Japan and China need to raise the state pension age to reflect rapidly aging populations and longer life expectancy, concludes consultancy Mercer after releasing its Global Pension Index 2010.

With a score of 40.3, China ranked bottom of 14 countries covered by the index, which compares pension systems from around the world and ranks them based on adequacy, sustainability and integrity.

The index, produced by Mercer and the Australian Centre for Financial Studies, is based on more than 40 indicators that reflect features desirable in all retirement savings and income systems.

Four new variables were included this year: the costs of each country’s system; the level of home ownership; asset allocation; and the effect of divorce on the provision of retirement benefits.

Tim Jenkins, Mercer’s Asia-Pacific retirement, risk and finance business leader, points out that the 2010 study used data for China covering both industrialised and rural parts of the country, as opposed to just industrialised last year.

“This led to a fall in the Chinese index value from 48.0 in 2009 to 40.3 in 2010, due primarily to a recognition that China’s national pension system does not yet cover the whole country,” he says.

Japan, meanwhile, finished just one place higher than China at 13 with a score of 42.9 – well below 12th-placed Germany on 54.0 and the overall index average of 61.7.

Jenkins notes that the Japanese index increased slightly from 2009 primarily because of the introduction of new questions relating to efficiency and sustainability. Japan, in fact, scored worst of all countries for the sustainability of its pension system with 27.9 against an average of 51.9.

“Japan and China need to raise the state pension age to reflect the rapidly aging populations and longer life expectancy in both countries,” he adds. “China can improve its index by broadening the coverage of its national pension system, increasing the state pension age over time and enabling individuals to retire gradually while receiving a part pension, amongst other things.”

The legal retirement age in China is 60 for men, 55 for female cadres and 50 for female blue-collar workers, which are early by global standards. Beijing has started to consider putting these back, although the majority of the public is against it for fear of taking jobs from younger generations.

Shanghai did recently introduce flexible retirement on a trial basis, allowing employeesworking in the city to defer retirement by five years.

For Japan, the retirement age is 60 for half of salaried men and 65 for the other half. For salaried women, half is 60 and the other half is 63. It is scheduled to be 65 for all by 2030.

This year the Mercer pension index was expanded to cover 14 countries, with the addition of Brazil, France and Switzerland. Notably no country in the index was classed as having an A-grade system (score above 80) with good benefits, sustainability and a high level of integrity.

The global financial crisis was recognised as having threatened the sustainability of public and private pension systems in several countries (Canada, the UK and the US) through the decline in asset values and an increase in government debt.

For the second year running, the Netherlands was ranked as having the world’s best retirement savings and income system, with a score of 78.3. It was followed by newcomer Switzerland (75.3) in second place, Sweden (74.5) in third and Australia (72.9) in fourth, having slipped from second spot last year.

Jenkins notes that Australia’s drop was in part because of the inclusion of new cost indicators in 2010, where Australia scored relatively poorly.

“Each Asia-Pacific country has its own particular issues, whether it’s how the costs of the retirement system can be reduced in Australia, or how coverage of the national pension system can be broadened in China,” says Jenkins.

Singapore, meanwhile, fell from eighth place in 2009 to ninth this year, while Hong Kong is not included in the rankings. Jenkins stresses he would be eager to expand the index’s coverage, but that this was subject to funding.

David Knox, a senior partner in Mercer’s retirement, risk and finance business, adds: “As the gap between pension age and life expectancy widens, pressure on public pension systems is increasing. This highlights the need for governments to continue to review their state pension or retirement age and focus on increasing the adequacy of the private system.”