The pension age in Australia should be automatically linked to life expectancy to help the system cope with large demographic changes in society.

David Knox, senior partner at Mercer, made the suggestion after Australia fell from second to third place in the Melbourne Mercer Global Pension Index.

He said some lessons could be taken from the Netherlands – who moved up into second position – such as linking pension to life expectancy and bringing more of the self-employed into the superannuation system.

“For example in the Netherlands the pension age is adjusted every five years according to life expectancy,” Knox said. “That’s a very useful mechanism and takes the politics out of it, and it improves the visibility of the system.”

Other suggestions included:

  • Introducing a requirement that part of the retirement benefit must be taken as an income stream;
  • Increasing the labour force participation rate at older ages; and
  • Increasing the minimum access age to receive benefits from private pension plans so that access to retirement benefits is restricted to no more than five years before the age pension eligibility age

Australia’s overall score in the Index remained strong, however it has been slower than many countries at improving the sustainability of the system, specifically in terms of increasing workforce participation of older workers and reducing government debt.

Although Australia was ranked as having the most adequate pension system (grade B+) its overall score decreased from 79.9 in 2014 to 79.6 in 2015, moving it away from the elusive ‘A’ grade. Denmark and the Netherlands are the only countries to have achieved an ‘A’ grade in the Index’s seven-year history.

“While the Australian retirement income system remains amongst the world’s best, we are not the best and improvement will be influenced by the legislative and regulatory environment,” Knox said.

“However, Australia is on the right track and has the potential to address key areas for improvement, particularly via recommendations from the Financial System Inquiry and increasing the super guarantee to 12 per cent.”