Imagining the Ideal Pension System: International Perspectives

3 - Imagining the Ideal UK Pension System

45 3 Imagining the Ideal UK Pension System Bryn Davies Union Pension Services Limited This chapter presents what I imagine to be the ideal pension system for the United Kingdom. It is in the nature of a thought experiment ,1 where the theory or hypothesis to be tested is that it is possible to imagine a pension system that meets a set of desirable objectives, while being constrained as little as possible by politics or the existing structures of pension provision. This contrasts with most discussions on pension provision that focus on these practical constraints. Although a concentration on what is practical is understandable, and perhaps even inevitable, the question is how far it is useful when considering the shape of an “ideal” pension system, given the triple goals of providing socially acceptable benefits, improving coverage, and reducing risks. Such an exercise faces real constraints. First, ideology still plays some part in whatever is proposed. We all belong to various “epistemic communities” and use our own “conceptual tools” (Ervik 2005). It also determines the language that we use to describe these ideas, and we need to recognize the impact that language has on the outcome of these debates (Davies 2009). None of us is free of ideology, but we can try to control for its impact by being as open as possible about where we stand. Readers can then make the necessary adjustment from their own perspective. The problem comes when ideas are presented as being value-free when, in fact, they are highly subjective.2 The second constraint is that the chapter considers only the situation in the United Kingdom, and it is presented entirely as an approach to providing pensions in the United Kingdom. Lessons can be learned from other countries, and it is even possible that other countries can learn from the experience of the United Kingdom. But as Barr and Diamond (2010) point out, when implementing pension reform, “choice 46 Davies is constrained by [a country’s] fiscal, political and constitutional capacity .” So, as a result, the ideas presented are bound to be shackled, however reluctantly, by existing structures. The third constraint is that this chapter can only skim the surface of what is really a major exercise, leaving out much of the background and concentrating on the structure of what is ideal, rather than on general principles. However, there are other sources for the background, including a series of reports from the UK’s Pensions Commission3 that were produced from 2004 to 2006. While I do not agree with all of the Commission’s analysis and conclusions, there is no point repeating the extensive and detailed work that it undertook in providing the data and setting out the issues that face anyone considering the UK pension system. The Pensions Policy Institute (PPI) has also provided a useful series of reports on UK pensions4 although, again, I do not agree with all of its conclusions. For an understanding of the principles that should govern pension reform, reference should be made to those laid down in the recent work of Nicholas Barr and Peter Diamond (Barr and Diamond 2009). Given these constraints, this chapter is structured as follows. First, it briefly explains what is still wrong with the UK pension system, despite some recent reforms. Second, it discusses the elements of pensions that should be provided in a civilized and prosperous society. Third, it considers the role of the State in mandating and/or encouraging these different types of provision. Fourth, it discusses how the required level of retirement income should be provided in practice, setting out a comprehensive approach with appropriate roles for State, employment-based, and personal provision. Fifth, it discusses how the pensions could and should be financed. Conclusions are offered in the final section. Throughout the chapter, I concentrate on the structure of pension provision, rather than on the parameters that should be applied to that structure. Imagining the Ideal UK Pension System 47 WHAT IS WRONG WITH THE CURRENT UK PENSION SYSTEM? A short outline of the current UK pension system is provided in Appendix 3A. The Pensions Commission (2005) concluded that, “The current pension system combined with the current state system will deliver increasingly inadequate and unequal results.” The Commission pointed out that while the State had planned to play a reduced role in pension provision for the average pensioner on the assumption that voluntary market-based private provision...