Pension reform in the United Kingdom: a source of inspiration for other countries?

	In December 2002, the British Government established the Independent Pensions Commission to review the private pensions system and the country's savings vehicles. The work of this commission has led to a proposal for pension reform that is currently under consideration.

Principles of the reform

Acting on the commission's recommendations and the consultations held in 2005, the government released a White Paper on pension reform in May 2006. This proposal for the system's reform highlights the following principles:

• a system that increases personal responsibility
• an affordable and simple system that is fair for all
• a flexible system that is sustainable over the long term.

A new national retirement savings plan

The proposed pension reform recommends that a pension plan based on portable personal accounts be established in 2012. All employees without a sufficiently generous supplemental pension plan provided by their employers would be automatically covered by the private retirement savings plan.

Salaried workers would contribute a minimum of 4% of their annual salary to this plan. Their employers would be required to make payments equal to at least 3% of each employee's salary. The government would contribute to this plan through tax breaks, which should represent the equivalent of 1% of members' salaries. Self-employed workers and unemployed citizens would be able to decide whether or not to become members of this plan.

This new retirement savings plan could generate higher retirement incomes than the individual plans presently available, given the lower administrative costs we can expect from a national plan.

A more generous public plan, but a rise in the retirement age

The basic state pension would increase, switching from price indexation to wage indexation. This measure, much debated within the government itself because of its potentially high cost, would come into effect in 2012, public finances permitting. As of 2010, the number of years individuals would need to contribute in order to be entitled to the full basic state pension would go from 44 for men and 39 for women, to 30 years for everyone. The normal retirement age, however, would gradually rise, reaching 68 in 2044.

Uncertain effects

While it encourages saving for retirement, the proposed personal account system would lead to a drop in the net wages of individuals and could limit wage increases for workers because of the additional cost imposed on employers. Employers might also be tempted to get rid of their defined benefit pension plans. With the number of such plans already dropping sharply, the reform would only accelerate this trend.

Overall, the changes to the public plan could prove extremely costly. A degree of uncertainty exists regarding the government's capacity to finance these measures.

Despite a few weak points, there is no doubt that pension reform would increase the retirement income of the average British worker. Other countries might be tempted to follow suit by also providing a national optional retirement savings system.

Source: Le Satellite, Direction de l'évaluation et de la révision, Régie des rentes du Québec, Vol. 4, Number 2, June 2006 (French only).