The UK Pension System - Essay Example

Introduction UK pension system is considered as one of the oldest pension systems in the world. The present of the system suggests a long history of modification and reforms introduced during last three decades. It has recently been labeled as the sixth best pension system within European Union.(Ellson,2005). Traditionally this system is a combination of public and private sources of funds are clubbed together to provide pensioner benefits to the elderly population. (Natali, 2004). However this system is now considered as being inadequate. The Independent Pensions Policy Institute (PPI) in its report suggested that the system is getting worse and that “it could not identify any future signs that future pensioners will be any better off than today” (Amble, 2006). It is because of this, it has now being largely argued that the UK Pension system needs to be revamped and in doing so if UK government can follow the example of its counterparts in EU, it may avoid the Pension crisis in the country. Though there pension systems in the EU are considered as more generous however it has also been argued that the declining stock markets are causing the reduction in the value of the pension funds, one of the essential pillars in the whole pension system in the EU and UK and that the EU pension funds may face bankruptcy if there are no radical changes are being initiated in order to meet the future challenges. This work will explore the UK Pension system, what it has been labeled as a failure and finally a comparison will be made between UK and few EU states to explore whether by following their example, UK can avoid the pension crisis in the country or not. UK Pension System Crisis As discussed above that the UK Pension system has evolved over the period of time to accommodate the changing requirements of the population. Since majority of the UK population is ageing therefore there are going to be extra pressures on the government to meet the requirements of the ageing population. The modern history of Pension in the United Kingdom suggest that the Basic State Pension system was introduced in 1948 and is financed by the National Insurance Contributions (NICs) for people having disposable income over a particular threshold income level as suggested by the Law. Pensioner contributions for People with income groups less than the basic threshold were contributed. The second pillar of the pension system in UK is represented by the supplementary pensions and is compulsory for the people who are earning above the lower earning limit. The third pillar of the UK pension system is a voluntary contribution of insurance and pension funds to accumulate the pension benefits over the period of time for the employees. During 2005, a major shakeup in the pension system of the UK was proposed with the major recommendations of increasing the pension age from 65 to 68 years however the basic state pension would increase and linked with the earnings rather than inflation. (BBCNEWS.COM, 2005). The Pension Commission set up to re-evaluate the pension system in UK suggested that the not many people are saving for spending in the later stages of their life and that more generous pensions may be given to the people especially in their later part of the life and for that purpose, a gradual increase in the pension age was suggested to increase from 65 to 66 in 2030, 67 by 2040 and 68 years by year 2050. It is largely therefore argued now that the UK pension crisis accumulated over the period of time can be averted if UK government follow the examples of EU states and offer more generous pensions to the people. It is because of the fact that the company pension provisions are declining and the state pension is continuously being ranked as inadequate. UK and EU Pension System As a case study, we will be taking the example of few of the very important members of EU and will make a comparison in order to assess where UK stands in terms of Pension system. A comparative study with Germany would suggest that the Germany has already initiated its reforms on modern footings in 2001 when they introduced voluntary pension scheme with other adjustments being made to further strengthen the private public mix of the pension contributions (Vidlund, 2007). Similarly the pension systems in Sweden and Italy are considered as the model pension systems in the EU with pensioners having fully funded pension accounts in Sweden whereas Italy is also in the process of launching individual accounts for the pensioners with direct funding in more generous proportions being given to the pensioners. Though it is believed that the UK system is not performing well but it is better than its closer rivals i.e. France, Germany and Italy. However the notion that the UK can avoid the pension crisis it is facing by offering generous pensions may be a very tricky and challenging proposition to prove. It is because of the fact almost all of the EU members who are offering the generous pension contributions are retracting from their policy stance and are revamping the system to better rationalize it. For example, Italy’s state pension may be facing bankruptcy within a decade if it is not rationalized and revamped as its pension system is receiving less than it is paying mainly due to the early retirement of the working class. Similarly in France, due to early retirement age, government of Nicholas Sarkozy, is in the process of overhauling the generous pension system of France and are cutting back the state pension. (Kirby, 2007). Conclusion Though in short run, UK can avoid its pension crisis by offering the generous pensions however as UK progresses, the ratio of the population having age of more than 60 years would increase also putting in extra burden on the finances to pay adequate pensions when our generation approach the age of retirement therefore it is a very challenging ask to exactly determine whether the generous pensions can overcome the pension crisis in the long run however in short run it may be a viable option for the government to exercise as other EU members are doing currently. References 1. David Natali. (2004). United Kingdom: The Pension System. Available: http://www.ose.be/files/mocpension/UKOMC.pdf. Last accessed 24 March 2008. 2. Brian Amble. (2006). UK pension system inadequate and getting worse. Available: http://www.management-issues.com/2006/8/24/research/uk-pension-system-inadequate-and-getting-worse.asp. Last accessed 24 March 2008. 3. BBC News (2005). State Pension age ‘to rise to 68’ Available: http://news.bbc.co.uk/1/hi/business/4484226.stm. Last accessed 24 March 2008. 4. Vidlund, Mika.(2007). A comparison of Pension Reform in the EU: What lessons can be learned. Available: http://www.cicerofoundation.org/lectures/Presentation_Mika_Vidlund.ppt. Last accessed 24 March 2008. 5. Ellson, Andrew.(2005). UK pension system ‘Sixth best ‘ in Europe. Available http://business.timesonline.co.uk/tol/business/money/pensions/article593408.ece. Last accessed 24 March 2008. 6. Kirby, Ema Jane.(2007). Guide to Europe’s Pension Woes. Available http://news.bbc.co.uk/2/hi/europe/6937301.stm Last accessed 24 March 2008. Read More