UK Issues Formal Pension Reform Proposal

May 25, 2006 ( - The UK government recommended on Thursday a pension reform proposal that represents the biggest changes to the pension system since 1946.

The proposal incorporates suggestions from a government-appointed Pensions Commission led by Adair Turner (See Turner Commission Calls for UK Pension Changes ) as well as details of the compromise on pension reform reached between UK Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown earlier this month (See Compromise Reached for UK Pension Reform ).

Bloomberg reports that the proposal includes a recommendation from Blair’s government to raise the UK retirement age to 68 by 2046 and the proposal of a new national savings plan by Pensions Secretary John Hutton, both suggestions from the Turner commission.   Hutton also put forth the proposal to link raises in state pensions with wages instead of inflation by the year 2012, a point in the Blair/Brown compromise. Earnings have risen 4.25% on average during the past decade, almost double the 2.4% pace of consumer price gains.

Blair, in a forward to Hutton’s 212-page list of recommendations, said he had “wide support” for the changes, which will require new legislation that must be passed by Parliament, according to Bloomberg. The total cost of the proposed changes, including those for industry and the government, would reach 217 billion pounds by 2050, or 6.7% of gross domestic product, the government estimated.

Other details of the proposal include:

  • Use of means-testing (where bigger pensions would go to those with greater need) will be reduced to encourage the middle classes to save more.
  • The Second State Pension, currently a top-up available to basic payouts to retirees, will be made more widely available by 2030 and turn into a flat-rate weekly payment. Also, the number of years of employment needed to qualify for the pension will be reduced to 30.
  • The current retirement age of 65 will rise to 66 by 2026, to 67 by 2036 and to 68 during a two-year period between 2044 and 2046. After that, the age will rise in line with life expectancies.
  • A National Pension Savings plan requiring contributions from both companies and workers, starting 2012. The proposal recommends employees earning up to 33,000 pounds a year should contribute 4% of their wages to the plan, with their employer contributing 3%. The government would add 1% through tax relief.

The Conservative opposition yesterday said the plan will leave 3.8 million women no better off, since many take time out of their careers to raise families and do not build up a full state pension, while the Liberal Democrats said the suggestions, many of which would not take affect until after 2012, did not go far enough and will not guarantee big enough payments to pensioners.

Hutton said up to 10 million more people could be saving for retirement under the plan while the new framework may boost the value of pension savings 25% because of the lower charges it will incur. Additionally, the government estimated that by 2010, 70% of women would qualify for a full state pension compared with 30% now.

The government document is available  here .