Despite pension reforms initiated as a condition of the austerity packages from the International Monetary Fund (IMF) and European Central Bank (ECB), the retirement age in Greece is still low and public replacement rates (the percentage of a worker’s pre-retirement income paid out by the pension system upon retirement) are too high.

 However, the greatest challenge facing the Greek pension system is that its old age dependency ratio – the ratio of elderly people to people of working age – is well above the European average.

The broader findings of the study, which are part of Allianz Global Investors’ Pension Sustainability Index, provide a unique insight into the need for pension reform in a number of countries based on various criteria applied consistently to each national system.

Brigitte Miksa, Head of International Pensions at AllianzGI, said: “While pension reform has been at the top of the political agenda across the globe for many years now, the progress of reform itself differs considerably from country to country, hence the need for an Index to show at a glance how countries compare. In this current study, Greece, India, China and Thailand show the greatest need for pension reform, although not due to a common cause.

“At the heart of Greece’s deteriorating ranking are acute sovereign debt, a quite serious aging problem and a pension system which remains generous despite recent reforms.

“In contrast, in India and China, the issue is that pension coverage remains extremely low and adequate measures have not yet been implemented to improve this. Thailand takes the fourth ranking as it has sporadic pension coverage and an extremely low retirement age (55 years of age).”

“At the other end of the table is Australia which has a two-tier system of lean public pensions and highly developed funded pensions which means it is best prepared with respect to potential burden for public finances, thus, it is under the least pressure to reform. Also in a strong position are Sweden, Denmark, New Zealand and the Netherlands. As with Australia, these three western European countries have comprehensive pension systems based on strong, funded pension provisions.”

Over the last decade, almost all western European countries have been trimming their public pension systems in an effort to make them more sustainable. However, a key driver of the Index results this year was the increase in sovereign debt as a result of the financial crisis with Greece and Ireland the most affected. In Ireland, as a result of the financial crisis and their bail out of the banks, sovereign debt has exploded in the last three years.

Another  example is France, where any gains made in terms of sustainability by stepping up pension reforms (which were hugely controversial and bitterly fought) were lost to a worsening of the sub-indicator ’public finances’ as a result of the increasing level of sovereign debt. The same was true in Spain. Conversely, Norway and Finland benefited from their comparatively solid public finances.

Renate Finke, Senior Economist at AllianzGI and author of the white paper, said: “The negative impact of the financial crisis on accumulated funds and national economies has tested the resolve of many governments. In central and eastern Europe, for instance, some countries decided to put their hand into the proverbial pension-fund cookie jar in response to the dramatic rise in debt to GDP ratios.

“Estonia, Hungary, Latvia, Lithuania, Poland and Romania reversed their pension financing model, diverting contributions from the privately funded second scheme back to the pay as you go public system  in order to strengthen their fiscal situation.

“While such measures have ameliorated fiscal problems in the short-term, they have depleted pension resources and affected long-term sustainability, hence countries in Central and Eastern Europe do not rank as well this year as they did in previous Indices.”

In Asia, comprehensive pension systems remain the exception rather than the rule and increasing the coverage of the pension system is still a challenge. The rankings of Asian countries in the Index have not changed significantly compared to earlier studies as they escaped the worse of the financial crisis and have experienced only minor increases in their debt to GDP ratio.

Andreas Hilka, Head of Pensions Europe at AllianzGI, said: “Though it’s not a patent remedy, the rise of (effective) retirement age seems to be a decisive factor for improving the financial sustainability of pension systems in many countries. Sustainable public pensions only go hand in hand with strong funded private pensions components. The ongoing shift towards from defined benefit to defined contribution schemes increases the vulnerability of retirement incomes to financial downturns. A comprehensive consideration of risk has become a must for funded pensions.”

Brigitte Miksa said: “The study focuses on the sustainability of national first pillar pensions systems. Although not one of the sub-indicators used in this study, we have growing concerns about the adequacy of retirement income. Pension reforms  introduced over the past 10 to 15 years have dramatically altered the global retirement landscape.

“Pay as you go systems are moving towards funded systems, defined benefit towards defined contribution, and family support structures towards more formalised public systems. This raises the crucial question as to whether today’s workforce will be able to generate enough retirement income to maintain their pre-retirement standard of living or whether they will be faced with income shortfalls or even old age poverty.”

The Pensions Sustainability Index (PSI) analyses the current and future prospects of national pension systems looking at variables such as demographic developments, public finances and pension system design to capture in one figure the need for further pension reform.