VZCZCXRO2803
PP RUEHAST
DE RUEHLO #3853/01 1511107
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P 311107Z MAY 06
FM AMEMBASSY LONDON
TO RUEHC/DEPT OF LABOR WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 5803
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEAUSA/DEPT OF HHS WASHDC
RUEHFDY/SOCIAL SECURITY ADMIN WASHINGTON DC

UNCLAS SECTION 01 OF 03 LONDON 003853 
 
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TAGS: ELAB ECON PGOV
SUBJECT: UK ANNOUNCES MAJOR REVAMP OF PENSION SYSTEM 
 
REF: 04 STATE 0247 
 
LONDON 00003853  001.2 OF 003 
 
 
¶1.  SUMMARY: The British government announced on May 25 what 
Secretary of State for Work and Pensions John Hutton 
 
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described as "the greatest renewal of our pensions system 
since the post-war reforms implemented by Clement Attlee's 
government."  The changes include an increase in the 
retirement age to 68 by 2050, more generous state pensions 
with indexing linked to earnings rather than prices, and 
creation of a voluntary national savings plan that would 
require individuals to "opt-out" rather than "opt-in."  The 
changes are intended to address several problems, the 
greatest being that the UK's basic state pension is lower 
than those of other western countries.  Also, the current 
system is too complex, and a declining percentage of the 
workforce is covered by secondary pension plans.  The 
government has built an impressive level of consensus around 
its reform proposals and response to the announcement from 
all major political parties, business, unions, and pensions 
advocacy groups was generally supportive.  The first 
implementing legislation will be introduced in September 
¶2006.  END SUMMARY. 
 
The Turner Commission Recommends Change 
--------------------------------------- 
¶2.  On May 25, the UK government published a so-called white 
paper, a precursor to detailed legislation, outlining plans 
for a complete overhaul of the British pension system.  The 
paper adopts virtually all of the recommendations made by a 
special commission, set up at the end of 2003 to review the 
pension system.  While the Turner commission initially had a 
mandate to look only at the public sector, the Prime Minister 
favored a broader approach and it quickly became evident that 
the prevalence of contracting-out -- equivalent to carve-outs 
in the U.S. system whereby some of the money workers pay into 
the public pension system is diverted into individually-owned 
accounts -- made it desirable to look at the private sector 
as well. 
 
¶3.  The commission was made up of three experts: Lord Adair 
Turner, Vice Chairman of Merrill Lynch Europe and former head 
of the Confederation of British Industry; Jeannie Drake, 
Deputy General Secretary of the Communications Workers Union; 
and John Hills, Professor of Social Policy at the London 
School of Economics.  Turner described the Commission's work 
as "a fact-driven process," and its first paper, issued in 
October 2003, was a basic status report.  A key finding was 
that the assumptions made by the government in its previous 
policy study (1998) were off target, i.e. that the 
then-current division of the average person's pension 
payments as 60 percent state and 40 percent private would 
gradually shift to 40 percent state and 60 percent private. 
In fact, Turner found that private pension plans were 
becoming less available and, where available, less generous, 
while the state too was planning to do less. 
 
The Present State of British Pensions 
------------------------------------- 
¶4.  The present British system combines features of the U.S. 
social security and welfare systems.  British pensioners 
receive a basic pension of 80 pounds per week.  The national 
poverty line is set currently at 109 pounds and the gap (29 
pounds) is given to retirees as an additional pension credit. 
 However, this additional payment is means-tested, i.e. for 
every pound of private income received, 40 pence is deducted 
from the pension credit. The poverty line is set through a 
mechanism that is linked to earnings, while the basic state 
pension has been linked to prices since the earnings link was 
severed under the Thatcher government in the 1980s. 
Therefore, if current trends in earnings and prices 
continued, the Turner Commission concluded, the present 
pension system would not only discourage private savings by 
individuals, but would lead to a gradual increase of the gap 
between the basic state pension and the poverty line, 
subjecting more and more of the payment to this means 
testing. 
 
¶5. As in other western economies, there has been a move away 
from defined-benefits plans to defined-contributions plans 
that offer no guaranteed pay out. In addition, pension plans 
offered by private companies presently operate under an 
"opt-in" system where workers must specifically declare their 
desire to participate in the private plan.  The Commission's 
conclusions regarding the impact of "opt-in" and 
means-testing on savings were reinforced by the latest 
 
LONDON 00003853  002.2 OF 003 
 
 
official data showing that almost 60 percent of private 
sector workers did not contribute to a non-state pension plan 
in 2005, up from just over 40 percent in 2003.  The latest 
Employer's Pension Provision survey indicates that the 
percentage of employers making pension provision for their 
employees declined from 52 percent in 2003 to 44 percent in 
¶2005. 
 
The Way Forward 
--------------- 
¶6.  The government has proposed an ambitious combination of 
remedies designed to simplify the system and improve benefits 
for most people.  However, average earners will no longer 
qualify for the additional secondary pension credit payment 
and their improved benefits will come from a new national 
savings scheme. 
 
-- The retirement age will rise gradually, starting in 
2010-2020, over which period women's eligibility will 
increase from 60 to 65.  (Retirement age for men currently is 
65.)  The retirement age for both men and women then will 
increase from 65 to 66 in 2024 and rise one year per decade 
thereafter to 68 in 2044. 
 
-- Individuals who leave the workforce for certain periods to 
care for children or other family members will find it easier 
to qualify for state benefits.  The number of years required 
to pay into the system in order to receive benefits will drop 
from 39 to 30. 
 
-- Workers not already in a company pension plan will be 
enrolled automatically in the national savings scheme (NPSS) 
starting in 2012, although they can opt out.  Companies will 
have to submit their plans for review to assure that they 
meet the same basic criteria as the NPSS.  Workers who opt 
out will be offered further chances to opt back in. 
Employees will pay in five percent of income, employers will 
match 3 percent up to a maximum of 33,000 pounds per year, 
and the government will offer an additional one percent tax 
break. 
 
-- The hope is that two-thirds of the workforce will 
participate in the new NPSS; the highest estimate is 70 
percent. 
 
-- Pensions will be linked to earnings, not prices, as of 
2012, although Chancellor Gordon Brown insisted on a caveat, 
"subject to affordability."  Over time, the government 
projects that the combination of the earnings link and the 
NPSS would mean no one would be on means-tested benefits by 
¶2050. 
 
¶7.  The Turner Commission had left it to the government to 
decide how to pay for improvements in state benefits 
packages.  The white paper confirmed the plan to reduce 
incentives currently paid on "contracting-out" schemes as one 
way of redirecting funds.  Additional revenue will be 
generated by reintroducing the earnings link two years later 
than recommended by Turner, by the hikes in the pension age, 
and through curtailment of additional means-testing for 
benefits during the transition years.  (The percentage of 
pensioners subject to means testing will be capped at the 
present 40 percent.)  In a private meeting with USG 
officials, Hutton said he also intends to use several billion 
pounds he has saved in other cutbacks at his agency to 
"smooth the edges" of the transition between the current 
second state pension and the NPSS.  Furthermore, he said, the 
change in the retirement age for women should "release 
resources" into the system. 
 
¶8.  One unanswered question is how the government plans to 
address a major anomaly in its grand plan, the deal it cut 
last October with public sector unions to retain the 
retirement age of 60 for current public sector employees. 
New public sector employees would be subject to the new 
rules, but there are already calls for the government to 
revisit the October 2005 decision as part of the larger 
reform plans. 
 
Strong Political Consensus 
-------------------------- 
 
¶9.  The lengthy study and reporting process has built a 
strong public and political consensus around the white paper 
proposals.  A key point was the agreement on May 20 between 
 
LONDON 00003853  003.2 OF 003 
 
 
PM Blair and Chancellor Brown on the reintroduction of the 
earnings link.  Both Adair Turner and Tory Shadow spokesman 
David Willets emphasized in private conversations with USG 
officials the importance of the multiparty agreement that has 
formed around the basic elements of the reform.  According to 
Turner, an even more critical element of the reform is the 
acceptance of the principle that the ratio of years paying 
into a pension scheme vs. years drawing out should remain the 
same, i.e. the British retirement age could go up further if 
life expectancy increases. 
 
¶10.  The implementing legislation is expected to move forward 
in two stages.  The government will introduce the first bill 
in September 2006 to restore the earnings link.  The second 
bill on the savings plan will be tabled in Fall 2007. 
Willets predicted smooth sailing for the reform legislation 
although he noted that there is a question as to whether the 
NPSS will be enough to move people off welfare.  Business, he 
commented, actually has an incentive to discourage 
participation in the private accounts to avoid making 
matching payments.  Other conservative commentators have 
suggested that the three percent contribution will place an 
unfair burden on small businesses; they suggest offsetting 
the pension contribution matching requirements with a cut in 
corporate tax rates to avoid squeezing small employers. 
 
¶11.  The UK government is optimistic that the reform plan 
will move ahead and resolve its most pressing issues.  Key 
components in reducing current inequalities, such as the 
increase in female retirement age, are already on the books, 
i.e. no new legislation is needed.  Although Hutton himself 
cautiously refused to say that he had nailed down the votes 
to pass the  legislation, it seems clear that both the 
Conservatives and Liberal Democrats are ready to go along. 
Certainly the fact that the government has successfully built 
consensus on a package whose impact will be felt for 
generations to come shows that it is still very much in 
charge of the legislative agenda.  There will be sniping and 
nibbling at the edges in the months ahead, but the bottom 
line is that most British workers will have better benefits 
under the new system than they are projected to have under 
the existing regime.  It's not hard to generate political 
will to move forward when you can point to a more affluent 
future at the end of the road. 
 
¶12.  For the full text of the UK government's white paper, 
check the Department of Work and Pensions internet site: 
www.dwp.gov.uk/pensionsreform/whitepaper.asp. 
 
Visit London's Classified Website: 
http://www.state.sgov.gov/p/eur/london/index. cfm 
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