The House of Commons Library (HoCL) has just published (9 April 2021) a briefing paper entitled: ‘Pensions: international comparisons’. It is described as “A look at how UK pensions compare with those in other countries. The note compares the UK state pension with similar systems in Europe and goes on to look more broadly at the structural differences in the sources of pensioner income across economically advanced countries.”
From the paper’s conclusions:
- the UK provides a lower level of pension than most other advanced economies relative to average earnings
- the UK devotes a smaller percentage of its GDP to state pensions and pensioner benefits than most other advanced economies
- income from occupational and personal pensions is a relatively important source of pensioner income in the UK, in contrast to many other countries where state provision (financed either through social insurance contributions or general taxation) is dominant.
The HoCL provides the following additional detail on international comparisons and benchmarks.
Proportion of state support:
From the latest OECD data on the composition of pensioner incomes among member states:
- ’the UK is near the lower end of the scale in terms of the proportion of pensioner income (excluding earnings) coming from ‘first-pillar’ state pensions (see explanation below) and benefits (around half)
- in the UK a substantial proportion (just over a third) comes from occupational pensions and the remainder from personal saving
- by contrast, in 16 OECD countries out of 36, public transfers provide over nine-tenths of pensioner income (excluding earnings).
(‘First pillar’ is one of the three ‘retirement income pillars’ in a World Bank classification. It consists of state pensions and pensioner benefits associated with statutory programmes financed through taxation or social insurance contributions. The second pillar consists of occupational pensions associated with defined benefit or defined contribution workplace schemes. The third pillar consists of personal pensions associated with voluntary saving by individuals.)
Levels of state expenditure:
The HoCL argues that the simplest way to quantify how much each country contributes in aggregate to first-pillar pension provision is to look at overall expenditure as a percentage of gross domestic product (GDP).
The OECD collects standardised data on each member country’s social expenditure on state pensions and pensioner benefits. In six countries, social expenditure on old-age pensions in 2017 accounted for over 10 per cent of GDP. In the UK the figure is 4.7 per cent. On percentage of GDP devoted to spend on the state pension, the UK is ranked 28th out of 35 OECD countries.
The HoCL paper refers to an alternative basis for international comparison, namely pension replacement rates. These express a person’s pension income as a percentage of previous earnings from work. This illustrates the effectiveness of each country’s pension system at sustaining workers’ living standards as they enter retirement.
The analysis shows that the UK has an overall net replacement rate of 28.4% from mandatory pensions for an average earner. This well below the OECD average of 58.6% and the EU average of 63.5%.
When voluntary provision (mainly workplace pensions) is included as well, the UK’s net replacement rate rises to 61.0%. But this is still below the OECD average of 65.4% and the EU average of 67.0%.
The Mercer CFA Institute Global Pension Index (formerly the Melbourne Mercer Global Pension Index) is an annual cross-country comparison of pension systems produced in collaboration with the Monash Centre for Financial Studies, Australia. Its 2020 report scores and ranks the pension systems of 39 countries, based on more than 50 indicators under the sub-indices of adequacy, sustainability and integrity.
According to the HoCL paper, the UK system has achieved a ‘C+’ grade in each of the last five editions. (Grades run from A to D, with 14 countries graded higher than the UK.) This C+ grade denotes “a system that has some good features, but also has major risks and/or shortcomings that should be addressed. Without these improvements, its efficacy and/or long-term sustainability can be questioned.”
The Mercer report indicates that the UK’s overall score is mainly affected by its below-average performance in the ‘adequacy’ sub-index. The Mercer report’s authors recommend a range of measures to boost the UK’s score, for example supporting pension adequacy through among other things raising the minimum pension for low-income pensioners.
The OECD uses a common set of conventions to measure incomes consistently across countries to determine the proportion of the pensioner population in each country living in relative income poverty (defined as having incomes less than 50% of the median).
In the UK the proportion of pensioners in poverty was 14.9% in 2018, the 13th highest (i.e. worst) level for pensioner poverty out of the 33 OECD countries for which data is available for 2016-2018.
The HoCL explains that the OECD’s figures for the UK differ from the Department for Work and Pension’s (DWP) own measure of households in relative low income, published in the annual Households Below Average Income (HBAI) publication. According to HBAI, the percentage of pensioners in the UK living in households with income below 50% of the median equivalised net household income was 9.8% in 2018/19 and had increased to 11.1% in 2019/20.
The paper also notes that discussions of relative low income in the UK usually focus on the proportion of people living below 60% of the median income after housing costs – 15.9% of pensioners were living below this low income benchmark in 2018/19 and had increased to 18.1% in 2019/20.
I recall articles from Business for Scotland written 2-3 years ago providing analyses of the UK state pension compared to that provided in other advanced countries. One article recalled the No campaign scaremongering and stoking individual concerns in 2014 about pensions in the event of Scotland’s independence. Its author (Claire Elliot) urged the need for positive case-making and reassuring commitments on pensions when IndyRef 2 comes round.
But the author also emphasised the importance of spelling out the deficiencies, the unfairness and the risks associated with the pension status quo in the UK. This HoCL briefing usefully adds to the evidence base not least as it’s from a source that can only be regarded as authoritative and objective – even by Unionists!