How can Australia improve its performance on the global retirement stage?

Two major reports have assessed Australia’s rank on the global superannuation stage and what the country can do to improve. 

Australia’s compulsory superannuation system was established in 1992 by the Hawke government and is now $3.4 trillion in size, with the superannuation guarantee set to reach 12 per cent by 2025.

While it is globally recognised as one of the leading systems and viewed as a model for other nations, where does it officially stand in the ranking and what can be done to improve on it?

Australia’s ranking

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According to the Global Retirement Index (GRI) from Natixis Investment Managers, Australia sits at seventh place, which is down two spots from fifth last year. This came despite achieving a higher overall score of 78 per cent compared to 75 per cent in 2022. 

The GRI rankings, created in collaboration with CoreData Research, take into account four subindices to evaluate retirement environments across the globe: finances in retirement, material wellbeing, health and quality of life.

This is the nation’s ninth consecutive year in the top 10 for retirement security, driven by its high ranking of third in the world for finances in retirement and ninth for the health subindices.

However, Natixis IM, said the downgrade this year was caused by falls in the inflation and interest rates category as a result of macro-economic forces. Rates in Australia have risen by 4 percentage points since May 2022. 

Australia fell from first place to 20th this year in the inflation category of the Natixis IM report, alongside a decrease from 11th to 20th in interest rates. 

Secondly, the 2023 Mercer CFA Institute Global Pension Index ranked Australia fifth out of 47 retirement systems. This was up by one spot from 2022. 

It scored Australia a B+ grade, behind the Netherlands, Iceland, Israel and Denmark that received an A grade. 

Systems with a B+ grade were classed as those systems that have a system with a sound structure and many good features, but fall short of a “first-class and robust retirement income system that delivers good benefits, is sustainable, and has a high level of integrity” of the top-ranked countries.

Australia scored highly for its integrity – regulation, governance, protection, operating costs and communication – but dropped down for its adequacy that covers benefits, system design, savings, government support, home ownership and growth assets.

On the other hand, the Netherlands for example, was praised for comprising a flat-rate public pension and quasi-mandatory earnings-related occupational pension schemes linked to industrial agreements. 

Iceland’s system comprised of a basic state pension and a pension supplement (both of which are means-tested according to different rules), mandatory occupational private pension schemes with contributions from employees and employers and voluntary personal pensions. 

What can be improved?

As to what Australia can do to achieve an A grade, Mercer said Australia lost points for having no requirement that a portion of super savings be taken as an income stream. 

This is despite measures in the Retirement Income Covenant urging super funds to formulate a retirement income strategy to improve the outcome for their members in retirement.

Mercer listed four things that could be done to raise the country’s rating for next year’s report. These were as follows:

• Moderating the assets test on the means-tested age pension to increase the net replacement rate for average income earners.
• Introducing a requirement that part of the retirement benefit be taken as an income stream in most circumstances.
• Introducing a government superannuation contribution to primary carers of young children.
• Introducing a requirement to show benefit projections on members’ annual statements. 

Dr David Knox, senior partner at Mercer, said: “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. 

“But we still don’t compel Australians to take some of their super as an income stream. Retirees in A-grade systems receive regular income in retirement and are therefore encouraged to spend knowing that their income will never run out. This is not yet the mindset in Australia, where we know that many retirees are underspending.”

Louise Watson, country head of Australia and New Zealand at Natixis IM, added she is concerned about the country’s high retirement age (67) compared to other nations across the globe. 

“This really shows how important it is for us to make our investments work as hard as possible while we are employed and well into retirement,” Watson observed.

Regulatory impact

Mercer also welcomed Treasury measures to clarify an objective of super and pointed out the World Economic Forum already states a retirement system should provide a ‘safety net’ pension for all, improve ease of access to well-managed, cost-effective retirement plans and support initiatives to increase contribution rates. 

The proposed objective of super for Australia stated: “The objective of superannuation is to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”. 

Natixis IM praised the regulation introduced to the super system in the form of heat maps and the APRA annual performance test under Your Future, Your Super as well as older measures such as compulsory contributions. 

It said the success of recent measures would be a benchmark for other countries as well as Australia’s system copes with the greater move to decumulation away from accumulation as the system and its members age.

“As the intertwined changes around performance requirements and fund consolidation occur over the next few years, we will see additional proof points around what does or does not make such a system successful,” it said.

“Australia has exhibited a clear template for other nations to make progress on improving retirement security, but only time will tell if recent changes lead to further improvements or have unintended negative consequences. 

“The Australian system’s experience over the coming years will demonstrate multiple pathways for other countries to implement a similar pension scheme while tailoring specific elements to fit their unique savings and investing environments.”