UK - Introducing a 'foundation' pension combining the current Basic State Pension (BSP) and the State Second Pension (S2P) could reduce the number of people on means-tested pension benefits to 25% by 2050, according to research by the Pensions Policy Institute (PPI).

The idea of a 'foundation' pension has been proposed by the National Association of Pension Funds (NAPF) as a way to simplify the pension system and provide more equal retirement benefits to people such as women and carers.

It has proposed the foundation pension would be payable from 2017 to every individual over state pension age with at least 30 years of National Insurance (NI) contributions, with an initial level of £8,000 (€9,638) a year in 2010 earnings terms.

Analysis by the PPI suggested the measure could help reduce pensioner poverty, with pensioners in the lowest 25% of income distribution improving their income by 27% by 2030, while the number of pensioners eligible for means-tested pension credit would fall from current projections of 45% of pensioner households to just 25% by 2050. 

However, the PPI admitted this would come at a cost, with projections suggesting overnight implementation of the measure in 2017 at a level of £8,000 a year could cost the government an extra £25bn a year, or 1.5% of GDP, compared with the existing BSP and S2P system.

By 2050, the cost would still be £17bn a year, or 0.9% of GDP.

The NAPF has proposed a number of funding options to bridge the gap, including increasing state pension age, increasing NI contributions for both employers and employees and receiving extra revenue from the removal of contracting out of S2P - something that is already in the process of being removed for defined contribution schemes.

Research by the PPI found that if the introduction of a foundation pension is combined with faster increases in the state pension age, a 1% increase in national insurance and the revenue from the abolition of contracting out, then the additional cost to the government would fall from £25bn to just £6bn, or 0.3% of GDP.

In addition, by 2030, this combination of funding measures would result in a net saving to the government of £3bn compared with the current system, which increases to a saving of £14bn by 2050.

However, the PPI conceded the transition to a foundation pension would be "complex", mainly due to the "interaction with contracted out pensions".

It estimated that, if it is implemented in 2017, by 2031, 95% of pensioners could be receiving a state pension at the Foundation Pension level.

Chris Curry, PPI research director, said: "A foundation pension, set at a level of £8,000 a year, would build on the progress made in the recent state pension reforms in providing more equal pensions for everyone.

"The foundation pension would also reduce, though not remove the need for means-tested benefits and improve the incomes of low-income pensioners."

He added that a single state pension could also be "more predictable" than the current two-tier state pension system and therefore could help with retirement planning.