Pensions Definition: ‘A regular payment to those who have retired from work due to age or ill-health paid by the state or an employer’ Heery and Noon (2001) Pensions are provided as both a statutory benefit through the National Insurance system and by employers (extra-statutory ‘occupational’ pensions). There are several forms of occupational scheme. Pensions have been undergoing major change in recent years.

Occupational pensions Around 46% of all employees are members of pension schemes additional to the state scheme. Around 13 million people are saving in workplace pension schemes (5 million in the public sector and 8 million in the private). Occupational pensions coverage is declining (12.5 million in 1967, compared to 9.1 million in 2005).

Types of occupational pension 1)Defined benefit (DB) schemes Guaranteed pension amount based on years’ membership of the scheme. Usually based on 1/60 or 1/80 of salary. Maximum is normally 2/3 of salary. 2) Defined contribution (DC) schemes Pension based on contributions to a fund but the final amount is not guaranteed. Final pension based on the investment value of the fund at pension age and what this will purchase as an annuity.

Pros and cons Defined benefit schemes: They were originally seen as assisting recruitment and retention because they encouraged employees to stay. For employees, the big advantage is that the pension amount is guaranteed. The disadvantage for employers is that they have to take the risk and pay the guaranteed amount. The cost of the scheme may exceed liabilities, meaning that the employer has to make a substantial subsidy.

Pros and cons Defined contribution schemes: The advantage to the employee is the portability of the fund, so the schemes may be better for employees who change jobs frequently. The advantage to employers is that such schemes are relatively risk-free – deficits do not have to be met by the employer. The disadvantage for employees is that they will not know the value of the future pension until they retire, and no fixed amount is guaranteed.

Other types of scheme Hybrid schemes which combine DB and DC arrangements ‘Top hat’ schemes for senior executives A group personal pension scheme whereby each employee has his/her own pension contract with an insurance company. Employers may make contributions.

Major pension benefits An annual pension on retirement The facility to ‘commute’ a pension for a tax-free lump sum Dependants’ benefits (widow/widower pensions) The ability to enhance a pension through additional voluntary contributions (AVCs) The ability to purchase added years (in DB schemes) Benefits on death-in-service and death in retirement Benefits on the employee’s leaving before normal retirement age.

The pension crisis A rapid decrease in the number of employers offering DB schemes – leading to a fall in the number of workers saving for retirement A public policy issue Major reasons for the decline in DB schemes are: the escalating cost of employer contributions; long-term demographic trends; reduced investment income for funds; increasing state regulation of schemes; a change in UK accounting standards in the way pension schemes are valued in company accounts; increased life expectancy for pensioners, meaning increased cost to schemes

The Turner reports The Pensions Commission (chaired by Lord Adair Turner) posed four options for the future: Pensioners will have to get poorer. A greater share of taxation will have to be spent on pensions. Workers will have to save more for their retirement. Employees will have to work longer before retiring.

Turner recommendations Reform the state scheme to deliver a more generous, more universal, less means-tested and simpler state pension. Encourage individuals to save for earnings- related pensions through automatic enrolment at a national level. A modest minimum level of compulsory employer contributions. The creation of a national Pension Savings Scheme to cater for those without a good employer-based scheme.

Pensions Act 2007 The state retirement age to rise to 68 by 2046 The basic state pension increase to be linked to national earnings growth from 2015 at latest Minimum income guaranteed by a means-tested Pension Credit to continue to rise in line with earnings The state second pension to become less valuable for higher earners It will be easier for people with interrupted work patterns to qualify for contributory state pensions. From 2012 all employees aged between 22 and state retirement age to be automatically enrolled in a pension scheme (but with freedom to opt out) Employer required to make minimum contribution of 3%