This month’s release of the Melbourne Mercer Global Pension Index confirmed our status as a strong performer with our superannuation system – albeit a third place behind Denmark and Sweden when scored on the basis of adequacy, sustainability and integrity is unlikely to prompt an outpouring of patriotic pride.

Financial security in retirement is a critical challenge for both individuals and countries as the social and economic impacts of ageing populations is confronted.

Australia scored 75.7 on the Mercer Global Pension index, just behind Sweden on 78.9 and Denmark 82.9. By comparison the US system scored 59 and the UK 64.8.

The Mercer Global Pension Index scored 18 different countries savings systems across a broad range of 40 indicators. It also proposed a range of ways that the Australian system could be improved. What is interesting here is how the suggested improvements to the Australian system would be received by super fund members.

The key recommendations are:

• A requirement that part of the retirement benefit must be taken as an income stream
• Increase the labour force participation rate among older workers
• Introduce a mechanism to increase the pension age as life expectancy increases
• Increase the minimum access age so that retirement benefits are not available more than five years from the age pension eligibility age

There is no doubt these recommendations are all worthy of consideration and debate from a public policy perspective. But it does perhaps raise the issue of confidence in the superannuation system of seemingly constant change.

The global financial crisis reminded everyone in a market-linked superannuation fund of investment market risks. But an issue that is increasingly showing up in investor sentiment surveys is that of legislative risk – the risk that the government will continue to tinker with the rules as the superannuation asset base continues to grow.

The other area of this year’s Mercer Global Pension Index that is bound to provoke further debate is its analysis of the asset allocation levels in the various country pension schemes.

When the countries in the index are ranked by the percentage of funds invested in growth assets this is where Australia is clearly on top of the table.
The Australian system has between 71%-80% in growth assets according to the Mercer study. Canada, Switzerland, UK and the US are down in the 51%-60% band while the Netherlands has 21%-30% in growth assets.

Now the differences can partly be explained because of the variations in the types of pension systems – defined benefit versus defined contribution for example – but Australia’s high exposure to growth meant its index score was adjusted down because in the view of the research team “such an allocation provides a high level of exposure to volatile assets ...a broader range of assets including bonds and credit is likely to provide a better long- term outcome for members”.

There has been considerable discussion since the GFC about whether the Australian default funds invest too much in growth assets like shares. Certainly this report is likely to add fuel to that debate.

The asset allocation decision is arguably the preeminent decision any investor – either within or outside super – makes. The Mercer Global Pension Index provides an authoritative benchmark for investors to consider when reviewing their super funds asset allocation.

Whether you have your own self-managed super fund or are a member of a large public offer fund it is also something that is within your power to change.



By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
13th August 2012