There are two levels of state pension in the United Kingdom. The basic state pension pays around £80 ($150) a week and is payable to anyone who has made National Insurance contributions for a part of their working life. The contribution is based on an earnings-related sliding scale.
The second state pension, formerly known as State Earnings-Related Pension Scheme, or SERPS, is an addition to the basic state pension and provides a benefit of around 20% of the contributors' earnings throughout his or her career. The terms of the scheme have been changed many times since its launch in the late 1970s, but is targeted at lower- and middle-income earners and benefits are only generated on earnings up to a £31,000-a-year ceiling.
There also is a means-tested state benefit.
But all levels of provision are linked to various indexes and measures of inflation and earnings that have been revised frequently in the past 25 years. "As a result, it is close to impossible for the individual to have a clear idea of what they can, in the future, expect from the state system," according to the Turner report.
Mr. Turner's review found that the British population older than 65 will double between 2005 and 2050. If the state and corporate pension systems remain unchanged, the report found, they will not be able to sustain this increase in the size of the dependent population. He posed three possible solutions to prevent this crisis:
• a major revitalization of voluntary individual savings; and/or
• significant changes to the state system; and/or
• an increased level of compulsory private saving.
According to Mr. Ellison, the British state pension system's problems go back to the late 1970s when the government created SERPS, allowing citizens to transfer a portion of their state pension to their company-sponsored plans. Under this program, now called the Second State Pension, the government maintained a guarantee to pay a minimum level of benefits.
"The design of SERPS was unsustainable from the beginning and the contributions were not enough for the benefits. So benefits were quietly cut throughout the 1980s and 1990s," Mr. Ellison said.
Starting in the late 1980s, SERPs, still retaining their state guarantee, could also be transferred to private pension arrangements if wage earners decided to opt out of their company-backed pension plan and launch their own retirement savings accounts. (These private arrangements would include things such as company-sponsored plans — akin to a corporate IRA — or state-approved private plans.)
The decision to allow workers to further opt out of company-backed pension plans (mainly defined benefit) in favor of private arrangements (mostly defined contribution) led to a scandal in the mid-1990s when thousands of workers claimed they had been misled by representatives of financial firms. Members of company-sponsored pension plans claimed they were not given enough warning that by setting up private pension accounts they would be taking on market risk and that investment returns were not guaranteed.