UK – The UK government has acknowledged the "financial and administrative impacts" of ending contracting out and pledged to work closely with business to allow a smooth transition in 2017.

The pledge, contained within the Department for Work & Pensions' White Paper on state pension reform, has been welcomed by employers, who viewed it as a commitment "not to undermine" defined benefit (DB) funds.

Unveiling the reforms that will see the UK shift to a single-tier state pension, pensions minister Steve Webb said the current multi-tier system was "extraordinarily complex" and did not allow workers to predict their income in retirement.

"The overall cost of the new system will be the same as that of the one it replaces," Webb added during his speech in the House of Commons.

"This is not a pensions giveaway for the next generation. A higher flat pension is affordable only because, in the long term, people will not become entitled to very large earnings-related pensions through the state system."

His department's accompanying White Paper, 'The single-tier pension: a simple foundation for saving', further outlined how the state second pension would be abolished after 2017 and confirmed a review of the state pension age every five years, starting the same year contracting out would end.

The British Chambers of Commerce welcomed the simplification for savers the reforms would bring.

Its director of policy and external affairs Adam Marshall added that it would also create a "much-needed incentive" for workers to save privately.

"Employers will also be reassured by the government's commitment to make the administration processes of ending contracting out as simple as possible, and not to undermine defined benefit schemes," Marshall said.

He also praised as "sensible and necessary" the proposal to introduce an override whereby employers could amend fund accrual in a "limited" fashion to compensate for the loss of the national insurance rebate, previously a consequence of workers being contracted out of the state second pension.

The matter will be subject to consultation.

However, law firm Sackers was less positive about what it regarded as the "cure for the 'contracting out headache'".  

Zoe Lynch, partner at the law firm, said the solution was "likely to give many sponsors a migraine".

"With the abolition of DB contracting out, the plan is to retain the contracted-out rights within the scheme," she said.

"Schemes will therefore be required to retain records and remember the restrictions attached to DB contracted-out benefits."

The industry raised concerns about the end of contracting out ahead of the publication of the White Paper yesterday.

Union Unite expressed concerns about precisely the override praised by Marshall, noting the "danger" of employers watering down pension provision to "claw back" the increased national insurance cost.

Additionally, the White Paper outlined proposals that would see the state pension age examined every five years, with a decade-long notice period suggested to increase the age.

It said the five-year interval struck the right balance.

"More frequent reviews would allow the government to respond quickly to changes in life expectancy projections, but would mean clarity for individuals would be reduced," the policy paper said.

"In contrast, less frequent reviews could result in the need for large adjustments to State Pension age."

The reform will also introduce a minimum 10-year contribution period to draw the state pension and raise the threshold to receive the full state pension, under the reforms a flat-rate sum of £144 in current terms, from 30 years to 35 years of contribution.