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U.K. PENSION REFORM GAINS NEW SUPPORT

Posted On: Jan. 28, 1996 12:00 AM CST

LONDON-A new voice has been added to the growing demands for U.K. pension reform.

The Retirement Income Inquiry, an independent panel commissioned by the National Assn. of Pension Funds, advocates creation of a new two-tiered system. Such a system would include a basic assured pension, which would guarantee all pensioners a government-backed minimum retirement income, while workers with higher earnings would be required to save for their own pensions, which could be provided through an employer-sponsored plan with employer/employee contributions.

Under the proposal, the State Earnings Related Pensions Scheme, the current component of the government pension system that calculates benefits based on salary, would be phased out and replaced with compulsory contributions by employees, employers and the self-employed to some form of funded pension program. This program could be an employer-sponsored or personal pension or a proposed National Pension Scheme set up by the government but privately administered, the panel suggests in "Pensions: 2000 and beyond."

For higher earners, their assured pension would be gradually reduced by a percentage of whatever other income they received over the assured level.

The Retirement Income Inquiry, chaired by former senior Treasury official Sir John Anson, did not endorse any of the widely differing suggestions on what should be deemed adequate minimum retirement income. Rather, its assured pension has been designed to be compatible with a range of views on what the level should be. However, the report noted that adoption of its proposals should avoid the current problem of some unemployed needing to receive state income support.

The National Assn. of Pension Funds, which commissioned the nearly two-year inquiry but remained independent of it, welcomed the report's emphasis on funded pensions for all as the most effective solution to the U.K.'s long-term retirement income needs.

NAPF Chairman Tom Ross said the association fully supports the proposal to replace SERPs with a compulsory funded pension system, but doesn't want it managed by a state governing body. "Our view is that such a scheme would be best run by competing private organizations with individuals having personalized accounts."

Mr. Ross added that he hoped the report would lead to positive action "sooner rather than later, because the pensions time bomb is already alight."

The report claims that for demographic reasons, the existing state pension arrangements will not be able to cope for long. By 2030, the number of people in Britain of working age for each person of pension age will have fallen to 2.7 from 3.3 in 1991. The basic state pension, now about 15% of average gross male earnings, will fall to 9% of earnings by 2030 if it continues to be linked to price inflation.

The government, which has previously opposed calls for compulsory pension savings, gave the proposals a cool response. Social Security Secretary Peter Lilley said extending means-testing of pensions would discourage savings. He said the government had already introduced a number of reforms to ensure that employer-sponsored and personal pensions "are affordable without putting unacceptable charges and costs on employers."

The country's leading employers' group also had reservations about the report's recommendations. The Confederation of British Industry said that while the proposal for an assured pension "strikes us as an idea with potential," the organization is worried by the report's recommendation that employers should make increased contributions to employee pensions. This could make British industry less competitive and place an undue burden on many smaller employers, said Dominic Johnson, the CBI's labor markets and benefits policy adviser.

Pension reform has been debated in the United Kingdom for the past few years. One of the most important outcomes of the debate to date is the Pension Act 1995, which will go into effect in April 1997. This was the result of the Goode Report into pension law reform, written by a government-appointed committee headed by attorney and Oxford University law professor Roy Goode,largely in response to the Maxwell pension scandal (BI, Oct. 11, 1993). The report became the basis of the Pension Act 1995, which deals primarily with controls over pension fund management and security.