“Pension provision has become a delicate balancing act”

Allianz International Pensions has created the Retirement Income Adequacy (RIA) Indicator, which ranks 49 countries according to their potential to provide an adequate retirement income for future retirees. It analyzes a number of income sources (state, occupational, private pension, financial assets, real estate) as well as spendings relevant in old age, such as out-of-pocket expenses for health care.


Pension systems with mature funded and balanced state, occupational and private pillars rank at the top, meaning that it is highly likely such systems can provide an adequate retirement income. Top 3 are the Netherlands, followed by Denmark and Norway. Germany is ranked in the middle of Western European countries and in the top thirteen overall. At the bottom of the list are developing countries without comprehensive pension systems: Indonesia and India score lowest, Malaysia a bit higher. A couple of countries in between are characterized by just one strong pillar (state, occupational or private pension), Austria is an example.


Rethink retirement income streams


“We already know that diversification of retirement assets is crucial for savers”, says Dr. Renate Finke, Senior Economist at Allianz International Pensions and author of the study. “Thus the RIA approach not only focuses on one factor of the retirement income, let’s say the state pension, but provides an integrated view across all income streams. Why? Because pension provision has become a delicate balancing act between keeping the public pensions systems financially sustainable (compare: Pension Sustainability Index) and ensuring a certain level of retirement income for future generations.”


Governments have undertaken reforms that will generally leave people with lower retirement income relative to pre-retirement income compared with today’s pensioners. In the future, pensioners’ income mix will differ: the previously dominant state pensions are giving way to funded elements; the emphasis on defined benefit plans is shifting towards defined contribution schemes and family support structures are moving towards more formalized public ones.


But the question remains the same: How much retirement income is enough? “There is no ‘one-size-fits-all’ answer”, explains Finke. “Some countries define adequacy as a social standard, such as the poverty line or as a percentage of pre-retirement income, in others it implies maintaining a certain standard of living.”

Dr. Renate Finke, Senior Economist at Allianz International Pensions and author of the study

Netherlands head list, Germany facing challenges

The top 3 countries are followed by Switzerland, Japan, the US and Austria. Sweden follows close behind. The Netherlands, Denmark, Switzerland, the US and Sweden score highly for their funded pillars and score at a high to moderate level for their public pension. They additionally show strengths in other factors, namely non-pension wealth, low spending needs for health and good progress with respect to an extended working life.

Germany is in the upper third in the RIA ranking. It has started to set up retirement income provision on a wider basis, however, there still needs to be a bigger focus on funded pensions. To mention an example: Employees have the legal right to save a part of their salary in the occupational pension scheme (“Entgeltumwandlung”), which not all of them make use of. Today, 56.4 percent of all employees are covered by company pension plans.

Indonesia and India find themselves at the other end of the scale, mainly because they have a low coverage of their working age population, an underdeveloped funded pillar and additionally face high out of pocket health expenditures, which weigh heavily on the elderly’s budgets. Malaysia scores higher because it can build on a mandatory funded pillar. The downside is that workers there can draw on this pension pot early meaning future retirees might run out of money.

One of the problems confronting many countries can be seen in the case of Austria. While it receives a high score for its first pillar, its funded pillar is underdeveloped and people still have low retirement ages and spend a long time in retirement. “This is a situation where the flipside of the adequacy coin is affected – sustainability”, says Finke. “Countries, like Austria, with just one strong pillar may not be financially sustainable in the longer term.” Austria still also has a significant gap of three years between the actual and official age of retirement. Pension reforms might be put on the agenda and other income sources have to be strengthened. “An integrated system becomes increasingly important where the different elements are designed according to the role they need to play in the overall retirement income mix.”

Finke: “We are aware that a comparison between extremely diverse systems has shortcomings but the RIA index does not claim to give an absolute judgement on respective systems. However, we believe the ranking can help foster discussions about how to generate an adequate income and educate about policy measures in place in various countries.”

Retirement Income Adequacy (RIA) RankingDownload(Republication royalty free if source is named: allianz.com)

Petra Brandes
Allianz SE
Phone: +49 89 3800-18797
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