Government proposes reform of national pension system

In May 2006, sweeping changes to state and private pensions were published by the UK government in its white paper on pension reform, entitled 'Security in retirement: towards a new pensions system'. Although the response from the social partners to the amendments has been largely positive, some concerns have also been raised.

On 25 May 2006, in what was described as a 'landmark document', the UK government published its proposals for pension reform in a white paper entitled 'Security in retirement: towards a new pensions system'. The publication of the white paper marks the end of a long process of review initiated by the independent Pensions Commission in December 2002 (UK0301109F), which resulted in the publication of the Turner report in November 2005 (UK0512104F), so called after the chair of the commission, Adair Turner.

The white paper follows most of the recommendations set out in the Turner report, but goes further in relation to improving pension provision for women and carers, and proposes a more ambitious timetable for raising the state pension age.

Key proposals of white paper

• The state pension age for men and women will be increased from 65 to 66 years in 2024; the retirement age will increase further to 67 years from 2034 and again to 68 years from 2044. Those currently aged 47 years or older will not be affected by the changes.

• Sometime between 2012 and 2015, the state pension will be updated in line with average earnings, rather than inflation, but this will be 'subject to affordability and the fiscal position'.

• A national pension savings scheme (NPSS) will be introduced in 2012. All companies will have to enroll their workers in the scheme unless they already have a more generous occupational pension scheme in place in which workers are automatically enrolled. Employers will be required to make a compulsory contribution of 3% of salaries, while employees will contribute 4% of their earnings. The government will contribute 1% in the form of tax relief. Employers' contributions will be phased in over several years.

• The number of years of national insurance contributions that are required to qualify for a full pension will be reduced to 30 years for both men and women (currently 44 years for men and 39 years for women). Measures will also be introduced to enable carers of children or disabled people to build up an entitlement to a state pension without having to reach a minimum level of national insurance contributions.

• The Financial Assistance Scheme (FAS), which is designed to help people whose occupational pension schemes have collapsed, will be overhauled and extended. Currently, compensation is only provided for those who are three years from retirement age. This will be extended to 15 years under the new reform. The value of the scheme is to be increased from GBP 400 million (about €591.7 million) to over GBP 2 billion (€2.9 billion).

• The changes will mean that 70% of women will be eligible for a full basic state pension by 2010, compared with 30% of women at present, and that by 2020 an additional 270,000 women will get a full basic state pension. The changes to the FAS should help an additional 30,000 workers who have lost their pensions.

Social partner responses

While reactions to the governments proposals have been generally positive, both the Trades Union Congress (TUC) and the Confederation of British Industry (CBI) have raised some concerns.

TUC General Secretary Brendan Barber, welcomed the 'progressive' proposals, but stated that the TUC remained opposed to raising the state pension age, arguing that real inequalities persist in life expectancy between those who are rich and those who are poor. In addition, the TUC was surprised that there will not be a permanent Pensions Commission to continue to monitor the pensions system and make periodic recommendations to the government.

The union body also urged the government to bring employers, unions and other stakeholders together to contribute to the design of the NPSS. Its worry is that 'continuing well-funded lobbying for an alternative that gives insurance companies a guaranteed cut of a big new market will get in the way of working out how a low-cost user-friendly NPSS will work in practice'. Finally, the TUC pointed out that, no matter how well-designed the structure of the pensions system appears, the level of pensions will still depend on decisions taken by future governments; the unions were disappointed that the date for index linking has been postponed.

Sir Digby Jones, former Director-General of the CBI, stated that the white paper provided a 'sustainable long-term settlement on pensions', but expressed concern over compulsory employer contributions, particularly for small companies. The CBI welcomed the plan to phase in this obligation for employers, but was concerned that 'without a meaningful package of financial support, hard-pressed small firms will be left high and dry at the cost of jobs of the very people this was designed to help'.

Helen Newell, IRRU, University of Warwick