Crain News Service
LONDON - Business and pensions groups have welcomed U.K. proposals to privatize the state pension system, although employers have expressed their concerns about the extra costs they might face.
In a surprise move March 5, Prime Minister John Major disclosed that anyone beginning work once the proposals become law will not receive a state pension but instead will have to set up an individual account with a private financial institution.
However, the state will adjust private pension contributions for the lower-paid to ensure they receive at least the equivalent of the basic state pension entitlement.
The proposals are not likely to become law, at least in their present form, since it is widely anticipated the Conservative Party will be voted out of office in a general election that will occur by May 1. There is, however, a rising crescendo by industry groups to adopt a mandatory form of supplemental pension benefits.
What's more, Labor Party officials have expressed opposition to doing away with the basic state pension. Instead, they have advanced a notion of creating a "stakeholder pension" overseen by the state for those not covered by employer-sponsored schemes.
Still, Mr. Major's proposals are viewed as radical. No country outside Latin America has privatized its basic state pension system.
The U.K. government's proposals will not affect those now working. On retirement, they will continue to be paid a basic state pension as well as payments from the existing state earnings-related pension plans.
The proposals are aimed at enabling the state, over a generation, to switch the financing of state pensions to private savings and investment, funded from reductions in national insurance contributions, rather than higher taxes. The proposals would cut public spending about 40 billion pounds ($64.57 billion) a year by the year 2040.
Social Security Secretary Peter Lilley said the average person should be able to build up a fund of 130,000 pounds ($209,859), enough to provide a weekly pension of 175 pounds ($282.50) at current prices, compared with the current single person's weekly pension of 61.15 pounds ($98.72) and a married couple's 97.75 pounds ($157.80).
Under the proposals, new entrants to the workforce would receive a rebate of around 9 pounds a week on their National Insurance contributions that would have to be invested in their own pension fund. While they would not be entitled to SERPS, they would get a 5% rebate on earnings to finance a second-tier earnings-related pension.
While the proposed changes will present extra business opportunities for private pension providers, they are likely to cost employers in terms of the extra administrative work involved. For existing employees, pension contributions will remain tax-free and pensions will be taxed, while for new employees, contributions will be taxed income, but pensions will not.
A spokeswoman for the National Association of Pension Funds said operating two fundamentally different tax regimes simultaneously will be administratively complex and costly for employers.
She also said the 9 pounds a week rebates from the government are likely to go into a separate plan. For employers offering a final-salary pension plan, this means they will have to operate the two alongside each other.
NAPF Chairman Tom Ross, while otherwise welcoming the proposals, said the government needs to give more encouragement to employers to set up company pension plans, which are "already a proven vehicle for funded second-tier pension arrangements," and that employees should be required to join these plans.
Mr. Major said at a press conference March 5 that the measures are aimed at averting a crisis in the middle of the next century, when there will be too few people working to fund state pensions for the growing number of retired.
The Conservative government has been trying for more than a decade to reduce the state's role in pensions. In 1986, it gave employees the right to opt out of SERPS by allowing equivalent contributions to go instead into their personal pensions. The government also switched the basis for indexing pensions to prices from wages, which have reduced benefits substantially over time.
The latest proposals cannot be passed until after the spring general election. If Mr. Major's party retains power, a discussion paper will be issued allowing interested parties to comment.