The quality of pension systems available to workers varies greatly across the globe. The Netherlands has the best system, while the U.S. isn’t even close to the top, according to the latest Mercer CFA Institute Global Pension Index.
Four countries received an A grade: the Netherlands, Iceland, Denmark, and Israel.
The Index is sponsored by the CFA Institute and is published in collaboration with the Monash Centre for Financial Studies (MCFS) and global consultant Mercer. It compares retirement income systems across the globe with more than 50 indicators, covering a wide variety of pension policies and practices. The report also suggests ways that each system can be improved to provide more adequate retirement benefits.
Pensions are a unique and valuable type of retirement plan, in which an employer makes contributions to a pool of funds and invests it on the employee’s behalf, with the earnings on said investments generating income to the worker upon retirement. In the U.S., more and more employers in the private sector have switched from traditional pension plans to 401(k)s.
Here, we analyze the results of the latest index, released in October 2023, which ranks the pension systems of 47 pension systems.
Key Takeaways
- The Netherlands, Iceland, Denmark, and Israel have the best pension systems, according to the report.
- The U.S. ranks far from the top.
- Common challenges pension systems around the world need to address include increasing the average retirement age due to rising life expectancy, encouraging more savings, and limiting access to funds before retirement.
The Top 4 Pension Systems
The index compares retirement income systems and rates each based on its adequacy, sustainability, and integrity. The index value for each country is represented by a value between zero and 100, with higher values signifying more favorable pension systems.
The top four countries with the highest overall index grade were:
1. Netherlands
With an index value of 85.0, the Netherlands received the highest score for 2023.
Its retirement income system uses a flat-rate public pension and a semi-mandatory occupational pension linked to earnings and industrial agreements. Most of the Netherlands’ employees are members of these occupational plans, which are industry-wide defined-benefit plans. Earnings are based on a lifetime average.
The index found that the Netherlands’ overall index value could be improved by:
- Increasing household savings and reducing household debt
- Increasing workforce participation among older workers as life expectancy rises
2. Iceland
Iceland ranked second with an overall index value of 84.8 in 2023. Iceland’s retirement income system is comprised of a basic state pension with a supplement and private occupational pensions with compulsory employee and employer contributions, as well as voluntary personal pensions.
The index found that Iceland’s overall index value could be improved by:
- Lowering household debt and government debt as a percentage of GDP
- Introducing ways to protect pension interests of both parties during a divorce
Important
Worldwide, pension systems are under more pressure than ever before because of rising life expectancy, increased government debt, uncertain economic conditions, inflation risk, and a shift towards defined-contribution plans.
3. Denmark
Denmark came in third with an overall score of 81.3.
Denmark has a public basic pension scheme, a supplementary pension benefit tied to income, a fully-funded defined-contribution plan, and mandatory occupational schemes.
The index noted that Denmark’s score could be improved by:
- Increasing household savings and reducing household debt
- Introducing measures to protect the interests of both spouses in a divorce
- Increasing workforce participation among older workers as life expectancy rises
4. Israel
With an index value of 80.8, Israel also received an A grade for 2023.
Israel’s retirement income system is comprised of a universal state pension and private pensions with compulsory employee and employer contributions. In most cases, annuities are paid from the private pension system.
The index noted that Israel’s score could be improved by:
- Increasing the level of assets held in private pension arrangements, lowering the reliance on the public system
- Reducing the government debt as a percentage of GDP
- Introducing protection for members of private pension plans in the event of mismanagement or fraud
How the U.S. Scored
The U.S. had a score of 63.0 in 2023, ranking 22nd out of 47 pension systems. The U.S. retirement income system includes Social Security and has voluntary private pensions, which can be occupational or personal.
How All Countries Ranked
The following chart shows the 47 pension systems included in the index and how their pension systems scored and ranked in 2023:
| Grade | Country |
| A | Netherlands |
| A | Iceland |
| A | Denmark |
| A | Israel |
| B+ | Australia |
| B+ | Finland |
| B+ | Singapore |
| B | Norway |
| B | Sweden |
| B | UK |
| B | Switzerland |
| B | Canada |
| B | Ireland |
| B | Chile |
| B | Uruguay |
| B | Belgium |
| B | New Zealand |
| B | Portugal |
| B | Germany |
| C+ | Kazakhstan |
| C+ | Hong Kong SAR |
| C+ | USA |
| C+ | UAE |
| C+ | Croatia |
| C+ | France |
| C+ | Colombia |
| C+ | Spain |
| C | Saudi Arabia |
| C | Poland |
| C | Japan |
| C | Italy |
| C | Malaysia |
| C | Brazil |
| C | Peru |
| C | China (mainland) |
| C | Mexico |
| C | Botswana |
| C | South Africa |
| C | Taiwan |
| C | Austria |
| C | Indonesia |
| C | South Korea |
| D | Thailand |
| D | Turkey |
| D | India |
| D | Philippines |
| D | Argentina |
Index Scoring Explained
The Mercer CFA Institute Global Pension Index is calculated using the weighted average of three sub-indices. The adequacy sub-index was weighted 40%, the sustainability sub-index was weighted 35%, and the integrity sub-index was weighted 25%.
The average overall score was 63.0. The average sub-index scores for all 47 pension systems were 72.2 for integrity, 64.8 for adequacy, and 54.2 for sustainability, suggesting that sustainability is a bigger issue, on average, than adequacy and integrity.
This is what each sub-index takes into consideration:
Adequacy Sub-Index
The adequacy sub-index looks at how a country’s pension system benefits a range of income earners. Additionally, the adequacy measure considers the system’s efficacy, the country’s household savings rate, and the rate of homeownership.
Sustainability Sub-Index
The sustainability index considers factors that can affect whether a country’s retirement fund system will survive long-term. Indicators include the level of coverage of private pension plans, government debt, and economic growth.
Integrity Sub-Index
The integrity sub-index examines the communication, costs, governance, regulation, and protection of pension plans within each country. It also considers the quality of the country’s private sector pensions because, without them, the government becomes the only pension provider.
How Is a Pension Paid Out?
There are typically two ways a pension can be paid out. The first is a lump-sum payment, which distributes the assets in the account all at once. The other option is an annuity, which pays out the funds in periodic payments over time.
What’s Better, a Pension or a 401(k)?
It’s common to prefer a pension over a 401(k), because the pension provides retirement income in a preset, guaranteed way. This is because a pension is a defined-benefit plan, whereas a 401(k) is a defined-contribution plan.
Do Pensions Get Taxed?
Yes funds that you receive from your pension are taxed as regular income in your income tax bracket. This is the case regardless of the payout method: a lump-sum payment or periodic payments.
The Bottom Line
The Mercer CFA Institute Global Pension Index includes recommendations to improve each country’s retirement-income systems, acknowledging that no universal solution exists because each system has evolved from unique economic, social, cultural, political, and historical circumstances.
Common challenges in pension systems around the world include the need to increase the average retirement age to reflect increasing life expectancy, encourage more savings, and increase access to private pensions for the self-employed. According to the report, pension systems globally should also limit access to funds before retirement and improve transparency to improve participants’ understanding and confidence.
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