China was the most improved performer in Mercer's 13th annual ranking of 43 retirement systems around the world, even if the latest gains left its retirement safety net well off the pace set by perennial leaders in northern Europe and a newcomer.
Iceland — one of four new countries included this year, along with Taiwan, the United Arab Emirates and Uruguay — debuted atop the ranking, with a score of 84.2. The Netherlands and Denmark, which have dueled for the top spot in recent years, came in second and third, respectively, with scores of 83.5 and 82. The U.S. fell one spot to 19th.
For China, a range of measures over the past year — which helped lift employees' replacement ratios, bolstered the country's second "enterprise annuity" pillar and its voluntary third pillar while gradually raising the official retirement age — boosted its overall score to 55.1 from 47.3, said Janet Li, Mercer's Hong Kong-based Asia wealth business leader.
In the ranking China moved up to the 28th place in 2021 from the 33rd in 2020.
China posted gains across all three subindexes Mercer and its new partner from last year, the CFA Institute, evaluate to determine each country's global pension index ranking.
For the adequacy subindex, which takes into things such as the benefits a retirement system offers, the level of government support and system design, accounting for 40% of a country's overall grade, China's score improved to 62.6 from 57.4.
For the sustainability subindex, touching on considerations such as the total assets in a system, government debt and the pace of economic growth, accounting for 35% of the total, China's score rose to 43.5 from 36.2.
And for what Mercer calls the integrity subindex, looking at aspects such as regulation, governance and operating costs of the system and accounting for 25% of a country's total tally, China's score rose to 59.4 from 46.7.
Ms. Li said the average index score for countries in Asia, at 52.2, lagged the global average of 61, suggesting the challenges the region faces from aging populations, longer life expectancies and declining birth rates.
The U.K. posted the year's second-biggest increase, rising to 71.6 from 64.9 in 2020. The U.K. ranked 9th in the 2021 index, up from the 15th spot a year earlier.
"The U.K. pensions system is in a much-improved position from last year," noted Tess Page, partner and trustee leader at Mercer.
"We have benefited from auto enrollment pushing up savings rates, as well as mostly helpful policy and regulatory changes," Ms. Page said.
However, many defined contribution plan participants in the U.K. still face a cliff edge at retirement. There are a number of actions that employers, trustees and the government could take to help improve the U.K. system and deliver better long-term retirement outcomes, Ms. Page said, adding "a great start would be further increasing auto-enrollment contributions and coverage — notably to better serve those who are self-employed."
"One real bright spot of opportunity ... is the U.K.'s leadership on managing pension scheme climate change risk," providing a path to sustainable investment returns, Ms. Page said.
So far it has been a little too much talk and not enough action. Many pension schemes do not know where to begin, but there are small changes that can be effective such as basic assessments to evaluate what actions will ensure most impact," she said.
Despite improving its retirement adequacy result to 61.4 in 2021 compared to 60.3 a year earlier, in the overall index, the U.S. retirement system fell to the 19th spot from 18th a year earlier.
Mercer said in a news release Tuesday that the U.S. could increase its score by raising the minimum pension for low-income retirees and by improving the vesting of benefits for all retirement plan participants. Another strategy would be to reduce pre-retirement leakage by limiting access to funds before retirement, Mercer said.
Meanwhile, the Mercer CFA Global Pension Index, in a news release, called for urgent reform to address a gender pension gap globally that has worsened since the onset of the coronavirus pandemic last year.
Paulina Pielichata contributed to this story.