Australia’s pension system design is being held back from achieving a top A-rating in the Mercer CFA Institute Global Pension Index by a lack of focus on retirement income as its primary purpose.

The Australian system ranked seventh overall and scored 77.6 out of a possible 100 – up slightly from a score of 76.7 per cent last year – but that was in part due to the increase in superannuation guarantee (SG) contributions to 12 per cent and upgraded economic growth forecasts.

Australia’s system was graded B+ overall, alongside Sweden, Chile, Finland and Norway, but behind Israel, Singapore, Denmark, Iceland, and the Netherlands in top spot. The best pension system in the world scored 7.8 percentage points better than Australia’s.

The index, a joint publication of Mercer, CFA Institute and Monash University, says the Australian system has “a sound structure, with many good features, but has some areas for improvement that differentiate it from an A-grade system”.

The Australian system was graded A for both sustainability and integrity, but only B for adequacy. The report said the Australian system could be improved by a greater focus on retirement as its primary purpose and by changes to the assets test on the Age Pension to increase the net replacement rate for average-income earners.

It also suggested improvements could be made by raising household savings and reducing debt; and by introducing a government superannuation contribution to primary carers of young children.

While the accumulation phase of the Australian system is often held up as a global exemplar of defined contribution system design, its decumulation phase continues to have some shortcomings. The Retirement Income Covenant, introduced more than three years ago, is designed to shift funds’ attention to developing retirement income strategies, but there is one element of the decumulation system design that not even the RIC can fox.

In an article in the October 2025 print edition of Retirement Magazine, to be published this month, former Mercer senior partner and national leader for research and policy David Knox says the Australian system lacks any compulsion when it comes to retirement income, a glaring omission that puts the Australian system out of step with many of its global counterparts.

Knox, a lead author of the MCGP Index for 16 years up to and including last year, writes that the Australian system has “the potential to deliver adequate and sustainable retirement incomes, together with the means-tested Age Pension to millions of Australian retirees for decades to come”.

“But the system is not yet delivering that outcome,” he says.

Knox notes that the primary purpose of superannuation is “the provision of income during the retirement years”.

“It is not there to build a nest egg or for estate planning. It is to provide money for retirees to spend during their later years. The retirement phase can work much better than it is,” he says.

Knox says the global comparison with the Australian system is “stark”.

“We have no [retirement income] requirements at all,” he says.

“Australian retirees can take all their superannuation money out at retirement and spend it immediately, pay off debt, give it away (perhaps operating as the Bank of Mum and Dad) or invest it elsewhere.

“Alternatively, they can leave it in their superannuation accumulation account, where it will be subject to a higher tax rate than in a tax-exempt pension account, but with no drawdown or income requirements.”

The 2025 MCGP Index sets out eight principles it says achieve a balance between acting in the best interests of private pension plan participants and acting in the broader national interest, with the number one being “retirement first”.

“The primary purpose of a pension fund is to provide retirement income to the fund’s participants and their dependents” so they can retirement with dignity, it says.

“This principle must remain as the fundamental priority in all investment decisions. This primary purpose does not mean the investment approach must be conservative. As the OECD noted: “Countries should ensure that their investment regulations are not constraining equity investments in a way that could reduce risk-adjusted returns.”

Tim Jenkins, 2025 MCGP Index lead author and Mercer partner, says pension systems with no or limited investment restrictions or government directions tend to perform better in the index.

“This suggests that instead of imposing mandates, governments can focus on making investment options attractive, promoting transparency and sound governance, and fostering collaboration with the private sector to support transparency and sound governance, and fostering collaboration with the private sector to support sustainable retirement systems and economic growth,” Jenkins says.