NCPA - National Center for Policy Analysis

"Stakeholder Pensions" Proposed For British Workers

February 16, 1999

Congress and the Clinton Administration should consider the experience of the British as they search for a consensus on Social Security reform, say Heritage Foundation analysts.

The Social Security system in the United Kingdom is partially privatized. Virtually every worker is eligible for a basic state pension, and most can enroll in a second tier of state pension benefits. But they also can choose to divert a portion of their national payroll taxes to invest in private pension plans.

More than two-thirds of British workers are "contracted out" of the second tier of the government pension system and enrolled in private plans. The pool of private pension funds in U.K. now exceeds £830 billion (almost $1.4 trillion), slightly more than the size of the British economy, and larger than the private pension funds of all other European countries combined.

Prime Minister Tony Blair (Labour) wants to expand workers' access to private pension options and fix specific problems with the current system. In a recent government green paper, "A New Contract for Welfare: Partnership in Pensions," officials propose a new system which would retain the basic state pension, with its flat rate benefit, but increase it in line with prices.

  • They also want to create new "stakeholder pensions" -- available to all workers -- that would combine features of current employer-based and personal pension plans.
  • All retirees would be guaranteed a minimum income from the combination of investments and the basic state pension, and the existing State Earnings Related Pension System (SERPS) would be replaced with a second-tier government pension system that offers better benefits to low-income workers.
  • For both the second state pension and the private pension funds, the government would subsidize, through tax rebates, the contributions of those who make £9,000 to £18,000 ($14,850 to $29,700).

Source: Robert E. Moffit, "Learning from Britain's Next Step in Privatizing Social Security Benefits," Backgrounder No. 1251, February 12, 1999, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.

 

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