State Earnings Related Pension Scheme Research Articles

Growing the UK Pension Pot: The Case for Privatisation

The system of contracting out of state pensions – a form of pension privatisation – operated very successfully in the UK until recent years with cross-party support. This was very important in ensuring that the UK system of private pension provision was one of the most successful in the Western world. This paper proposes reviving the concept of voluntary pension privatisation through contracting out using the proposed reformed UK pension system that will be introduced from 2016. Under the proposals, individuals would receive rebates of national insurance contributions equal to the fair actuarial value of the pension that they will forego as a result of opting out of half the state pension. The rebates will be paid to somebody contracting out regardless of whether that individual pays sufficient cash national insurance contributions: the rebates are designed to reflect the actuarial value of the pension foregone. They will vary with age and be available to low earners and those who are receiving state pension entitlement as a result of undertaking caring responsibilities. Such people will be able to build up considerable pension assets in their own right. In the context of widespread discussion about the inequalities arising from returns on capital being higher than economic growth, this might be regarded as especially important. Currently, large numbers of people are discouraged from accumulating capital because the main objectives of saving are fulfilled by the state pension schemes. If the state pension is linked to earnings, the rebate would be around £3,000 per year for a 40-year-old. This seems high, but it is a reflection of the very high cost of the state promising earnings-related pensions as it does currently. The rebate would be saved in a defined contribution vehicle and the government’s low-cost National Employment Savings Trust (NEST) scheme would be available as a savings vehicle. If the state pension were linked to prices, the rebate would be around £1,500 for a 40-year-old. The rebates will change as mortality and interest rates change and be set according to objective criteria. They would be challengeable in the courts to prevent the erosion of rebates as happened under the previous contracting out scheme. If 10 million people decided to contract out, rebates might total between £15 billion and £30 billion. The government has, in fact, paid national insurance rebates of £10 billion until quite recently. Although this cost may seem high, it is merely bringing forward the cost of government pension promises to the time at which the promises are made. It would be reasonable for the government to borrow to finance the payment of rebates if necessary (or run lower budget surpluses) given that, when people contract out of the state pension, it lowers future pension liabilities. This reform can be seen as a first step to a more comprehensive plan of pension privatisation. The reform proposed in this paper would revive – in a more robust form – the policy of UK governments which, until, recently, was to promote private pension provision as an alternative to state provision. It is particularly important given that the coalition government is now in the process of abolishing contracting-out from state pensions. Largely due to the system of contracting out developed after the war more than 5.5 million workers (nearly one-quarter of the workforce) had personal pension plans by 1995, while many more were members of occupational pension schemes. Overall, the number of people contracted out of the state earnings related pension scheme (SERPs) reached 13.8 million by 1994/95. The ratio of people contracted out of SERPs to SERPs’ members peaked at over 2:1 in 1992/93. Partly because of this policy the value of pension fund assets in the UK is equal to 73 per cent of GDP. In contrast, in large parts of continental Europe private pension fund assets are almost non-existent: in France, Italy, Spain and Greece, as well as in Austria, Germany, Sweden and Norway, they account for less than 10 per cent of GDP. However, contracting out declined in the twenty-first century. By 2011, only 1.6 million people were contracted out through private sector defined benefit schemes. The main reason for the reduction in contracting out was the reduction in rebates of national insurance contributions that were received by people who contracted out. The rebates from 2012 onwards were set at 4.8 per cent of the relevant earnings band when a figure of over 10 per cent would have been more justifiable. The reforms proposed in this paper would ensure that the rebates of national insurance contributions given to those contracting out of the state scheme would reflect the value of the state pension benefits that were given up.

A Case of Confusion and Incoherence: Social Security under Wilson, 1964–70

This article will focus on the failure of the 1964–1970 Wilson governments to implement two radical election pledges: to produce a comprehensive state earnings-related pension scheme and to introduce the ‘income guarantee’ – a minimum benefit to be paid without recourse to the traditional means test. The story of these failures will be put in the context of the often difficult political and economic circumstances of this period. However, it will also be suggested that significant strategic mistakes were made. Furthermore, this chapter will highlight one of Wilson's least effective organisational experiments, the introduction of the short-lived post of social policy ‘overlord’.

Contracting-Out in the United Kingdom

Contracting-out was introduced in the United Kingdom in 1978 as part of the arrangements for the State Earnings-Related Pension Scheme (SERPS) in order to avoid duplication with the existing well-developed defined benefit occupational pension plan sector. Members and sponsors of contracted-out schemes were able to save on their social security contributions in recognition of the fact that they were accruing equivalent benefits through an occupational pension plan. Later on this concept was extended to those with individual money purchase pension plans. This article considers a brief history of contracting-out, the principles of contracting-out, some problems associated with contracting-out, the implications of the introduction of stakeholder pensions and State Second Pension, and the latest rebate review and rebate orders. It examines how U.K. pensions policy since 1978 has been based on a partnership between social security and private pension plans.

The Pensions Green Paper: A Generational Accounting Perspective

In this note we show how the policy proposals contained in the government's Green Paper on pensions (DSS, 1998) affect the long term sustainability of the UK's public finances and redistribution between current and future generations. Using the methodology of generational accounting we show that the proposals in the Green Paper will marginally increase the tax rise needed to ensure intertemporal solvency, and slightly worsen generational imbalances. The effect of implied changes in National Insurance Contributions, and the fiscal and generational implications of fully funding the proposed State Second Pension, are also discussed. One of the main tasks of a Welfare State is to guarantee an adequate standard of living in old age. In the United Kingdom the events of the 1980s and 1990s, namely, the decision to index benefits to prices and the various reforms to the State Earnings-Related Pension Scheme (SERPS), have ultimately paved the way for a problem of poverty in retirement (Atkinson, 1994). With the release of the Green Paper A New Contract for Welfare: Partnership in Pensions (DSS, 1998), the government has revealed its plans to reform the system of transfers to pensioners and avoid this problem. The measures in the Green Paper can be considered from a number of different angles: for example, how will they affect saving behaviour? to what extent do they redistribute between rich and poor? In this note we consider the fiscal and generational effects of the reforms: how do they affect the longterm sustainability of the public finances and intergenerational redistribution.

Personal Pension Take-up in the 1990s in Relation to Position in the Labour Market

Pension reform in Western societies has sought to shift the balance of provision towards the private sector. In Britain, the 1986 Social Security Act marked a watershed in privatisation by promoting personal pensions while cutting the value of the State Earnings Related Pension Scheme. The article assesses the effects of the Act, especially the different implications according to gender and position in the labour market. Data from the 1993/4 and 1994/5 General Household Surveys is used to examine the changing pension arrangements of employees. We distinguish between personal pension membership among those who rejected the opportunity to belong to an occupational pension and those for whom this option was not available. The extent to which personal pensions were taken up by the intended target group or by those unlikely to benefit is assessed. Rejecting membership of an occupational pension scheme was associated with labour market disadvantage but those who opted for a personal pension were more advantaged than those who remained in SERPS. Among those lacking access to an occupational pension scheme, take-up was higher among younger and more advantaged employees. However, a substantial proportion of personal pension contributors were low paid, especially among women employed part time, illustrating the extent of mis-selling of personal pensions to those who are likely to have been better off in SERPS.

The Proposed State Second Pension

AbstractThe UK government has recently proposed radical changes in second‐tier pension provision, with the existing State Earnings‐Related Pension Scheme (SERPS) being replaced by a new State Second Pension (SSP). This paper sets out how the proposed scheme differs from its predecessor and describes the distributional effects of this reform. It shows that the SSP greatly increases the pension entitlements of low earners while maintaining existing benefit levels for higher earners. However, the higher contributions needed to pay for the new scheme mean that, after taking financing into account, people earning more than around £12,000 a year will lose out. Because of the upper limit to National Insurance contributions for employees, these losses will be greatest for people earning at the contribution ceiling.

A Disaster Foretold? The Case of the Personal Pension

ABSTRACTWith the creation of the State Earnings Related Pension Scheme (SERPS) in 1975, pensions policy in the UK was characterized by a consensus between the Labour and Conservative parties. By the mid 1980s, under the influence of New Right ideas, the Conservatives had broken with this consensus. Conservative pensions policy now centred on the ideological objectives of promoting individual property ownership and pension provision “independent”of the State. Such objectives were central to the creation of personal pensions under the 1986 Social Security Act. This article examines the political background to the emergence of this policy and seeks to evaluate how far the stated aims have been achieved. It does this by analysing the current controversy over methods of selling personal pensions and by looking at statistical evidence on the incomes of individuals who have taken out personal pensions. The argument concludes that personal pensions have been, predominantly, taken out by groups with low incomes, and the combination of low contributions and transaction costs threatens to lead to inadequate pension provision; such problems are likely to be particularly marked for women. In turn this conclusion, when set in the context of the tax regime applying to personal pensions, raises further doubts over the extent to which “independent”pension provision is likely to be achieved.

Personal Pensions and the Review of the Contracting‐Out Terms

From April 1988, individuals were offered a new pensions option by the Government: the possibility of 'contracting out' of the State Earnings-Related Pension Scheme (SERPS) into an Approved Personal Pension. In a personal pension scheme, an individual accumulates his or her pension contributions in a fund, the proceeds of which are used to buy an annuity from an insurance company on retirement. Two main objectives lay behind this reform:..

A Dissection of Pensions Funding

This paper is about actuarial methods of funding pension schemes and follows on from the report of the Working Party of the Pensions Standards Joint Committee on Terminology of Pension Funding Methods (The Terminology Report) published in 1984. It looks at the basic structure of the main methods and at how they behave. We then discuss the question of the suitability of the methods under various conditions. The reader may find it useful to have a copy of the Terminology Report to hand.The paper is written against a background of uncertainty, as regards the State Earnings-Related Pension Scheme, and of great debate and legislative activity as regards Occupational Pension Schemes. This activity and debate makes it more important than ever before that the actuarial profession explains its methods and approaches to those in the pensions industry who are not actuaries, but who nevertheless rely on actuarial advice.

Pensions Schemes after the 1989 Budget

The Social Security Act 1986 allowed a wider range of pension schemes to contract out of the state earnings-related pension scheme (SERPS). Individuals now have a good idea of choice concerning their pension strategy, and an evaluation of this strategy involves some complex decision-making by individuals. One component of this choice is the tax treatment of pensions. Pensions are given a degree of 'fiscal privilege' relative to other forms of investment, such as life insurance. The issue of pension taxation, and reforms to the system of taxation, have been discussed by Fry, Hammond and Kay (1985), but this particular study preceded the major reforms introduced in the 1986 Act.

Watchdog.

Q Can you please clear up a point or two for me? I have been asked by members if they choose to opt out of the National Health Service superannuation scheme, will they still be entitled to SERPS (State Earnings Related Pension Scheme)?

The Effect of Demographic Factors and Indexation on the Long term Financing of the State Earnings-Related Pension Scheme.

In September 1974 Barbara Castle published her proposals for a new earnings-related State pension scheme in her White Paper “Better Pensions”. This followed a succession of attempts by previous Secretaries of State for Social Services to change State pension arrangements radically. Unlike the ill-fated Crossman and Joseph schemes, however, the Castle scheme succeeded both in reaching the statute book and in coming into operation. A Bill was introduced in February 1975 and on 7 August 1975 the Social Security Pensions Act 1975 received the Royal Assent. The State earnings-related pension scheme (SERPS) came into operation on 6 April 1978. It provided State pensions related to earnings, but also offered to employers with good occupational pension schemes the possibility of ‘contracting-out’ and providing equivalent or better earnings-related benefits through their own scheme.

Comparing National Priorities: Family and Population Policy in Britain and France

ABSTRACTThe recent discussion of the State Earnings Related Pension Scheme in Britain in terms of the unfavourable demographic position early next century has highlighted how little attention is normally paid by British politicians and social policy analysts to population size and structure. Further, the attention is normally confined to the question of how policy should adapt to demographic change, rather than how to modify it, although Britain has an implicit policy of restricting family size. Britain is not alone in this but many countries show more concern about the future of their population and some wish to increase it. Among these is France. This article compares Britain and France: first, over the priority given to demographic issues by statesmen and academics; and second, over the advantages and problems seen in different demographic futures. It argues that family policy needs to be seen in a demographic context.

The State, Pensions and the Philosophy of Welfare

ABSTRACTThis is a study of the prevailing state pension systems in Britain and the US in the context of a philosophy of welfare that has developed over the last decade. In this philosophy state welfare systems are justified in terms of their maximizing liberty and autonomy rather than merely social justice. It is argued that the state earnings-related pension scheme in Britain and social security in the US, because they are ‘unfunded’ and paid for out of current taxation, are not merely inefficient but also reduce the independence of individuals and impose high burdens on future generations. It is argued that no philosophical justification can be given for this imposition. The major theoretical flaw in state-managed pension arrangements, it is claimed, is the confusion of the welfare principle with the insurance principle.

The Costs of the State Earnings Related Pension Scheme

In her introduction to the White Paper (Better Pensions) describing the new state pension scheme which came into effect in Britain in I978, the then Secretary of State for Social Services wrote: 'The cost of the commitments in this White Paper has been very carefully considered in relation to the capacity of the country to support it' (HMSO, I974). We can find little to indicate that this is a true statement. The memorandum on the financial implications of the scheme provided in that paper by the Government Actuary contained estimates of the costs of the whole national insurance scheme until 2008-9. It did not measure, and did not claim to measure, the cost of the additional pension commitments which the White Paper proposed, and which were, with minor amendments, subsequently implemented. It is that cost which we attempt to measure in this paper. We find that these costs are very substantial. Their magnitude was masked, in the Government Actuary's calculations, by favourable demographic trends which reduce the costs of the existing commitments of the national insurance scheme. In the early 2ISt century, however, these trends are dramatically reversed and the full cost of the I978 scheme will emerge. It is by no means fanciful to speculate that when the scheme is approaching maturity the burden of state pensions on the working population will be twice what it is todayif, indeed, future generations prove willing to honour the promises which have been so casually made on their behalf. The approach we adopt in this paper is to treat the new provision for earningsrelated pensions as a self-contained pension scheme in its own right (The State Earnings Related Pension Scheme SERPS). In Section I we describe the central elements of that scheme and our analysis of it, while Section II considers the implications of contracting out. We discuss how costs are affected by demographic factors in Section III and in Section IV relate our projections to those of the Government Actuary.

Contracting Out of the State Earnings Related Pension Scheme

The first review of the State Earnings Related Pension Scheme is currently in progress. We have argued elsewhere (Hemming and Kay, 1981b) that the review should involve a fundamental reappraisal of the structure of the scheme. In this paper we concentrate on a single issue, but one which is necessarily central, and one where change is certain to occur; the terms on which private occupational pension schemes may contract out of the state scheme. The Government Actuary has already proposed modifications to these terms which would be effective from April 1983. (DHSS, 1981).