Radical reform of British pension provision is urgent


Martin Wolf in the Financial Times YESTERDAY:

“Existing defined benefit pension funds should be consolidated”

Economic security in old age matters. But it is complex: good policy requires rigorous long-term thinking. Unfortunately, that has been lacking in the UK, which has jumped from one “corner solution” — defined benefit plans — to another — defined contribution plans. The best positions are rarely to be found in corners. It would be better to adopt schemes that pool risks, as DB schemes do, but keep some of the flexibility of DC schemes. The basic state pension in the UK is extremely modest (a maximum of £179.60 a week).

The “gold standard” for pensioners whose earnings make this unacceptably small used to be a defined benefit pension, which promises an income in retirement related to peak earnings. But provision of DB pensions by private corporations has become unacceptably expensive to corporate sponsors. According to the Pension Protection Fund, the number of schemes has duly shrunk from 7,751 in 2006 to 5,327 in 2020; the number of members has shrunk from 14m to 9.9m; only 54 per cent of schemes allow accrual of new benefits by members and only 11 per cent are open to new members. The one healthy part of the DB system is the public sector’s: taxpayers are paying to give public servants an index-linked income-linked pension they cannot have themselves.

Read the full article here.