UK - The UK government has launched a green paper detailing proposed changes to the state pension system that will see the abolition of the state second pension (S2P), the end of contracting out to coincide with the move and the introduction of the flat-rate payment for retirees.

Proposals put forward in 'A state pension for the 21st century' were greeted warmly by many in the industry, who said the current system was overcomplicated and that the changes signaled a "turning point" for the UK pensions system.

Pensions minister Steve Webb argued that the current complexity of the state system was a "major barrier" to saving and that introducing the flat-rate pension, estimated to be around £140 a week, would allow workers to gain a better understanding of expected income.

While several options for reform were put forward, the one branded more radical in the green paper involves the merger of state pension and S2P, rather than gradually combining to two tiers of the system to offer the outlined flat-rate pension, which would not offer any additional means-tested benefits as is currently the case.

Discussing the potential of an automatic increase in the retirement age, the green paper concedes that while it is an avenue being explored, it poses a number of problems.

It says: "In the face of the sort of rapid gains in longevity witnessed over the past 20 years, there may be difficulties in balancing the need to maintain parity with a formula with the need to provide some period of notice for those affected by any increases."

Issues of lack of parliamentary oversight were also raised, with the Department for Work and Pensions (DWP) noting that, while increases would then be made without the government able to take wider issues into consideration, allowing for a safety valve to overrule increases would "negate the value of a clear link between the formula and the extent of any state pension age increase".

Steven Baxter, longevity consultant at Club Vita, welcomed the proposals, saying the current system was "overcomplicated, ill-designed and risks becoming unaffordable in 21st century Britain".

However, he calculated that the reforms, which will not affect those already drawing a pension, will take several decades to take effect fully.

Baxter estimated that it would take until 2027 for half of pensioners to be drawing a flat-rate pension, with the figure rising to 90% by early 2040.

"That means we will have at least 30 years of a two-tier system that could provoke uncomfortable envy among current pensioners," he said.

Joanne Segars, chief executive of the National Association of Pension Funds, said proposals were a "turning point" for the UK.

However, she warned about the effects of ending contracting-out on occupational schemes.

"The end of 'contracting out' by defined benefit pension schemes is an inevitable part of simplification," she said.

"But the government must make an early promise that it will make it simpler for schemes to contract back in. It must not load extra costs and red tape on these pension schemes, which are under severe pressure."

Mark Hommel, pensions partner at PwC, said that the announcement meant employers could now start agreeing on the details of future retirement provisions, but added that, if an automatic link were established between longevity and the state retirement age, occupational schemes should not be excluded.

"We hope the government will make it easy for employers to change their own pension arrangements to link future retirement ages to longevity in the same way as is being proposed for state pensions."

Towers Watson's John Ball questioned how the automatic increase would happen and which factors would be used as a basis for the formula, noting that maintaining the work/retirement balance was one option being considered.

"However, other principles are not ruled out," he said. "If the government instead chose to preserve the average number of years for which people can expect to receive state pensions, the state pension age would rise by a year for every extra year of life expectancy."

Topics