Australia's pension system is ranked third globally

As the government undertakes its review of the Australian retirement income system, a new report has ranked Australia’s pension system third globally.

Receiving a grade of B+, Australia ranks behind only the Netherlands and Denmark in the 2019 Melbourne Mercer Global Pension Index. According to the Index, the B+ denotes a system that “has a sound structure, with many good features”, with some areas for improvement.

The Index assesses pension systems according to three key indicators: adequacy, sustainability, and integrity.

Under the ‘adequacy’ banner are factors including benefits, savings, system design, and tax support. Meanwhile, ‘sustainability’ takes into account the likes of demography, contributors, total assets, and pension coverage; and ‘integrity’ focuses on factors including regulation, governance, protection, and operating costs.

Receiving an overall Index score of 75.3, the Australian system was awarded a score of 70.3 for adequacy, 73.5 for sustainability, and 85.7 – or an A – for integrity.

The report outlined a number of measures which could boost the Australian system’s score:

• Moderating the asset test on the means-tested age pension to increase the net replacement rate for average income earners
• Raising the level of household saving and reducing the level of household debt
• Introducing a requirement that part of the retirement benefit must be taken as an income stream
• Increasing the labour force participation rate at older ages as life expectancies rise
• Introducing a mechanism to increase the pension age as life expectancy continues to increase

A number of these measures may be addressed by the government’s review of the retirement income system.

The review is looking into the three pillars of the existing retirement income system: the Age Pension, compulsory superannuation, and voluntary savings. The review will cover the current system and how it will perform in the future as Australians live longer and the population ages.

The release of the Index follows research from Challenger earlier this year that found Australia’s super system is, for the most part, delivering on its intended goal of providing income in retirement to substitute or supplement the age pension.

According to Challenger, there’s now $800 billion in the super accounts of members aged over 65. This figure represents over 28 percent of total assets in the super system.

The average balance per member in retirement is $305,000 for those in not-for-profit funds, like Qantas Super, compared to an average balance of $255,000 for members in retail super funds. The average balance for Qantas Super members aged 65 and above is $390,000.