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UK suffers pensions rating dip

27 October 2015

The UK has been marked down in a key global pensions review due to pension freedoms.

The 2015 Melbourne Mercer Global Pension (MMGP) Index has marked the UK down from its 2014 score, pointing in particular to the UK government’s decision to make annuities optional rather than compulsory.

‘Pension freedoms’, the raft of reforms announced by UK Chancellor George Osborne, has already elicited a strong response from pensioners. Earlier this month, figures published by the Financial Conduct Authority showed that just 11,000 annuities had been bought in the UK thus far in 2015 – a drop of almost 90%.

But if pensioners have voted with their feet, the opening up of pensions has cost the UK 2.6 percentage points on its MMGP Index value. The organisation said in its report that the primary reason for the fall in points was “the removal of any requirement for retirees to purchase an annuity”.

The annual report is co-produced by Mercer, a financial consultancy, and the Australian Centre for Financial Studies. Australia’s pension system is highly respected worldwide and the country took third place in the 2015 Mercer rankings.

The report was published just a fortnight after the closure of a pensions consultation conducted by the UK government. The consultation looked into how to incentivise more individuals to take responsibility for pension saving. Its results are due to be published on 25 November.

Category shifts

The Melbourne Mercer report made a number of policy recommendations. Aside of returning to a compulsory annuity system, Britain could also improve its index value by raising the minimum pension threshold for low-income pensioners, increasing the coverage of employees in occupational pension schemes, raising household savings levels, and increasing labour force participation rates for senior citizens.

The index allocates scores using more than forty indicators that fall into three categories: adequacy, sustainability and integrity. The overall index value takes the average of these three. Britain’s score actually rose by 0.1% in the integrity category, but dropped 1.1% in the sustainability category.

By far its biggest drop, however, came in adequacy, where it lost 5.6%. Adequacy carries the largest weighting of the three categories, accounting for 40% of the final score. Its leading indicators include such elements as benefits, savings and tax support. The UK was ranked 14th globally for adequacy.

Another 2015 report on global pensions was published by the French investment bank Natixis. It also put Australia in third place worldwide, in large part because it has introduced mandatory retirement saving schemes. But the Natixis report placed the UK in 22nd position worldwide, down four spots from its 2014 ranking, with an overall score of 79%. The UK performed especially badly in the report’s ‘finances in retirement’ category, scoring just 53%.

In both cases, pension freedoms have clearly added risk to the outlook for UK pensions. Those planning for retirement will need to tread carefully.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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