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SPECIAL REPORT

Portability and Preservation of Pension Rights in the United Kingdom

This study was commissioned by the UK Office of Fair Trading as part of its inquiry into UK occupational pension schemes.

David Blake and J. Michael Orszag

This study examines pension portability and the preservation of pensions rights in the U.K. We review the economic theory underlying pension schemes and the arguments for and against more pensions portability. We show that the effect of current laws and actuarial practice is to penalize young early leavers heavily, so that they can lose up to 30% of the pension that they might have expected when they retire. We propose a policy to reduce this early leaver penalty according to a sliding scale that involves determining transfer values for younger workers on the basis of actual contributions paid rather than on notional accrued benefits, but with accrued benefits having a more significant weight in calculating the transfer values of older early leavers. The effects of the various actuarial valuation methods and assumptions used as well as the discretion allowed to actuaries are discussed in detail. We also compare the position of early leavers in the U.S., Canada, the Netherlands, and Japan.

Published in Volume Three of the Report of the Directory General's "Inquiry Into Pensions", Office of Fair Trading, London. (Available free on +44 (0) 870 60 60 321, oft@echristian.co.uk, www.oft.gov.uk.)

[Executive Summary] [PDF of Report (121 pages)]
[Reply to Comments from the Institute and Faculty of Actuaries]
[Letter from Director General of Fair Trading to the Institute of Actuaries]