UK - The UK pensions industry has welcomed proposals to introduce a flat-rate state pension system, but warned the resulting abolition of contracting out would have "significant" implications for defined benefit (DB) schemes in the country.

The comments came as the Department for Work and Pensions (DWP) published responses to its consultation on the state pension reforms, examining both how the introduction of the new state system could be staggered, as well as if the government should introduce methods to increase state pension age automatically in line with rising longevity.

The National Association of Pension Funds welcomed industry consensus that a flat-rate pension, expected to be around £140 a week, should be introduced, arguing that it was a vital component to the success of auto-enrolment.

However, chief executive Joanne Segars warned that the end of contracting-out - triggered by the end of the state second pension (S2P) - would be difficult on DB schemes.

"This would have significant implications for employers, schemes and members and needs to be managed carefully," she said, echoing sentiments voiced by Tesco, one of the UK's largest supermarket chains, in its response to the DWP.

In its summary of responses, the department said: "Respondents noted that employers facing increased costs could increase employee contributions, reduce future benefits or close schemes to future accruals."

However, the Confederation of British Industry (CBI) argued that the end of the S2P should instead be seen as an opportunity to examine "a wide array of complex and burdensome regulations", while manufacturers' organisation EEF chose to see the reforms as an opportunity to support DB schemes.

"We would caution against a mindset that is evident among many commentators that DB schemes are in terminal decline, implying that the impact of abolishing contracting out for salary-related schemes might be short lived, and therefore easements and mitigation would not be required," it said.

Despite the majority of respondents supporting state pension reforms, the TUC said that while it recognised the need for reforms, the government had not demonstrated "in sufficient detail" how the changes would address problems such as reliance on means-testing.

It added: "Nor does the consultation paper quantify sufficiently the impact its proposals will have on the retirement income of the individual winners and losers there will be under each of its options for reform."

Pensions minister Steve Webb seemingly accepted the criticism, stating that the government would consider the feedback and bring forward "more detailed proposals" on the reform.

Asked if the government should consider a method that would automatically increase state pension age in line with rising longevity, most respondents dismissed the idea.

Legal & General said that "on balance", it favoured a periodic review approach, with the NAPF, Association of British Insurers and CBI also agreeing the status quo should remain.

The DWP noted that many respondents stressed that instead of solely examining increases to average life expectancy, increases should also look at healthy life expectancy and differences in longevity according to region.