UK government unveils long-awaited pensions reform package

The much-trailed reform program for the UK pensions system has been formally unveiled by the government in its white paper on the issue.

The headline reforms have already been widely leaked, and the white paper reflects many of the key elements of change put forward by Lord Turner, head of the government-appointed Pensions Commission, in his report, published in November 2005.

Among the major changes to be introduced is an increase in the standard retirement age to 68 years (from the present 65) from 2044, and a restoration of the link between state pensions and earnings. The latter reform, which has long been advocated by consumer groups who allege the current link to prices means pensioners are worse off, will be implemented from 2012, provided the economic conditions are right.

The reforms – billed as the most significant overhaul of retirement provision in the UK since the introduction of the welfare state in the 1940s – will see employees automatically enrolled into a new national pensions savings scheme (NPSS), or ‘Britsaver’. Workers will be expected to contribute 4% of their salaries to the scheme, with employers that do not offer at least as generous a scheme as NPSS being expected to contribute 3%. The government will add another 1% in the form of tax relief.

Business leaders have criticized the levy on employers, with the Confederation of British Industry suggesting that it could cost UK companies GBP2.3 billion a year, according to a BBC report.

There has also been criticism of proposed changes to the State Second Pension – an earnings-indexed top-up to the current basic pension.. The opposition Conservative party says that these changes, which will occur while workers continue to contribute to the scheme, means that many are facing a ‘stealth tax’ as they no longer reap a benefit from the added payments.

However analysis published by Datamonitor has urged political parties to focus on the overall picture and assess whether recommendations are equitable, sustainable and affordable in conjunction with each other.