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Pension reforms in the UK: background summary

An overview of pension reforms in the UK since the 2000s

An overview of pension reforms in UK since the 2000s     

Characteristics of the UK pension system

  • The UK pension system is made up of a combination of state and workplace/voluntary elements. The UK state pension system traditionally consisted of a state basic pension and an earnings-related element. However, this has been replaced by a fixed rate for all new pensioners, although those who have already retired continue to get the basic and earnings-related element, as do those retiring in the next few years, if this would be more advantageous for them. This new fixed rate pension requires 35 years of contributions to be paid in full, and those working beyond the state pension age can potentially increase their pension.
  • In addition, there are a range of voluntary workplace and voluntary personal pension components, which are important in terms of complementing the state scheme.
  • Many medium and large-sized companies have their own pension plans; industry-wide schemes are not common in the UK, although there are some multi-employer schemes. In the past these were normally defined benefit schemes, to which both the employer and the employees contributed, and which paid a pension based on a proportion of earnings (normally final earnings) linked to the number of years of service with that employer. Defined benefit schemes (DB) are being closed by employers, particularly in the private sector, in favour of less advantageous defined contribution (DC) schemes, where only the contributions are guaranteed not the pension benefits.
  • Personal pension plans can be set up by employees individually with an external pensions provider.  Group personal pension plans are also provided by employers as occupational schemes, due to their flexibility and cost-effectiveness. Personal pension plans are all DC plans.

Pension reform in the UK

  • The UK pensions system has undergone a number of reforms in recent years. The changes are aimed at increasing the retirement age, as well as equalising the retirement age between men and women, and trying to ensure more widespread workplace pension provision. The latter is particularly important, given that the state pension is basic. In addition, as stated above, many companies have closed their final salary defined benefit (DB) schemes, in favour of defined contribution (DC) schemes, which are less costly for the employer, but not as favourable for the employee.
  • In April 2006, the Pension Protection Fund was established in order to compensation members of DB pension schemes in cases where the employer became insolvent and there were insufficient funds in the scheme.
  • On 1 October 2011, the Default Retirement Age (DRA) was removed, meaning that employers could no longer require employees to retire at the age of 65.
  • On 1 October 2012, auto-enrolment (which was provided for by the Pensions Act 2008) was introduced beginning with the largest companies. Under auto-enrolment, the employer enrols all employees in a workplace pension scheme, to which the employer must make a minimum contribution; employees have the option of opting out of the scheme. The introduction of auto-enrolment is being staged in over a period that is set to end in 2019. The government has introduced auto-enrolment in order to ensure that all eligible employees are offered the opportunity of being members of a workplace pension scheme: in the past, many employers did not offer schemes or employees did not enrol in them. However, there are concerns in the government that the low levels of contribution rates to these schemes will not be sufficient to afford workers a decent retirement income.
  • Under the Pensions Act 2014:
    • The current basic state pension and the additional state pension have been replaced by a fixed rate pension, although this does not apply to existing pensioners.
    • The state pension age is being increased gradually from 66 to 67 between 2026 and 2028. There will also be a regular review of the state pension age.
    • The government is enabled to introduce minimum standards concerning governance and administration of workplace pension schemes.
    • The Act also contains a number of other measures relating to private pensions, many of which strengthen existing legislation.
  • From April 2015, those with a defined contribution (DC) scheme have been able to access and withdraw the money saved (their pension pot) from the age of 55. Further, certain defined benefit scheme members are able to switch to a DC scheme if the rules allow this. The purpose of these reforms is to make pensions more flexible. However, there have been concerns that individuals may withdraw and spend all their cash, leaving little for actual retirement, and a plan to allow those who have purchased pension annuities to sell them for cash has been abandoned.
  • The general trend in terms of company pensions in the UK is the fact that many company defined benefit schemes have closed to new entrants, meaning that most workers are now covered by less advantageous DC schemes.