Introduction

My research interests concern the roles of the numerous stakeholders in occupational pensions, including scheme members, employers, governments and the European Union. The OECD produces an international comparative review of pension systems across OECD countries, the latest version of this report was published on 1 December 2015. The following comment briefly considers some of the recent reforms to the UK pensions system and highlights the need to maintain a focus upon the social importance of occupational pensions, particularly in light of their increasing role in the UK in providing for people in old age through initiatives such as automatic enrolment.

The UK position

The OECD Pensions at a Glance report provides a global perspective of pension systems in OECD countries over the two year period between September 2013 and September 2015 (the “OECD report”). It was observed that there has been a period of “intense reform activity” over the past ten years.  The UK is amongst the many countries that have taken action to address the pressing social and economic issues involved with pension provision.

Since the introduction of the state pension in 1908, the UK has typically provided a low level of state pension which has encouraged individual citizens to save for themselves through private arrangements or through being members of occupational pension schemes provided by their employers.  According to the OECD report, the UK state pension will provide 22% replacement of average earnings following the reforms to the state pension system to be introduced in April 2016. This will improve the rate of the state pension in the UK,  but the level will still be below that in many other countries. The UK system is contribution based, being dependent upon National Insurance Contributions whereas other systems such as in New Zealand are residence based and provide 40% replacement of earnings. The total public spending on pensions according to the OECD report is 5.6% of GDP whereas the average is 7.9%.  It must be remembered that any consideration of state pension provision must be seen in the context of the welfare system, tax rules and occupational pension provision specific to that country.

The political philosophy of encouraging citizens to provide for themselves is routed in liberal, individualistic traditions and is evident from the original welfare system reforms that followed the Beveridge Report of 1942. The early reforms saw the introduction of a contributory state pension provided to everyone at a flat rate for the rest of their lives. However, the low level of the state pension created an opening for more employers to provide occupational pensions. In the current environment, an uncertain economic situation and longer life expectancy has meant that state systems are under considerable strain and the role of the employer in providing for employees in their old age is of ever increasing importance.

Current pensions policy in the UK has seen a continued increase to the role for the employer, with the introduction of automatic enrolment being phased in between October 2012 and February 2018.  Following initial legislation in the Pensions Act 2008, employers are now compelled to enrol their employees into a pension scheme and to make contributions to that scheme.

The current government has also enacted legislation to permit members of defined contribution schemes (also known as money purchase schemes), to access their pension on retirement as cash instead of being obliged to purchase an annuity, increasing the individual’s control over their retirement finances.

Looking to the future, the Summer Budget statement in July 2015 announced the launch of the consultation into whether tax relief for pension contributions should continue in its existing form. The consultation ran from 8 July 2015 to 30 September 2015 and the responses are being considered, according to the Chancellor’s Autumn Statement and Spending Review (issued on 25 November 2015) an announcement will be made in the 2016 Budget.

A global outlook

The OECD report observed that about half of OECD countries have enacted pension reforms such as reducing indexation (increases to make allowance for inflation), amendments to pension tax relief, increasing contribution rates and increasing retirement ages. Such reforms seek to reduce the negative effects of an aging population, the slow recovery after the global economic crisis, low returns on investments and low interest rates.

The OECD report observes that recent pension reform to pay-as-you-go systems have had an impact but sees the next major issue for pensions as being one of “social sustainability” and whether pensions will be adequate to support people in their increasing old age.

Conclusions

There are numerous actors within the occupational pensions system, each with financially motivated agendas which often come into conflict. For example, an employer providing a funded defined benefit scheme in the UK will often be faced with difficulty funding a scheme with a significant deficit and seek to save costs; the government must balance the complex issues of state pension spending and incentivising occupational and private pension savings through tax reliefs; and a scheme member is primarily concerned with ensuring that they receive the benefits that they expected to receive in order to provide for them in their retirement.

With the increasing role of occupational pensions in providing for employees in their retirement, the social function of occupational pensions must be kept at the forefront of any policy initiatives. The EU as a stakeholder in pensions has emphasised the need for adequate, safe and sustainable pensions following its 2012 White Paper and has provided useful resources for considering pension provision thorough initiatives such as the EU Ageing Working Group and the OECD report which is part funded by the European Commission. The perspectives gained from working with other countries to develop and share information on addressing concerns about aging, sustainability and adequacy of pensions from a social, member focused perspective, provides an example of a positive benefit from EU involvement in pensions.

James Kolaczkowski

PhD Candidate
University of Bristol Law School