The United Kingdom Pension System: Key Features
The United Kingdom was one of the first countries in the world to develop
formal private pension arrangements (beginning in the 18th Century) and was
also one of the first to begin the process of reducing systematically unfunded
state provision in favour of funded private provision (beginning in 1980).
This explains why the UK is one of the few countries in Europe that is not facing
a serious pension crisis. The reasons for this are straightforward: state pensions
(both in terms of the replacement ratio and as a proportion of average earnings)
are amongst the lowest in Europe, the UK has a long-standing funded private
pension sector, its population is ageing less rapidly than elsewhere in Europe
and its governments have taken measures to prevent a pension crisis developing.
These measures have involved making systematic cuts in unfunded state pension
provision and increasingly transferring the burden of providing pensions to the
funded private sector. The UK is not entitled to be complacent, however, since
there remain some serious and unresolved problems with the different types of
private sector provision.
This paper examines the key issues relating to the UK pension system. It reviews
the current system of pension provision, describes and analyses the reforms
since 1980, examines the legal regulatory and accounting framework for
occupational pension schemes, assesses the different types of risks and
returns from membership of defined benefit and defined contribution schemes,
and investigates the management and investment performance of pension fund
assets. The paper ends with a discussion review of institutional investment in
the UK conducted by Paul Myners and published in March 2001.