Pension systems around the world: how the UK measures up
Pension schemes in most western countries are in crisis as governments are grappling with ageing populations and mounting levels of state debt. In the UK, people over the age of 65 now outnumber those of school age, and the average retirement lasts almost a quarter of a century. As a consequence, state pension ages are increasing around the world - in the UK, it will be raised to 66 by 2020, and to 67 by April 2028.
Also under pressure, most companies in Britain have ditched their generous final-salary pension schemes and replaced them with defined-contribution plans - thereby creating a two-tier workforce as many older workers remain on final salary plans. Unilever, the company behind Pot Noodles and Dove soap, and Shell have recently angered staff by cutting pension payouts.
Final-salary schemes typically guarantee a retirement income worth two-thirds of final pay after 40 years' service, while defined-contribution schemes (where contributions are usually set as a percentage of salary) are invested mainly in the stock and bond markets and currently amount to a pension worth just a fifth of final salary.
Despite receiving a slightly higher score last year, the UK remained in sixth place for the third year running in the annual Mercer survey, which compares retirement income schemes in 16 countries around the world. Experts at Mercer said the UK government should raise the minimum pension for those on low incomes and encourage households to save more generally. They did note that reforms underway such as auto enrollment into workplace pensions from October could make the UK a better place for pensions.
A similar scheme in New Zealand has seen the amount of workers saving for their pension more than double, with more than half of the country's working population now enrolled. The UK could see even higher figures as its auto-enrolment arrangements will cover all eligible workers, rather than only those who are changing jobs or just starting work, says the Association of British Insurers.
Maggie Craig, acting director of life, savings and protection at the ABI said: "Around half of workers are either not saving into a pension or not saving enough, so auto-enrolment will give many people the much needed nudge to save for their retirement and break the 'savings stalemate'. Whilst current financial pressures can mean building up a sufficient pension pot often gets put on the backburner, people should not ignore the opportunity to benefit from employer contributions and tax relief on their own contributions."
The UK is spending less on pensions than other countries - 6.7% of GDP (the OECD average is 8.4% and the EU average 9.1%). However at around 30%, the UK has one of the highest shares of public pension spending going to public sector workers, making it the fourth highest among the 27 countries in the OECD.
A look around the world reveals that...
Over 80 countries have some kind of social pension - Pensionwatch has a list and further information.
Unlike most continental European countries, the Netherlands has a large occupational pension system that takes the pressure off government budgets. The retirement system comprises a flat-rate public pension coupled with an earnings-related occupational pension. Over 90% of Dutch workers are covered by 64 industry-wide and 866 single-employer schemes, with over 90% of these schemes providing defined benefit pensions (which are on the retreat elsewhere), according to a 2007 study of 12 developed countries by James Capretta at the Washington-based Center for Strategic & International Studies.
After two decades of pension reform, Australia is now held up as a model for other countries. In 1985-86 the trade unions secured, with government support, a deal that all covered employers contribute 3% of total wages to a pension plan, called a "superannuation fund". By July 1991, some 75% of Australian workers were covered by this fund, affectionaly called Super. That contribution has since risen to 9% and there are discussions about taking it up to 11% or 12%. In 2003, co-contributions were introduced - matching payments from the government to superannuation accounts for those on middle and low incomes who make voluntary contributions.
Edward Whitehouse, pensions expert at the Paris-based Organisation for Economic Co-operation and Development, says: "Australia was in a similar position to the UK, with half of people in schemes and half not. Switzerland was too. In the 1980s the Swiss made it compulsory for the other half of employers to set up schemes or go to an insurance company to set one up, and again that was pretty quickly set up," he told Money Marketing.
Australia also has a means-tested state pension. Whitehouse says Britain could learn from Australia on means testing. "The way we have done it in the UK has not been great. We have a top-up, whereas the Australians do it in reverse. They pay the state pension to everyone apart from the richest slice of people. And that is a lot easier to test. In Australia the rich don't even bother claiming it. You don't save as much money as you do by giving a top-up to the lowest 30%, by affluence testing rather than poverty testing, but you still save a lot of money. So since we are moving towards this basic pension, why not have an even higher basic pension but take it away from the richest 25%."
The National Association of Pension Funds has described the UK's means-tested state pension (currently £102.15 a week) as the "worst in Europe" and is arguing for simpler rules. Find out more about the state pension on Directgov.
Japan, one of the world's oldest societies, has a flat-rate basic pension, the National Pension that provides minimal benefits. Except for the self-employed, all Japanese workers also have to join Employees' Pension Insurance, with a flat-rate element similar to the National Pension (based on employer and employee contributions) and an earnings-related benefit. Those employed by the government join Mutual Aid Associations, which mirror the EPI. Both tiers of the pension system are funded from a payroll tax, which is split evently between employees and employers. There are additional occupational retirement schemes, and a larger number of older people work than in other countries.
Meanwhile in Africa, less than 5% of people have a right to a pension. In many Asian countries, including India and China, that figure is between 5% and 25%.
India has a much more youthful population than western countries but the number of elderly people is steadily growing: by 2050, those aged 60 to 79 will make up more than a fifth of the population. All central and state government employees are covered under a pensions plan - but that captures only 12% of India's workforce. In 2004, the government introduced the New Pension Scheme, a defined contribution plan that is available to all citizens. And it has just unveiled a new pension and life insurance scheme that would benefit over 5 million of its unskilled and semi-skilled workers employed overseas.
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