Increased Scrutiny Leads to Increased Transparency

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November/December 2014

Increased Scrutiny Leads to Increased Transparency of Retirement Systems Globally

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Denmark remains atop the winner’s podium of retirement savings systems around the world with an overall score of 82.4, according to the 2014 Melbourne Mercer Global Pension Index (MMGPI). The primary reasons that Denmark has retained the top spot are that it is a well-funded pension system with good coverage and a high level of assets and contributions, it provides adequate benefits, and it is a private pension system with developed regulations. Following close behind in the rankings are Australia, in the second spot, and the Netherlands.

The MMGPI again found that there is no perfect system that can be applied universally around the world, but there are many common features that can be shared for better outcomes. The MMGPI now covers 25 countries and close to 60% of the world’s population, growing from 11 countries in 2009. It measures more than 40 indicators under three sub-indices: Adequacy, Sustainability, and Integrity.

The index looks objectively at both the publicly funded and private components of a system, as well as at personal assets and savings outside the pension system. Its findings are published by the Australian Centre for Financial Studies (ACFS) in conjunction with Mercer and is funded by the Victorian State Government.

Many countries around the world are grappling with the social and economic effects of aging populations, and global comparisons can lead to lessons for government, industry, and academia as they debate how best to provide for an aging population. Average scores within the MMGPI have increased over time, suggesting that pension reform around the world is having a positive effect. The average score for the 14 countries studied in 2010 was 61.7, compared to 64.3 for those same countries in 2014.


Beyond the rankings, the 2014 MMGPI looked at the importance of trust and transparency in a retirement income system. In many countries, the tides of accountability for ensuring financial security in retirement are shifting from state and employer to individuals. This trend will continue as life expectancy continues to increase and many governments reduce the per capita expenditure on their aged population. This shift means communication to members has never been more important or come under more scrutiny from members, regulators, employers, consumer groups, politicians, and the media.

Ensuring transparency and the trust of individuals is becoming increasingly important. If you lose community trust in a pension system, you jeopardize the effectiveness of the system.

One of the most fundamental changes in pension systems around the world in recent years has been the ongoing shift from employer-sponsored defined benefit (DB) schemes to defined contribution (DC) arrangements. In a DC retirement savings system, individuals carry the risks and responsibilities for decisions relating to investments, contribution levels, and the ultimate benefit format. Consequently, governments and plan sponsors understand the importance of transparent communication to members in order to increase their knowledge and appreciation of their funds’ operations and good governance.

In some countries, the shift from DB to DC has been, or is being, met with a transformation of industries.Take, for example, Australia, where the superannuation industry has transformed from something of a cottage industry 20 years ago to becoming the investment powerhouse of the Australian economy. Many countries are on the cusp or in the middle of a similar experience and could lean on such experiences to improve their understanding of the need for increased trust and transparency and how they can adapt efficiently and cost-effectively.


An increasing need for individuals to have a greater understanding about their retirement savings and investments will require greater transparency from all pension plans. The provision of relevant and timely information to members is necessary to improving members’ understanding of the pension system. Increased, and valuable, information can also lead to a stronger emotional connection as members realistically consider their future financial needs. Several tools can be provided by pension plans to help members using a range of technologies, as well as lessons from psychology and behavioral finance.

When discussing and implementing increased transparency, it is critical to distinguish between certain types of information provided to members — they are not all the same. For example, some information provided in the plan’s annual report or the member’s personal statement is factual, such as the plan’s assets, the past investment performance, the member’s current balance, past contributions, etc. On the other hand, benefit projections are not factual — they are projections or estimates of the future. Such projections can be very valuable to the member but it must be noted that they rely on many assumptions about the future, so members should not take them as accurate predictions — there is considerable uncertainty, and a range of possible outcomes exists. However, this difficulty is not a reason to avoid using them in member communications. One approach is to link the development of benefit projections with the availability of web-based calculators, on which members can vary the inputs. We need to learn from examples from around the world to develop the best approach in expressing these uncertainties and the associated risks.


The OECD good design principle suggests that plan members should have “free and ready access to comparative information about costs and performance of different providers.”1 Although having a standardized format showing items such as fees and investment returns (including some allowance for risk) would be desirable, there is considerable debate about the most appropriate way to present this information, particularly to members who have limited financial understanding.


An additional element of members’ trust in the pension system is the question of what happens when there is a failure. Unfortunately, failures will occur; some may be relatively minor, such as an error in a member’s statement, whereas others may be very significant events, including a major fraud, theft, mismanagement of funds, or inappropriate financial advice. The community’s confidence in the pension system would be threatened by such events.

Whatever the actual event, it is critical that members know they will receive reimbursement should their accrued pension benefits be diminished through an illegal activity. Such an outcome is likely to require the intervention of a separate government agency or the regulator but it should also improve the members’ trust in the overall pension system.


The involvement of a strong regulator in the private pension system is also a prerequisite for ongoing community confidence. Pension regulators have a critical role to play not only in regulating individual pension plans but also in ensuring that the government, policymakers, and the media receive relevant information about the state of the pension industry. Such information includes the pension coverage of the workforce, the levels of contributions paid and benefits received, the value of assets, and the asset allocation across the industry, as well as some commentary about matters relating to costs, investment performance, and governance.


1. OECD. The OECD Roadmap for the Good Design of Defined Contribution Pension Plans, June 2012.


For more information and to see the complete 2014 Melbourne Mercer Global Pension Index rankings, visit



David Knox, PhD (Melbourne)
Senior Partner, Retirement
+61 3 9623 5464

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