Retirement Income Security in the United Kingdom

Author:Lillian Liu

This article examines the U.K. retirement income security system from the American perspective. It addresses issues that most concern U.S. analysts: how the United Kingdom has kept its future public pension costs at a manageable level, the extent to which privatization of public pensions has contributed to low pension costs, the popular appeal of individual pension accounts, and the impact of privatization on retirement income. These issues are best understood in the context of the U.K. pension programTMs particular institutional structure and policies, two of whichS ficontracting outfl of public pensions, and strong reliance on means-tested benefitsShave been largely rejected in the evolution of U.S. policy to date.

Particular use is made of recently available data on coverage rates for public and private pension programs over the total working population and administrative records on inactive personal pension accounts. LLLLLLL 22 2Bh 2 2* S2...D2y Z2 2‡SZˇD2iS˙S 2S 2...SZD2...ZS˙ ...Z˝2e S F

AcknowledgmentsX2-ˇ2Sˇ22 S ˙22...S 2qSD2hS2v#D2‡y2tF w˝D2...SS2iF2‡'D2...S˙˙˝2...ˇS D2eS 2... ˙D2tˇ 2/D2S 2wS˝ S2&gtZS2 ˇ2ˇ˙* ˙2Z 2 2S˙2S 2 2ˇ2SZ˙F22e2*ZS˙2ˇS +22ˇ2 D q 2&gtS ˝D2 2ˇ2 S Z22ˇ2˝SF22xSS˙˙˝D2ˇ2Sˇ2S˙ 22* y˙ 2S ˝2S 2ˇZ F

Introduction

22-ˇ2*2 2...ZS˙2...Z˝ 2 2ˇ2- 2...S2ˇS2y Sˇ 2 22ˇ2*S S˙2˝SD2 ˙2*S˙˝2y˝2ˇ *.Z2˙ E2SZSS˙2yS˙E S Z2 2ˇ2˝F22-ˇ2ˇS2˙2S ˝ 2ˇ2ySy˝2y2 S 2S ˝ 2#+22S+X20s2...ZS˙ ...Z˝2 22y2ˇ2 22#ˇ s22 2ˇ2PI2Z ˝c522-ˇ IWWREWT2e˝2g Z˙2 2...ZS˙ ...Z˝2'S 2*y˙2S **Z2 2ˇ2˝2S 2*E 2ˇ2* 2 2 F22s S D2y2 2g 2S 2 *2ˇS2S˙ * 2 2**S˙2 2ˇ # F22e2Z 2 S2S 2S ˝ 2ˇ2**S˙22S2ZS˙˙2 Sy˙ˇ 2 S˙2* SZZ D2ˇ22*SS˙˙˝2*˙SZ ˇ2' 2...ZS˙2...Z˝2* S2 2S2 2ˇ2Z 2˝F22-# 2ˇ2ˇ2Z 2* * 2y˝2ˇ2e˝2g Z˙2 ...ZS˙2...Z˝D2 2'S*˙D2ZE 2ˇ2 Z 2 2 S˙ SZZ D2ˇ ˇ2ˇ˝2 2 2ˇ *Z Z2 2ˇ#2ˇ2SZZ ˇ˙2y2 2S 2S S @e˝2g Z˙2 2...ZS˙2...Z˝ IWWUD2fl˙F2ID2**F2PVEQQD2IHPEIQRD2S ISVEISWAF22e2ˇ2# D2ˇ2S2S S˙2 2II2...ZS˙2...Z˝2 2y˙˙ * 2 2yˇ2r2 2ˇ2-F...F g D2S 2S˙˙2 2ˇ2 S S˙2SZZ F[1]

22e2 y2 2Z 2S 2ˇ #˙2ˇSD2 2Z 2˝SD2S E 2ˇ2 2*y˙Z2* E 2* S2 2#ˇ˙22 2*S2 *S2SS 2Zˇ2S2 E S˙2SZZ F[2]22r#D2 ˙˝ #Cgˇ˙2S 2ˇ2- 2u E CˇS2SZZ˙S2IH22 ˝SE2'* Z2#ˇ2ˇ2SZZ S2S2Z2S˙ S22 * SF22/ˇ˙2 ˇ2 2ˇ2ˇS ˇS2S2˙ 2 ˇ2ˇ˝2#ˇ2 E S˙2* 2SZZ 22S ˇ2 S˙2*SZ2 2 y D[3]2S2S*Z2 2ˇ Z E2*SFS 2 2S˝2y Z2 2ˇ2- 2...SF

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22...S˙2S*Z2 2ˇ2-FuF2'* Z2S2#ˇ˝2 'S S F22pD2yZS2ˇ2- 2u 2ˇS2y ˙S2 2ˇS 2*22 ZS˙2ˇ2 2D222 Z2 #2ˇ2*2ZZ22 2 S Z 2ˇ2-FuF2*y˙Z * 2˝F2-ˇ2xS S˙2s S Z2p 2@xspAD2#ˇZˇ S Z2ˇ2 2* 2* S2@ ˇ2#ˇ2ˇ Z2Z˝2* SD2Zˇ2S2D2Sy˙˝D Z+ 2S 2S ˝2y D2 *˙˝ D2S 2#+ .˝AD22 2S**S22ˇS2ˇ2ˇE22˙ E ˙ Z˝2*y˙F22s 2S D22Z*SS2 ˇS2 S2ˇS2ˇ2-FuFE2*.Z2˙ E2*y˙Z * 2Z2˙S22ˇ2q2hZ2*Z2@qh*A2S ˇ2˙#2S 2˙S 2 S˙2 S F[6]22-ˇ22S2Sˇ *2SZZ*˙ˇ D2 2ˇS2ˇ2- 2u ˇS2S2˙S 2** 2 2S 2**˙S 2ˇS 22ˇ2- ...S2S 2ˇ2S 22*.Z22Z 2ˇ ˇ2PHSHF7 s2#˙2y2 ˙22 ˝2ˇ2 SZ2ˇS2ˇS2 F ˇ2˙ Z˝22S 2+*2*y˙Z2* 2'* 2 2ˇ - 2u 2S2S2S S Sy˙2˙˙F

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22- ˙2ˇ2S˙˝2PHˇ2Z ˝D2yˇ2ˇ2- 2u 2S ˇ2- 2...S2˙2*S˙˝2 2* S˙D2 S˙˝D2˙ZS˙

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22e S˙˝2 2ˇ2SZ˙22 S F2 2 2Z X

IA2S 2˙ 2 2ˇ2-FuF2˝2S 22˙ D

Z 2 2ˇ2 S2 2ˇ2˙X22@SA2ˇ 22 2*y˙Z2* D2#ˇZˇ2*S˝2 ˙˝ 0*˝E˙˙52y Y2@yA2ˇ2Z D2S E ˙S2D2#ˇZˇ 222S 2*y˙Z2S *S2Z* D2S˙˙# 20Z SZ 252 ˇ2*y˙Z22S 2 2*2SˇF2*S *˙S 2 SY2S 2@ZA2**˙ S˝2S E y D2#ˇZˇ2Z 2S2 ZS 2* 2 2 Z2 2S ˝2* Y @PA2S 2S S˙˝2 2*y˙Z2* 2 S Z D2'S E

2ˇ2˙ Z˝2D2S 2ˇ2' 22#ˇZˇ *SFS 2ˇS2Z y22S 2 2*y˙Z * 2'* Y @QA2S 2S 2 2ˇ2**˙S˝2 2* S˙2* E

2 22 2IH2˝SD2'*˙ 2S 2S 2Z2 2ˇ2* 2 2ˇ2 E S˙2SZZ D2S 2Z 2ˇ2' 2S S Sy˙˝2 2ˇ2**˙S2S**S˙Y @RA2S 2SZZ 2 22 2ˇ2*y˙2S 2**Z

22ˇ2-FuF2 2 Z2Z˝2˝D ˇ2#ˇ22y 2Z 2 2* * 2 Y2S @SA2S2#2ˇS2*˙SZ2ˇ2-FuF2˙2 2S2#E

* 2˝2 2S 2eZS 2**ZF

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24

Z*2Zˇ˙2**D2Z+ 2S 2S ˝2y D *˙˝ D2#+2 .˝D2S 2S˙˙22S E2* SF -ˇD2*˙Z2S 2* S2* 2Z2ˇ2yS * 2ˇ2- 2u 2S2S2#ˇ˙D2y2SS˙Sy˙2SS2 ˙S2 ˙˝22qS2fS 2@ 2xˇ 2s˙S AF[10]22s2ˇS S˙22ˇ2Z˙˙Z220ˇ2fˇ522 2yS˙˝2 **˙2 2ˇ2- 2u F

The U.K. Retirement Income Security System: An Overview

2*y˙Z2* 2* S2 2yˇ2ˇ2- 2u 2S ˇ2- 2...S2S2yS2 2ˇ2ZS˙2 S Z2* Z*˙ 2*˙ 2+2S 2S˙˙2*SZ*S 2 2S2 ES E 2* SF[11]22f2ˇ2S2S.2 Z2y# ˇ2#2Z E2˝2 2y 2Z2S 2 2**˙SE 2ZF

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22e2S˝2 22 2ˇ2ySZ2 S2 2ˇ2-FuF ˝D2 Z˙ 2ˇ2#2*ˇS2 2*SFS D22*2 ZˇS2IF

The First Tier: The Basic State Pension, 1908-98

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22-ˇ2*S 2 2*˝E˙˙2y 2*2 2S IWRVD2#ˇ 2˙ES 2* 2#2 Z*S2 2ˇ xS S˙2s S Z2@xsA2˝D2 ˇ2#ˇ2ˇ2 Z Z˝2* S2@ 2Z+ D2 *˙˝ D2S 2#+ .˝D2 2'S*˙AF22p 2 2xs2#S2ˇS2y˝2ˇ -S˝D2*˙˝D2S 2*˙˝F22-ˇ2 2ZS˙ S Z2* S2y+2 #2 2y˝2' 2Z*˙˝ ZS 22S˙˙2#+D2'Z*2ˇ2˙#2S F22r#D 2Z 22*S˝2 ˙˝2 S˙2* D2Z S˝22... /˙˙S2f E2 2 2* 2xs2y 2SJS 2*ˇS22ˇ2S E2* S2@e+ 2IWUHD **F2PQEPUAF

22y2ˇ2˝SD2ˇ2 S2 2ˇ2ySZ2S2* ˇS2S 2Sˇ2Sy˙X

IA222v#2S 2@Sy2IT2*Z 2 2S˙2#+2

S ˝2 2Z y 2*A2S2'*2 Z y 22ˇ2xsD2S 2ˇ 2'Z˙2 ySZ2S2* 2ZS 2 2*2 2˙# ZD2SZZ 2 2y 2 ˙ Y[13]

2@PA22f 2S2*S2SZZ 22˝S2 2Z E y D2 S˙2 2S F22g y *2 2ˇ2˙#2*S2S 2ˇ2#ˇ2 #+2ˇ2S˝2 S˙˙2ˇ2 2ˇ2˙˙2J 2S'2y 2@RR2˝S2 2 2S 2QW2˝S 2# AY14 S

QA222-ˇ2˙˙2 2ˇ2S'2ySZ2S2* 2 2S

˙2* 2ˇS2S 2y˙#2ˇ2ˇˇ˙ 2S E2ZSˇ2y D22ˇS2* #ˇ2S S˙2Z2 S˙˙˝2JS˙ ˝2 ˇ2 y F[15]

22s 2IWUVD2#2S2#2 Z22*2ˇ ySZ2S2* X22-ˇ2 ˙˙Ey 2˙˙2@IA2#S22S ˇ˙˝2PS2*Z 2 2ˇ2SS 2#S 2S 2@PA2#S22y S.2S S˙˙˝2 2˙ 2#ˇ2*Z22#S 2 ZSD2#ˇZˇE 2#S2ˇ ˇF[16]22-ˇ2S 2#˙2 S˙˙˝2JS˙2ˇ2˙# S 2˙2@vivAD2#ˇZˇ2#S2S˙2ˇ2S 2ˇˇ˙2 2˙ y˙˝2 2Z y 22S 2*SZ*S 2 2xs * 2* SF

22r#D2 2IWVH2ˇ2 2#Zˇ2y 2 ' 2ˇ2higher2 2*Z22#S 2 ZS22*Z2ZˇS ˙˝F22y2D2ˇ2ZS2 SESZˇ 2y 2ZD2S2ZˇS ˇS2ˇS2 2y 2 ˙˙˝2Z F2y˝2ˇ2*y˙ZF22-ˇ2S' E2* 2ˇS2S˙S˝2Z˙ 2 2PS2*Z 2 2ˇ SS 2#S 2 2IWUV22 ˙˝2IT2*Z 2 2IWWVF22e ˇS2S 2 #ˇ2*SZ2*Z2 ZS2y˝2IFS2*Z *2˝S2@ˇ2 S2S* 22y˝2ˇ2-FuF q 2eZS˝AD2ˇ2S'2#˙˙2ˇ +2 ˇ22 ˙˝ IH2*Z 2 2ˇ2SS 2#S 2y˝2PHQHEQID2S 22UFS2*Z y˝2PHSHESIF[17]

The Second Tier: Earnings-Related Pension and Its Privatization,1961-88

22-ˇ2Z D2S E˙S22 2*y˙Z2* 2y S S ˝2˝S2S 2ˇ2 2D2 2˙#2y D2S 2Z ˙˝2S2* 2 2ˇ2#+ 2**˙S F

Graduated pension, 1961.Sfˇ2**˝2 2ˇ2IWSH S˙˙˝2 Sy˙2ˇ2 22S 22 2ySZ S2* 2#ˇ2S 2S E˙S2F22-ˇ2 #20 SE S2* 52#S2 SZ2 2IWSW2S 2*˙ 2 2IWTID 2ˇS 2SH2˝S2S 2ˇ2ySZ2S2* F

22-ˇ2 ZS Z2 2ˇ2IWSW2xS S˙2s S Z2eZ2 2ˇ ˙ 2 2fˇ2* 2ˇ˝2˙2*S˙˝2 22*ZE E 2* 2 22 2 2*SFS F[18]

y# 22S Z2 2*˙˝2S 2ˇ2S˙S˝2#˙˙E

Chart 1.SSummary features of the U.K. retirement pension system and its privatization

-ˇ2˝2ˇS2#2X22p2yˇ2D2old-age benefits2S2*S˝Sy˙2S2S 2TS2 2 2S 2S 2TH2 2# 2@ SS˙˙˝2S 2S 2TS2y# 2PHIHEPHAF

K First tier2@IWHVEA2wS S˝2S2* 2 2˙#2 ˙SES2#+˙˝2y 2 * 2 2S 2y2*S2SZZ 2˝S2 2Z y 2@S'2y 22 S˙˙˝2˙2ˇS 2 E ˇ2 2SS 2#S AY2Z2 ˇ˙˝2ˇ2*2VR72 S 2 2S ˝2 2Z y 2*F

K Second tier2@IWTIEA2wS S˝2* 2 2S E˙S2y 2 2ˇ2*y˙Z22*S2* Y2Z2ˇ2S **˙S 2 *2S2ˇ2 2D2'Z*2ˇ2˙ E*˙˝F

K2-ˇ2State Earnings-Related Pension Scheme (SERPS)D22ˇ2ZˇE*2Z E2*y˙Z2* 2 Z2 2IWUVY 2*ZD20 SS2* D52*2 ˙˝2 S˙2y F

222EE ...i‡*...2y 2 #2*˙SZ2PS72 2Z ySy˙2S 2@S 2y# 2ˇ2˙#2S 2**2S 2˙2 **2 2*˙˝2*S˝˙˙2Z y A2yS2 2PH2y2˝SY2 2IWWWD2PH72 2ZS2Z ySy˙2S @RW2˝S2 2 2S D2y˝2PHPHD2RW2˝S2 2# AF

Privatization

K2-#2*ˇS2 2*y˙Z2* 2*SFS 2@IWTI2S 2IWVVAF22s 2yˇ2ZSD2*SFS 22*SS˙2@2*˙SZ2 ˙˝2ˇ Z E2*y˙Z2* AY2S 222˙ S˝F

22 -- e2 2IWTID2*˙˝2ˇS2ˇ2* 2 22*SZ*S2 2ˇ2*y˙Z2Z E2@0Z SZ25A2S 22*2 S2S *S2Z 22 2JS˙ 2*˙˝2@ 2y A2* 2*˙S D2+ # 2S20ZZ*S S˙2* F5

222-- e2 2IWVVD2#+2ZS 20Z SZ252 2ˇ2ˇ2*y˙Z2...i‡*...22*˙˝2*˙S 222*2S'E D2 Z y D2 S˙2* 2SZZ D2+ # 2S20* S˙2* F5

222-- p2IWUVEVVD2...i‡*...2Z2 ˇ˙˝2ˇ2˙2SH72 2S˙˙2S 2@ˇ2S 2SH72 Z˙2y2 2Z SZE 2*˙˝2*˙S D2ˇ2˙ E*˙˝D2S 2ˇ2 2Z y...

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