21 October 2009

Dear Investor,

Australia’s superannuation system – one of the best in the world

Australia has emerged as one of the best ranking countries in a global measure of superannuation funds recently developed by the Mercer group for the Melbourne Centre for Financial Studies.

The top-ranking country was the Netherlands, with Australia second, edging out Sweden and Canada.

The Australian superannuation system is based on a compulsory levy of 9% of an employee’s wage or salary that has to be paid by the employer (on top of the employee’s wage or salary) to a superannuation fund of the employee’s choice. All superannuation funds that are available to the public have to be registered with the Australian Prudential Regulation Authority. The employee can make his or her own extra contributions to the superannuation fund, and these contributions can attract tax concessions.

Australia’s retirement income system was ranked second in a world-first global pension index that compares private and public pension systems from around the world. The overall index considers results from more than forty indicators which reflect certain features that are desirable in all retirement income systems. These characteristics have been grouped into three sub-indices: adequacy, sustainability and integrity. The study allotted the adequacy of a pension or superannuation system the highest weighting with 40 points, with sustainability accounting for 35 points and integrity 25 points.

The inaugural Melbourne Mercer Global Pension Index, produced by the Melbourne Centre for Financial Studies and Mercer, is a world first in comparing the retirement income systems of 11 countries.

The Netherlands obtained top ranking in the Index with a score of 76.1 out of a maximum of 100, followed by Australia (74.0), Sweden (73.5) and Canada (73.2).

"With an ageing population on the agenda as a critical issue for governments around the world, this index can provide lessons and better insights into how countries are grappling with the related economic and social issues", said Professor Deborah Ralston, Director of the Melbourne Centre for Financial Studies.

The report recommended that Australia’s system could be improved by:

  • increasing the level of mandatory contributions, preferably with some participation from employees;
  • requiring some part of the final benefit to be taken as an income stream, instead of a lump sum amount;
  • raising the labour force participation rate amongst older workers; and
  • continuing to review the pension age as life expectancy increases.

No country in the Index was classed as having an A-grade system (obtaining a score greater than 80). “The fact that no country achieved an A-Grade classification confirms that no one system is perfect or currently robust enough to withstand the growing challenges of supporting an ageing population”.

“The best arrangements for a particular country will depend upon its individual social, economic, political, cultural and historical context. However, Governments can learn lessons to help them better prepare for demographic change by looking at other retirement income systems,” Dr Knox, Mercer’s worldwide partner in retirement, risk and finance, said.

The countries with the lowest ranking retirement income systems were Japan with a score of 41.5, China (48.0) and Germany (48.2). While these countries don’t fall into the lowest grade E category, with a score below 35, the efficacy and sustainability of their systems will be in doubt if major weaknesses are not addressed.

The adequacy of benefits – or how much income is available to a retiree – was given the highest rating in the index. The Netherlands (80.5) and Canada (76.2) scored highest in this index due to the level of the minimum public pension, and a relatively high net replacement rate of income for median income earners. Australia was in fourth position in the adequacy sub-index with a score of 68.1. Japan had the lowest score at 39.2.

In the sustainability sub-index, participation in private pension plans and the level of pension assets (expressed as a % of GDP) were the two major factors. Sweden (75.2) and Australia (71.0) rated the highest on this sub-index.

The integrity sub-index was based on an assessment of four key areas – prudential regulation, governance, risk protection and communication of private pension provisions. The highest rating countries for the integrity sub-index were the Netherlands (88.2), Australia (87.8) and the UK (86.3).

The inaugural Melbourne Mercer Global Pension Index was a pilot study and it is hoped that it will be repeated annually and future studies will be expanded to include more countries. The report is expected to generate strong interest internationally, including with organisations such as the World Bank and the OECD.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

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