United Kingdom


The United Kingdom’s pension system includes a basic state pension (BSP), a near universal flat-rate benefit, and a state second pension (S2P), which is based progressively on earnings bands for lower-income and higher-income earners. Means-tested benefits complement the BSP. As a result of the Pensions Act 2007, the S2P will become a flat-rate benefit in the early 2030s. Employers are allowed to “contract out” of the S2P by setting up separate occupational pension plans for their employees.

In January, 2011 the government introduced into Parliament the Pensions Bill 2011. Measures in the bill encourage people to work longer as the population ages and to increase retirement savings in employer-sponsored pension plans. The Pensions Bill 2011 would implement measures contained in recent government reviews that address the rising cost of pensions that is due to increasing longevity in the UK.[1]Among the major provisions in the bill are:

State pension age (SPA): accelerating the equalization of the SPA at age 65 for men and women by November 2018 (rather than by April 2020, as presently scheduled) and then increasing the SPA to 66 for men and women by April 2020. (The SPA is currently age 65 for men and age 60 for women.)

Automatic enrollment of private-sector employees into qualified employer-sponsored retirement plans: raising the minimum annual earnings level at which employees must be enrolled in a workplace pension plan from the scheduled 5,000 pounds (approximately US$ 8,057) to 7,500 pounds (approximately US$ 12,086), introducing an optional waiting period of up to 3 months before employees must be enrolled and allowing greater flexibility for employers regarding reenrollment dates.

Revaluation and indexation of private-sector occupational pensions: providing greater details about changing the measure of inflation from the retail price index (RPI) to the consumer price index (CPI); the CPI uses a more modern methodology, which is consistent across European Union member countries and should increase at a slower rate than the RPI.

Later on, in April, 2011 the Department for Work and Pensions issued the Green Paper, A State Pension for the 21stCentury,outlining proposals to change the state pension system. The government emphasizes that pension reform should reduce system complexity and provide future pensioners with a better foundation for saving.

The Green Paper requests feedback from interested parties (employers, the public, and the pension industry) on three topics regarding the state pension system. The first issue considers two options to simplify the state pension system for future pensioners. One option would accelerate the shift to a two-tier, flat-rate structure by 2020 rather than by the early 2030s. That option would continue to permit contracting out of the S2P into occupational defined benefit (DB) plans for around 2 million employees. By contrast, a second reform would combine the BSP and S2P into a single flat-rate pension set above the level of existing means-tested pension benefits, eliminating both means-tested pension benefits and the contracting-out option.

A second topic involves examining the prospects for changing current means-tested programs in line with other pension reform proposals to meet the future needs of certain pension groups (women, low earners, and the self-employed). The government aims to reduce the uncertainty and disincentives to saving in the state pension system and help pensioners avoid poverty. Currently, about 50 percent of pensioners qualify for noncontributory means-tested benefits.

The final topic for consultation considers future changes in the state pension age (SPA). The government is considering a more automatic mechanism for changing the SPA that could include either a formula automatically adjusting the SPA to reflect revisions in projected longevity or an independent review of projected changes in life expectancy, scheduled at predetermined intervals. The SPA is currently age 65 for men and age 60 for women (increasing to age 65 by 2020). The SPA will then gradually increase for both men and women until it reaches age 68 in 2048.


Article with courtesy of Social Security Online


Sources:The Pensions Primer, Pensions Policy Institute, March 16, 2011; "Budget 2011: State Pension Age Could Get Longevity Link," Professional Pensions, March 24, 2011; "Webb to Confirm Flat-Rate State Pension in Green Paper," Professional Pensions, April 4, 2011; "Flat-Rate State Pension: Stop Whining, Start Saving," Citywire Money, April 5, 2011.


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