International Comparisons
The UK Pension System and International Best Practice
Opinion
July 2005
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Commentary
By Robert Laslett
Chief Economist for Pensions
Department of Work and Pensions (DWP)
With the second report of the Independent Pensions Commission due in November 2005, the UK is considering whether to undertake further pension system reforms and what it can learn from international best practice. In this article I take a look at how the UK is performing by international standards, and at what is interesting us in the international scene.
Though the UK has a very distinctive pension system, the principles on which it is founded align closely with international best practice. The Principles for Reform that the Department for Work and Pensions (DWP) published in May 2005 are very similar to the goals laid out in the World Bank’s recent report “Old-Age Income Support in the 21st Century”.
Such differences as there are emphasise the underlying similarity – for example the Bank has an explicit goal that pension systems should be politically robust, while DWP has the principles that the system be comprehensible and based on a broad consensus, both of which help guarantee political stability. The question of how the UK is doing against international best practice can thus largely be answered by looking at how it performs against its own principles.
The UK does especially well in terms of affordability and economic stability, with fiscal transfers projected to remain at a low and sustainable level to 2050 and beyond. This is vital because it enables the UK to avoid the distortions that can arise from high taxes and high compulsory savings, but we continue to learn from the experiences of countries such as our EU partners that are sustaining and projecting much heavier burdens.
The UK is also achieving rapid reductions in pensioner poverty. We will both continue to push forward with improvements to our system of income-related benefits that have brought them into line with comparators such as Canada, and seek to learn from the experience of countries like New Zealand that offer a basic state pension to nearly everyone.
The UK has also historically done well in giving people the opportunity to build an adequate retirement income, but this needs to be reinvigorated. People often lack the information they need to make the right choices, and providing it has become a major focus of UK pension policy – the so-called Informed Choice programme. We are actively looking at lessons from around the world in financial education and information, for example at New Zealand’s experience with Web-based retirement planners and the record of US 401k schemes using joining techniques such as automatic enrolment.
We are also aware that it is difficult to make the system comprehensible, because of its mix of private and public provision, and of contributory and income-related elements. The Pension Commission observed that the UK pensions system is the most complex in the world. We are particularly keen to strengthen peoples’ feeling of ownership and to reduce complexity, and are interested in how models such as Sweden’s system of notional and financial accounts are addressing this.
Just as no country offers a perfect pensions blueprint, so there is something to learn even from the most controversial experiences. Australia’s experience with compulsory pension saving is very important, though controversy remains about its impact on overall household saving and retirement income. Closer to home, the PBGC’s experience provides many useful lessons about the complexity and difficulty as well as the benefits of protecting defined-benefit pension rights, and has been a vital source of learning for the UK as we established our Pension Protection Fund this year.
The views expressed in this article do not necessarily represent the views or policies of AARP.
BIO:
Robert Laslett has been DWP’s Chief Economist for Pensions and Director of Strategic
Analysis since May 2003. He runs the Department’s Pensions Analysis Directorate, whose
functions include providing economic advice on current pension policy issues, and undertaking
research to inform longer-term pension policy strategy. The directorate is responsible for
engaging with academics, consumer groups, pension industry representatives and other
government departments, as well as with policy staff and Ministers. He is a member of the
Pensions Client Board.
Robert has pursued a career as a professional economist in the public and private sectors, both in the UK and overseas. Prior to joining DWP he worked as an economic consultant specializing in financial services topics. He established and headed the London office of Boston-based Charles River Associates in 2000, and set up the financial services practice of London Economics in the 1990s. Earlier in his career, he worked at the World Bank in Washington DC on country lending programmes and country risk analysis, at HM Treasury in London, and in Malawi as a Fellow at the Overseas Development Institute.