Pension disaster as UK falls outside top 10 pension sectors in the world

The report from Mercer CFA Institute Global Pension Index 2024, which benchmarked 48 countries worldwide, awarded the UK a B grade. This classification indicates a system with a sound structure and many positive features, but with room for improvement.

The downgrade reflects growing challenges faced by pension systems globally, including the impact of rising living costs and increased longevity.

These factors are putting pressure on retirement savings, requiring pension pots to stretch further than before.

The Netherlands retained its top spot in the global pension rankings, followed by Iceland and Denmark in second and third places respectively. All three countries received an A grade, highlighting the strength of their retirement income systems

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The Netherlands' system was praised for its strong regulations and guidance offered to participants regarding their pensions.

Meanwhile, the UK found itself grouped with countries such as France, Germany, Switzerland, Ireland, Canada, and Sweden in the B category.

David Knox, lead author of the report and a senior partner at Mercer, emphasised the need for collaborative action.

He said: "Now is the time for Governments, policymakers, the pension industry and employers to work together to ensure that older populations are treated with dignity and can maintain a lifestyle similar to what they experienced through their working years."

The UK's slip in rankings underscores the need for pension system reforms. Benoit Hudon, Mercer's UK president and chief executive, highlighted this urgency, stating: "Like most countries, the UK is facing a challenge to ensure people have saved enough for an adequate retirement."

He emphasised key areas for improvement, including expanding auto-enrolment, addressing the fragmented pension system, and supporting productive asset investment.

These reforms are crucial as retirement systems globally shift away from defined benefit (DB) plans towards defined contribution (DC) arrangements.

DB pensions promise a specific income in retirement, while DC schemes place the risk of the eventual retirement pot size on the individual saver.

This transition reflects the broader challenges faced by pension systems worldwide, as they adapt to changing economic landscapes and demographic shifts.

In response to these challenges, the UK Government launched a six-week consultation in October to explore expanding collective defined contribution (CDC) schemes.

These innovative pension arrangements pool employer and employee contributions into a single fund, potentially offering more predictable pension income based on collective investment performance

The consultation applies to England, Scotland, and Wales, with Northern Ireland expected to introduce corresponding legislation as pensions are a devolved matter there.

The UK Government plans to introduce legislation for CDC schemes in 2025, signalling a commitment to modernising the pension landscape.

This move aligns with the global trend towards more flexible pension models, as highlighted in the Mercer report. It represents a significant step in addressing the UK's pension system challenges and potentially improving its future global ranking.