UK - Critics have warned UK state pension reforms will amount to "death by a thousand cuts" for defined benefit (DB) schemes, as the Pensions Policy Institute (PPI) released a detailed study of the government's proposed flat-rate reforms.

The National Association of Pension Funds (NAPF), which commissioned the PPI survey, once again argued in favour of a "radical" reform to the state system, which would see an end of the state second pension (S2P) and contracting-out.

The PPI study, 'An assessment of the Government's state pension reform', examined the two options put forward in the recent green paper.

It found that the option favoured by the NAPF - shifting the state pension system to a single-tier, flat-rate payment rather than accelerating the flat-rating of S2P - would be cost neutral until 2055.

Joanne Segars, chief executive at the NAPF, reiterated her support for the reforms, similar to the Foundation Pension outlined by the organisation in the past.

"It is this much more radical approach that will help to secure the long-term viability of the state pension system and to re-engage people with the importance of saving for retirement," she said.

Segars added that the reforms would "complement the introduction of auto-enrolment", although pensions minister Steve Webb said legislation was unlikely to be published before next summer.

However, the survey estimated that high-income earners were set to see state pension payments decline under the proposals, which are estimated to see a weekly payment of £140.

Webb conceded there would be residual complexity caused by the end of S2P. 

"Some allowance for past contracting out will have to be made," he said. "You might get £142, you might get more or you might get less, because some of it will be coming through your scheme."

During a discussion following the report's release, the question was raised whether the reforms and the end of contracting out would lead to a shift from DB to defined contribution, with the speaker arguing that the reforms would entail "death by a thousand cuts" for the former.

Segars addressed the point by arguing that many schemes had already ended contracting out, as it was viewed as complicated. She said contracting back in was the "sensible" approach to take.

Webb said he was "mindful" of the problems that could be caused by his department's proposals, particularly for DB schemes.

"You change structures that have been in place for decades, and that creates transitional issues," he said.

"We are very mindful of the need to work with those who are trying to provide quality pension provision, to make sure nothing we do in making the state pension better will in any way undermine quality occupational pension provision."

Topics