03 June 2005
Proposals to reform the state second pension outlined by the CBI this week are under active consideration and could form part of the government's response to Britain's retirement crisis.
A spokeswoman for the Pensions Commission has confirmed that the CBI's call for an overhaul of the state second pension (S2P) to encourage savings among low earners is 'one of a number of serious options still under review', in advance of chair Adair Turner's policy recommendations this autumn.
The S2P was introduced in 2002 to replace Serps and has been funded by the government on a 'pay as you go' basis. It allows for a second state payment on top of the basic pension, or an opt-out and the use of the additional cash to invest in a private scheme.
But Jay Sheth, senior policy adviser at the CBI, told Public Finance that the S2P had been 'ineffective' since it 'failed to provide an adequate retirement fund for many on low incomes'.
The CBI has suggested making the S2P a funded (or pooled) defined contribution pension, linked to earnings and managed at low cost by the state.
'This is about economies of scale. Administration costs for a pooled fund involving millions of people are lower than those for private schemes involving thousands of members,' explained Sheth. 'Average administration costs for current private provision are over 1.5% of the value of the fund, while we expect that the government could administer a reformed S2P at 0.4%.
'That's a significant saving for those on low incomes. A person who earns £20,000 per year, for example, could see their total retirement savings rise from £100,000 to £135,000 – or £2,000 per year for every year of their retirement.'
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