Australia's retirement system receives first A-grade

Australia's retirement system has finally received an A-grade rating in the annual Marsh CFA Institute Global Pension Index after stagnating at the B+ level for the last five years.

The superannuation system received an upgrade this year thanks to an increase in Australia's net pension replacement rate at retirement, alongside the continued maturation of the super system. This includes the legislated objective of superannuation and a greater focus across the industry on retirement income and decumulation.

Australia scored 80.6 on the index, up from 77.6 on the prior year. It rated highly in the areas of sustainability at 80.6 and integrity at 86.8. Australia ranked sixth overall on the leaderboard, which was dominated by the Netherlands, Denmark and Iceland.

The study highlighted Australia's net replacement rate had materially increased due to the means testing in retirement for people purchasing qualifying lifetime income products. The impact of this metric on the overall index score was an increase of at least 2.9 points.

The report called on all governments from around the world to establish clear objectives for their pension systems to "engender confidence in the community and help to build trust in the system over the long-term."

It singled out Australia as a leading example in this, saying it has legislated an objective for its superannuation system as "to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way."

"Any future changes to superannuation legislation must be judged against this objective," the report read, adding that in Switzerland's federal constitution, the old-age pension "must be sufficient to cover basic living expenses adequately" and "must as a minimum be adjusted in line with price trends."

However, there are several areas where the retirement system can improve. This includes focusing on retirement income as the primary purpose of superannuation and moderating the assets test on the means-tested Age Pension to increase the net replacement rate for average-income earners taking on minimum government drawdown.

Marsh People and Investments' global defined benefit and defined contribution leader Christine Mahoney commented that on a broader scale, "pension systems are under real strain."

"Governments that clarify their pension objectives, strengthen funding, and build flexibility into retirement design will be far better positioned to deliver dignified, secure retirements for the generations ahead," she said.

This year, the United Arab Emirates, Oman, Panama and China also improved their performance.

Chinese received a C+ with an index value of 60.6, up from 56.7 year on year. This was due to an increase in the minimum pension as a proportion of wage, revised scoring approach for questions on requirements to take an annuity on retirement to better reflect the pillars in the system, and improvements to several integrity questions.