News Analysis: So who has the world's best pension system?
There was a blizzard of dire warnings this week about a global pensions crisis, following the publication of a comprehensive report from the Organisation for Economic Co-operation and Development. But which country has got it most right on pensions and why? The answer may surprise you.
Despite the meltdown of its banks and domestic economy during the financial crisis and a 95% plunge in its stock market last year, the tiny Nordic nation of Iceland scores at the top, or near the top, of just about every pensions indicator the OECD has. Governments looking for answers to the savings crisis could learn many lessons from the way its system is put together.
For a start, the amount that Icelandic pension savers pay out in fees - to administrators, and to fund managers - is the lowest in the OECD at 0.2% of overall assets. The only country that bears comparison is Denmark - while savers in the UK pay out 1.2%, the Dutch 0.6%, and the Australians 1.1%.
The savings do not appear to have come at the cost of investment performance - though Icelandic schemes have also been lucky. According to figures from the Icelandic Pension Funds Association, the average scheme fell only 9.2% last year, as reported by Financial News last month. UK schemes dropped by an average 13%, while the big Swedish state pension funds all fell by more than 20%.
Iceland's citizens are also among the most thrifty savers in the OECD, stashing away 134% of their GDP in their pensions pots. Only the Dutch have more salted away, as a percentage of their country's economy.
As in the UK, the state pension forms a very small part of most people's retirement income - so the state is not being bankrupted by future pensions. Unlike the UK, membership of a workplace scheme is mandatory in Iceland.
This allows Icelandic pensions to be among the most generous of the OECD's 19 members. Iceland stands out as one of three countries where defined-benefit, or final-salary-based, plans are still the "cornerstone" of the savings system (the others being the Netherlands and Switzerland).
The average retirement income is 91% of final salary, compared to 33.5% in the UK and 40% in the US. Low income earners in Iceland actually recieve more in pensions than they did while working. Old-age poverty rates are at 5% - well below the 13% OECD average.
But there is also flexibility if schemes get into funding trouble. Icelandic schemes can reduce benefit payments to members by 5% if their funding level falls below 100%. Similar "pressure valves" exist in the Netherlands, and their absence in the UK is a key reason why companies now find final-salary plans unaffordable.
All this means Iceland has been able to use its pension wealth to shore up its economy. The government has called on schemes to invest all new monies in Icelandic assets, and, where schemes are in surplus, will allow savers to access their savings early to tide them through the tough times. The Government estimates Ikr75bn (€420m) will be available in this way.
--write to mcobley@efinancialnews.com
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