With an almost uncanny coincidence of timing, the respected Melbourne Mercer Global Pension Index was released within a day of the Federal Government’s response to the recommendations of the Financial System Inquiry, chaired by David Murray.
In terms of aiming to address Australia’s retirement income challenges, the two are indelibly linked.
As Smart Investing has discussed over the past week – see The super challenge of simplicity – the Government’s response to the Financial System Inquiry acknowledges that super is "fragmented, complex, costly and suffers from a lack of member engagement". Further, Government recognises the desirability of enshrining the purpose of super in law.
Meanwhile, the Global Pension Index provides an invaluable international benchmark of Australia’s retirement incomes together with practical suggestions about how to improve what is really the bottom-line: our money in retirement.
It is inevitable that some interest groups will have different reactions to the Government’s response to the Murray inquiry and to the suggestions of the pension index report.
Nevertheless, there can be little doubt that our super system will benefit from greater simplicity, a greater sense of purpose and, in turn, the implementation of more highly-practical steps to help achieve its goals.
Australia once again ranks third in the Global Pension Index out of 25 countries assessed – accounting for 60 per cent of the world’s population – in terms of the overall score for our retirement income system’s adequacy, sustainability and integrity.
The pension report, which is published by the Australian Centre for Financial Studies in conjunction with Mercer, underlines that while Australia’s system is world class, it is short of being the world’s best.
And our overall score slipped from 79.9 in 2014 to 79.6 in 2015, falling further behind, albeit by a seemingly? tiny percentage, in achieving the elusive "A" grade held by Denmark and the Netherlands. (An "A" grading comes with a score of 80.)
Significantly, Australia is ranked as having the world’s most adequate pension system.
Yet while Australia ranks extremely high on a global basis, the Financial System inquiry together with the Government’s response make clear that much work remains to be done.
As the commentary for the Global Pension Index emphasises, many of the world’s retirement income systems are grappling with the demographic shift of an ageing population with declining birth rates and "increasing and increasing" longevity.
And irrespective of each country’s social, political, historic and economic influences, the pension report stresses that many of their challenges in dealing with an ageing population are similar. These include encouraging people to extend their working lives, increasing the level of retirement funding and stopping the leakage of retirement savings before retirement.
Specifically in regard to improving Australia’s retirement incomes system, the pension report recommends that:
- Retirees should be compelled to take part of their retirement benefits as an income stream.
- The workforce participation rate of older workers is increased.
- The eligibility age for the Age pension increases as longevity increases. It would be a form of age indexation.
- The minimum age for access to superannuation is set at no more than five years before the age for access to the Age pension.
Another challenge is to encourage people to voluntarily save more for their retirement, thus aiming to reduce dependence on government pensions.
Although the pension index report appears to be aimed mainly at Government and the pension/retirement sectors, individuals saving for retirement may pick up some valuable pointers to, perhaps, discuss with their financial planners.
Over coming weeks, Smart Investing will look at what individuals can do to improve their retirement incomes, keeping in mind the recommendations of the Murray inquiry, the Government’s response and the Global Pension Index.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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