Two decades of pension reform in the UK. What are the implications for occupational pension schemes?
| Date | 01 June 2000 |
| Pages | 223-245 |
| DOI | https://doi.org/10.1108/01425450010332514 |
| Published date | 01 June 2000 |
| Author | David Blake |
| Subject Matter | HR & organizational behaviour |
Two decades of
pension reform
in the UK
223
Employee Relations,
Vol. 22 No. 3, 2000, pp. 223-245.
#MCB University Press, 0142-5455
Two decades of pension
reform in the UK
What are the implications for
occupational pension schemes?
David Blake
Pensions Institute, Birkbeck College, University of London, UK
Keywords Pensions, United Kingdom
Abstract The UK is one of the few countries in Europe that is not facing a serious pensions
crisis. The reasons for this are straightforward: state pensions are among the lowest in Europe,
the UK has a long-standing funded private pension sector, its population is ageing less rapidly
than elsewhere in Europe and its governments have, since the beginning of the 1980s, taken
measures to prevent a pension crisis developing. This article reviews the policies that have been
implemented over the last two decades. It describes and analyses the defects in the Thatcher-
Major governments' reforms that brought us to the current system, examines and assesses the
reforms of the Blair government, and then identifies the problems that remain unresolved and
how they might be addressed. Concludes with an examination of the implications of these reforms
for the future of occupational pension schemes.
1. Introduction
The UK is one of the few countries in Europe that is not facing a serious
pensions crisis. The reasons for this are straightforward: state pensions (both
in terms of the replacement ratio and as a proportion of average earnings) are
among the lowest in Europe, the UK has a long-standing funded private
pension sector, its population is ageing less rapidly than elsewhere in Europe
and its governments have, since the beginning of the 1980s, taken measures to
prevent a pension crisis developing. These measures have involved making
systematic cuts in unfunded state pension provision and increasingly
transferring the burden of providing pensions to the funded private sector,
principally on a defined contribution basis.
This paper reviews the policies that have been implemented over the last
two decades: it describes and analyses the defects in the Thatcher-Major
governments' reforms that brought us to the current system, examines and
assesses the reforms of the Blair government, and then identifies the problems
that remain unresolved and how they might be addressed. We end with an
examination of the implications of these reforms for the future of occupational
pension schemes.
2. The current system of pension provision
A flat-rate first-tier pension is provided by the state and is known as the basic
state pension (BSP). Second-tier or supplementary pensions are provided by the
state, employers and private sector financial institutions, the so-called three
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224
pillars of support in old age. The main choices are between: a state system that
offers a relatively low level of pension that is fully indexed to prices after
retirement; an occupational system that offers a relatively high level of pension
(indexed to prices after retirement according to the rules of Limited Price
Indexation[1] or better), but, as a result of poor transfer values between
schemes[2], only to workers who spend most of their working lives with the
same company; and a personal pension system that offers fully portable (and
LPI-indexed) pensions, but these are based on uncertain investment returns
and are subject to very high set-up and administration charges, often
inappropriate sales tactics, and very low paid-up values if contributions into
the plans lapse prematurely.
Employees in the UK in receipt of earnings subject to National Insurance
Contributions (NICs) will build up entitlement[3] both to the flat-rate Basic
State Pension (BSP)[4] and, on ``band earnings'' between the lower earnings
limit (LEL) and the upper earnings limit (UEL)[5], to the pension provided by
the State-Earnings-Related Pension Scheme (SERPS). These pensions are paid
by the Department of Social Security (DSS) from state pension age, which is 65
for men and 60 for women. The self-employed are also entitled to a BSP, but not
to a SERPS pension. Employees with earnings in excess of the LEL will
automatically be members of SERPS, unless they belong to an employer's
occupational pension scheme or to a personal pension scheme that has been
contracted out of SERPS. In such cases both the individual and the employer
contracting out receive a rebate on their NICs (1.6 per cent of earnings for the
employee and 3.0 per cent for the employer, unless it operates a COMPS, in
which case the employee rebate is 0.6 per cent) and the individual forgoes the
right to receive a SERPS pension. However, there is no obligation on employers
to operate their own pension scheme, nor, since 1988, has there been any
contractual requirement for an employee to join the employer's scheme if it has
one.
There is a wide range of private sector pension schemes open to individuals.
They can join their employer's occupational pension scheme (if it has one),
which can be any one of the following:
.contracted-in salary-related scheme (CISRS);
.contracted-in money purchase scheme (CIMPS);
.contracted-out salary-related scheme (COSRS);
.contracted-out money purchase scheme (COMPS);
.contracted-out mixed benefit scheme (COMBS);
.contracted-out hybrid scheme (COHS).
A CISRS is a defined benefit scheme that has not been contracted out of SERPS
and so provides a salary-related pension in addition to the SERPS pension,
while CIMPS provide a defined contribution supplement to the SERPS pension.
COSRS must provide ``requisite benefits'' in order to contract out of SERPS,
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