The Political Economy of Pension Reform
Edited by Martin Rein and Winfried Schmähl
Chapter 1: Contracting Out of the State Pension System: The British Experience of Carrots and Sticks
David Blake INTRODUCTION The United Kingdom was one of the ﬁrst countries in the world to develop formal private pension arrangements (beginning in the nineteenth century). First-pillar state pension provision began in the early twentieth century and the modern welfare state began in 1948. The UK operates its welfare state on the Beveridgean principle of providing just a minimum safety net, in contrast with the more generous Bismarckian principle that operates on the Continent. Second-pillar state pensions began in 1961 and the current second-pillar state pension scheme (S2P – the State Second Pension Scheme) began in April 2002. From the very beginning, individuals were oﬀered a carrot in the form of very generous tax incentives to ‘contract out’ of the second-pillar state pension scheme into either occupational pension schemes or personal pension schemes. However, since 1980, a stick has also been in use: the UK became one of the ﬁrst countries in the world to begin the process of reducing systematically unfunded state provision, thereby providing a diﬀerent type of incentive to make private pension arrangements. This explains why the UK is one of the few countries in Europe whose pension problem is manageable. 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 longstanding funded private pension sector, its population is aging less rapidly than elsewhere in Europe and its governments have taken measures to prevent...
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