The UK has a bad reputation when it comes to the State Pension. The claim is that other countries tend to pay higher pensions and UK pensioners are losing out. But how does the UK State Pension compare with other countries and is the bad reputation deserved? Here’s a look at how the UK State Pension compares and the problems of making meaningful comparisons between different pension systems.
4 Reports Comparing The UK State Pension with Other Countries
There are many ways to compare state pensions, and different data sets can give different types of results. Below you can find how UK State Pension compares with other countries in four separate studies:
EU’s Data on Social Security Payments
According to EU data on social security in its member countries, pensions around the continent looked like this in 2018:
- France – minimum pension is £130 a week, with a maximum of around £340 a week.
- Spain – a minimum means-tested pension around £155 a week, with a maximum of around £535 a week.
- The UK – the state pension is between £125 and £165 a week.
Some reports also show Germany’s maximum weekly pension to fall at around £507 per week. However, most workers’ pension insurance payments in Germany are compulsory, which means there is no statutory minimum, maximum or full pension with which to compare.
A House of Commons Analysis
A House of Commons Library analysis of different state pensions compared the UK State Pension with other Northern European countries using a flat-rate state pension system. According to its findings, state pensions in 2019 were:
- £168.60 per week in the UK.
- £214.02 per week in Ireland.
- £241.19 per week in the Netherlands (single pensioner).
- £168.58 per week (basic amount) and £353.04 per week (means-tested, single pensioner) in Denmark.
Reports by the OECD
The Organisation for Economic Co-Operation and Development (OECD) also collects data on public expenditure on pensions and pensioner benefits. Its most recent report looked at public social spending in 2015. The findings show social spending on old-age pensions accounts for:
- 2% of GDP in the UK.
- 7% of GDP in Spain
- 9% of GDP in Germany.
- 1% of GDP in France.
In the US, public spending is slightly above the UK at 6.4%. On the other hand, Canada and New Zealand are below the UK at 4.4% and 4.9% respectively.
The OECD also compares pension replacement rates, which showcase a person’s pension income as a percentage of previous earnings. The rates illustrate how a person’s living standard is sustained as he or she moves from work to retirement. The latest 2019 report shows the overall net replacement rates to stand at:
- 8% for Spain
- 5% for France
- 5% for Germany
- 1% for the US
- 29% for the UK
The UK’s rate is well below the OECD average of 62.9%. However, the above accounts for total mandatory pensions, both private and public. If you include voluntary provisions, the rate increases to 62.2% for the UK. They also increase to 65.4% in Germany and 87.1% for the US.
The Melbourne Mercer Global Pension Index
There is also an annual cross-country comparison by Mercer, a pension consultancy, and the Australian Centre for Financial Studies. Their 2018 report scored 34 different pension systems based on various indicators.
The report gave the top grade (A) only to the Netherlands and Denmark. The UK received a C+ together with France. Germany received a B, while Spain scored a C. The noteworthy point about the UK’s score is that it was criticised mainly for lacking in pension adequacy, with the report suggesting measures such as “raising the minimum pension for low-income pensioners”.
Problems with Comparing State Pensions
The data shows the UK State Pension is relatively low compared to other countries, no matter how you measure it. But comparing different countries’ pensions is problematic because of the differences in pension systems.
For example, the UK has lower public spending on old-age pensions as a proportion of its GDP. But most pension systems around the world are not just built around state pensions and benefits. Comparing just the state pension and benefits systems does not account for occupational pensions or lifetime savings and their impact on pension entitlements.
The above example of pension entitlements as a percentage of pre-retirement average earnings highlighted the issue. The UK faired relatively low when you examined only mandatory public and private pensions. However, the ratio got closer to that of Germany’s when voluntary payments were included. Even the country’s age demographics influence things like government spending on pensions.
The House of Commons comparison pointed out how countries “differ not just in the reliance placed on state pension provision as a component of overall pensioner income but also in the structure, eligibility criteria and financing basis of the state pension system”. Therefore, it’s not a good idea to stare at flat rates alone when comparing pensions and pensioner income.
What to Know About the UK State Pension
Comparing different pension systems around the world is not an easy task. But various research does show that the UK system is not currently providing UK pensioners with the most significant pension pot. The UK also ranks relatively high on pensioner poverty. The OECD's figures rank the UK 13th highest out of the 36 OECD countries. However, the statistics used for the study differ from the DWP's measure of households in relative low income, highlighting the difficulty in proper comparison.
What is important is that you know how the UK pension system works so that you can make the most out of your retirement income. For example, according to Which reporting, nearly 1.3 million households in the UK miss out on pension credit entitlements. You can read more about those from our previous post and ensure you get what you are entitled to.
What you receive in the UK will depend on your National Insurance contributions and when you retired. It’s a good idea to learn about the State Pension system to ensure you maximise your pension payment potential.