currently is in the UK, with contributions rising last year to 12% - split between individuals, employers and the government.
Unlike world leader Denmark, Australia’s asset allocation of their pension funds sees only 20% at most invested in bonds, while the market is heavily linked to shares with 45% of funds invested in shares. Cash and other types of assets make up the rest.
Few Australians take out an annuity, with the rate of those taking one out less than 10%.
Switzerland – Score of 73.9
When money’s involved, it’s only a matter of time before people look to Switzerland’s model and it’s no different with pensions.
Annuities are incredibly popular in Switzerland. Savers do have unlimited access to their private pension savings, yet around 80% of Defined Contribution assets are still used to purchase annuities.
Considering Switzerland has the 2nd-highest life expectancy for men in the world and the 3rd-highest for women, you would think that the annuity rates offered would be very low indeed, yet the annuity rates are regulated by the government and are widely considered generous.
Sweden – Score of 72.6
Sweden radically reformed its system in the year before the new millennium and they’re still partying like its 1999. The reforms see the country’s pension system highly respected and an earnings-related system with notional accounts seems to work well.
An income-tested top-up options also guarantees a minimum pension from the government.
Canada – Score of 67.9
Most employees in Canada have access to a workplace pension scheme, which is always managed by trustees and which is fairly low cost. The majority of these workplace schemes also offer defined benefits.
The offering from the Canadian government consists of a flat-rate offered to all, which is supported by a means-tested income supplement.
Singapore – Score of 66.5
The Central Provident Fund in Singapore covers all residents and residents are permitted to withdraw a limited amount of their fund before retirement to cover medical expenses or purchase of property. There must, however, be a minimum amount left in the pot in order to purchase a lifetime income stream.
Like Switzerland, Singapore has high life expectancy so many residents choose to take out a lifetime annuity.
Chile – Score of 66.4
Having narrowly been beaten by Singapore, Chile comes in at 8th spot on the list after an improvement in its score by 3.1 from the previous year.
Chile’s high position is widely attributed to its sophisticated annuity market and Chileans wishing to access their DC pension pots have to opt for a lifetime annuity, index-linked annuity or a phased withdrawal. The good annuity market sees a high number annuitizing each year with the rate approximately 70%.
There are mandatory private schemes, which are defined contribution plans, based on individual accounts and employee contributions and it works well because of the small number of pension administration contributions.
The country also has means-tested social assistance.
Countries ranked below the UK
Germany – Score of 58.5
Just below the UK score of 65.4 is Germany at 58.5. The German system is based on an earnings-related pay-as-you-go system which works with pension points which are earned over the course of an individual’s career. Supplementary pensions are also offered by some of the country’s major employers.
There is also a fairly generous means-tested state pension for low income pensioners.
USA – Score of 58.2
US savers very very rarely purchase an annuity, with takeup at less than 2%. Instead, savers make the most of the social security system which pays out based on lifetime earnings adjusted to current prices. Although the payouts aren’t great, most Americans have private plans as well.
Private pensions are voluntary and can be used to top up retirement income and these pensions can be corporate or personal. A means-tested top-up benefit is also offered.
Poland – Score of 57.9
Like Sweden, Poland reformed its system in 1999. Its new system applies to people born after 1968 and is made up with a minimum pension and an earnings-related system with notional accounts.
Voluntary company pension plans and individual pension plans also make up a large part of retirement income.
France – Score of 53.5
The French pensions system is next with a public pension paid out based on earnings.
There are compulsory occupational pensions as well, with two quite different schemes in place. There is one scheme for blue collar workers and another for white collar workers.
Despite the French government wanting to raise the state pension age from 65 to 67 by 2018, millions have taken to the streets to protest the rise. It would be costly for any political party to push the rise through, but it would be costly to the public purse if the pensionable age remains at 65 for much longer.
Brazil – Score of 52.8
A pay-as-you-go social security system is the focus of the pension system in Brazil with lower income earners receiving higher replacement rates.
On top of that, the country’s richest can sign up for an individual pension plan or, if they’re lucky, have one offered by their employer. Brazil doesn’t have a minimum access age, which means that retirement funds aren’t always used solely for retirement purposes.
Mexico – Score of 50.1
The Mexican government provides a minimum pension, while there are also mandatory private sector pension plans.
Household saving is still very low, however, and that is an issue that must be tackled sooner rather than later. There is also no requirement to take private pension funds as a steady income stream – again, something which the Mexican government is expected to look at.
China – Score of 47.1
In a country as large as China, it’s little wonder that there are several different systems which make up the Chinese pensions scene.
The country has a system for urban-dwellers in employment, one for urban-dwellers not in employment and a rural plan. The rural plan is relatively new and not fully developed at this stage.
The main urban system provides a basic pension which is made up of individuals’ contributions and a pooled account of contributions from employers. There also exist “enterprise annuities” which are supplementary plans that some of the biggest employers provide.
The Chinese government is also planning radical changes to the retirement age given that it currently stands at 53, much lower than the ever-increasing life expectancy. It’s expected that it will do this with three gradual adjustments to the retirement age in the coming years.
Japan – Score of 44.4
Japan’s retirement income situation is really quite simple with a flat-rate basic pension, an earnings-related pension and supplementary pension plans which are entirely voluntary.
Its lower score compared to the UK can partly be explained by the quite low minimum pension for lower earners and the major need to increase the retirement age.
South Korea – Score of 43.8
Like Japan, South Korea has a fairly modest basic state pension offering as well as a public earnings-related pension scheme. The earnings-related scheme is based on each individual’s earnings as well as being partly based on the earnings of the insured population as a whole.
India – Score of 43.3
Employers play a major role in India’s pension system with the main forms of retirement income coming from and defined contribution employee provident fund and voluntary employer managed funds. On top of that, India also has an earnings-related employee pension scheme.
There is currently no minimum level of support for the country’s poorest members of society and by adding such support, India could expect to improve its score over the coming years.
Indonesia – Score of 42.0
Indonesia, the lowest-ranked of all the countries analysed by Mercer’s, offers its civil servants an earnings-related pension. Private sector workers, meanwhile, are put into mandatory defined benefits plans, while there are also voluntary defined benefit or defined contribution plans for all other Malaysian savers.
Indonesia is also in the process of implementing a National Social Security System which should greatly improve its score with Mercer’s over the coming years.
And then there’s us, the UK – Score of 65.4 (9th place)
Here in the UK, we have a flat-rate basic state pension, which can be accessed at age 65 and which depends on how many years National Insurance contributions were paid. To receive the full amount, UK pensioners need to have paid at least 30 qualifying years of National Insurance contributions.
Auto enrolment is currently being brought in and will majorly shake up the UK pensions scene. It requires employers to supply a pension to all workers over the age of 22 and under 65 who earn over a specified amount which increases each year. The contributions are lower initially, but will rise to 8% of salary by 2018, with employees having the opportunity to opt out although they must firstly be enrolled before doing so.
Other reforms are also being passed before the next election and these include an increase over time of the private pension age and state pension age (rising to 67 by 2028), the promise of free guidance to all retirees, a scrapping of the need for DC savers to buy an annuity as well as several other reforms designed to give savers greater control over how they spend their pension pots.
For retirement advice to help you make the most of a pension in the UK, you can vivist our Retirement Advice page for info and details.
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