Aussie superannuation system falls in world rankings. Here’s why.

Australia’s superannuation system has dropped to fourth place in the annual Mercer CFA Institute Global Pension Index. It was edged off the podium by newcomer Israel, and trailed the Netherlands and Denmark in first and second places.

While Australia still earned a respectable ‘B’ on its report card, the economic fallout of COVID-19 has added new pressures to the system and made old ones worse, such as people living longer and the effect of low interest rates on investment strategies.

This year’s index compared 39 retirement income systems covering almost two-thirds of the world’s population, ranking each by letter grade and out of 100 for sustainability, integrity and adequacy factors.

What set the top three apart?

The Netherlands and Denmark both earned an ‘A’ grade, while Israel picked up a ‘B’ but had a higher overall score than Australia.

The report notes that neither the Netherlands nor Denmark allowed the withdrawal of super savings as coronavirus relief funds, unlike Australia’s temporary early release scheme which has paid out almost $35 billion in super since April this year.*

Additionally, the top three all had a national contribution rate of 12% or higher and offered universal state pensions. In comparison, Australia’s superannuation guarantee (SG) rate is 9.5%, while its Age Pension is not available to everyone and has means-tested payment rates.

How has COVID-19 impacted Australia’s retirement savings system?

With over a million Australians forced out of work due to the global health crisis, both employer and individual contributions to super accounts suffered.

On top of this, investment returns were weaker due to coronavirus-related share market volatility and record low interest rates.

How could Australia improve its ranking?

Australia’s worst score was 66.8 out of 100 for “adequacy”, highlighting this as a vital area for improvement. (In the index, adequacy refers to the benefits provided by the system – such as any government support – as well as the overall system design.) This result poses a key question: does our retirement system do enough for current and future retirees?

One course of action put forward in the accompanying Mercer press release is for the SG contribution rate to rise as planned to 12% by 2025. Currently, the Federal Government has not committed to the legislated changes.

First Super CEO Bill Watson believes securing an increase to the SG is essential.

”We already know that low paid workers, young people in insecure jobs, and women will bear the brunt of billions of dollars of lost retirement savings as a result of COVID-19,” he says, citing an August report from Mercer and industry peak body AIST.

“Any delay to the SG increase will only make it harder for members to rebuild their super.

“Not only will rebuilding balances take longer, it will require more voluntary contributions from members themselves on top of their employer contributions. For members who aren’t working because of the pandemic, or have reduced income, that’s a big ask.”

Need help or more information?

If you need help getting your super on track, or have any questions about your account, please contact our Member Services Team on 1300 360 988 or mail@firstsuper.com.au.

You can access more information about the Mercer CFA Institute Global Pension Index, or read the full report, by going to Mercer’s Global Pension Index webpage.

*Australian Prudential Regulation Authority (APRA) ‘COVID-19 Early Release Scheme – Issue 28’: https://www.apra.gov.au/covid-19-early-release-scheme-issue-28

Mercer press release ‘Global Pension Index uncovers impact of COVID-19 on future Australian pensions’.