Executive Summary

The proprietary Allianz Pension Index (API) is designed to comprehensively analyze pension systems in terms of sustainability and adequacy. The index is based on three sub-indices and takes into account 30 parameters, which are rated on a scale of 1 to 7, with 1 being the best grade. The current edition covers 70 countries and is based on the latest available data as of March 2020.

The first sub-index of the API combines demographic change and the public financial situation (financial leeway), building the starting point for any pension reform: These structural conditions are more or less given - demographic trends change only over long periods of time and budget deficits are built up faster than they are reduced, thus limiting governments’ room to maneuver. Many emerging countries in Africa and Asia score rather well in this sub-index as their populations are still young, and public deficits and debts are rather low. On the other hand, many European countries such as Italy and Portugal are among the worst performers: old populations meet high debts.

The second sub-index of the API is the sustainability index, measuring how pension systems react to demographic change. The best performers here are Indonesia and Bulgaria, mainly thanks to increases in their retirement ages, coupled with disincentives for early retirement and the introduction of capital-funded elements into the first, pay-as-you-go pillar. At the bottom of the scale are Saudi Arabia, Sri Lanka and Malaysia, where the retirement ages are still 60 and below and neither early retirement deductions nor other demographic factors are in place.

The third sub-index of the API rates the adequacy of pension systems, questioning whether they provide an adequate standard of living in old age. Overall, the average score in the adequacy sub-index (3.7) is slightly better than that in the sustainability sub-index (4.0), a sign that most systems still put greater weight on the well-being of the current generation of pensioners than on that of the future generation of tax and social contribution payers. The countries leading the adequacy ranking have either still rather generous state pensions, like Austria and Italy, or strong capital-funded second and third pillars, like New Zealand and the Netherlands. At the bottom of the ranking are emerging countries such as Nigeria and Laos, which still lack a reliable public pension system at all.

Combining all three sub-indices, the overall results range between 2.9 for Sweden and Belgium and 5.4 for the Lebanon. The trade-off between the sustainability and the adequacy of a pension system still seems to hound most policymakers. There is no country that stands out in balancing this trade-off: Belgium and Sweden come the closest, with scores below 3 in both categories (See Figure 1).

What would the “ideal” pension system look like? Our analysis shows that for most countries, a better balanced system is within reach. In that respect, Covid-19 might serve as a door opener: The last months have taught the world that radical change and bold actions are possible. That’s a lesson policymakers could apply to reforming pension systems as well.

Michaela Grimm
Senior Economist
Arne Holzhausen
Head of Wealth, Insurance and Trend Research