Chinese School - Britain set to shake up pension system

WORLD / Europe

Britain set to shake up pension system

(Reuters)
Updated: 2006-05-25 10:22

Britain will launch the most ambitious overhaul of its pension system in
60 years on Thursday to prevent a looming crisis caused by an ageing
population.

The government's eagerly awaited proposals, due to be presented to
parliament, follow years of debate over how to provide a more generous
basic state pension while encouraging workers to supplement it by saving
for private pensions.

The reforms are "probably the biggest shakeup of the pensions system
since the Attlee government (in the late 1940s)," Pensions Secretary John
Hutton said this week.

In common with many European countries, Britain's ageing population faces
a pensions timebomb, with an estimated 7 million people not saving enough
for their old age.

Employers, facing rising costs, have been closing traditional, generous
pension plans in favour of schemes in which the employee carries more
investment risk.

If nothing is done to tackle an estimated 57 billion pound ($107.2
billion) pension shortfall, many Britons might be dependent on
means-tested state handouts when they retire.

The government is set to call for a rise in the state pensionable age and
to endorse a plan for a new National Pension Savings Scheme (NPSS).

Workers whose company did not have its own pension scheme would be
automatically enrolled into the NPSS.

While many Britons agree on the need for reform, the proposals are
certain to draw fire, particularly from small businesses that face a
heavier pensions burden.

Some critics have said the proposed NPSS would undermine the pensions
sector by damaging existing plans and reducing the range of pension fund
providers.

The reform proposals caused a row, only recently settled, between Prime
Minister Tony Blair and his likely successor, finance minister Gordon
Brown, concerned about their cost.

They aim to provide a more generous state pension by linking increases in
the state pension to rises in earnings.

Since 1981, state pensions have risen in line with inflation, generally
lower than rises in earnings.

A government source told Reuters on Wednesday that the link to earnings
would be restored between 2012 and 2015.

One of the most controversial aspects of the reforms will be a plan to
force employers to contribute at least 3 percent of a worker's salary to
the new national pension scheme.

Employees will contribute 4 percent, with the state contributing 1
percent as tax relief, the Guardian newspaper, which obtained a leak of
the proposals, said this week.

It said the employer contribution would cost firms an extra 2.6 billion
pounds, but that the government would propose a three-year transition
package to help employers cope.

Philip Hammond, the opposition Conservative Party's spokesman on
pensions, said his centre-right party supported the key elements of the
planned reform. But he faulted the government for failing to build a
cross-party consensus on the proposals and said a three-year transition
period for businesses to adapt was inadequate.

"We think it has to be at least six years. This is a crucial issue
because if we get it wrong it will damage the economy and it will damage
employment," he told Reuters.

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