Big shift back to UK state pension system By Nicholas Timmins, Public Policy Editor
Financial Times Published: December 19 2004 21:55
About 500,000 people have moved back into the state pension system in a year, the latest figures from the Department of Work and Pensions show.
The move "is the biggest shift back into the state system ever", according to Stephen Yeo, an actuary with pension specialist Watson Wyatt.
The figures are the first to confirm a trend that the pension industry has been warning about for some time.
As employers close final salary schemes to new entrants, the money purchase schemes that are replacing them, and which new workers join, are almost universally contracted into the state system, pension advisers say.
At the same time, insurers are advising large numbers of people with personal pensions in their 40s and 50s and in some cases anyone with a personal pension to contract back into the state system.
Insurers say that the rebates on offer are now too low to cover what people would have received from the state.
"This is likely only to be the start of a major shift back into the security of the state system," Mr Yeo said, adding that there was "undoubtedly more to come". Malcolm Wicks, the pensions minister, disclosed that the government actuary expected a further 250,000 people to contract back into the state system this year.
The move would, in the long term, push up public spending on pensions as more people relied on the state system. It meant less money from contracted-out rebates was going into personal or company pension funds, he said.
The transfer also means that the target the government set in 1998 to shift the balance of income in retirement, so that in time half as much again comes from the private sector, is heading in precisely the wrong direction.
In 2001-02, Mr Yeo said, almost 8m private sector workers were contracted out of the state second pension, with the national insurance contributions they would otherwise have paid being put into funded savings money that increases the demand for equities and bonds.
In the following year, however, 500,000 people moved themselves, or were in effect moved by their employers or insurers, back into the state system, according to Watson Wyatt's calculations on figures released by the pensions department last week.
In 2002-03 there were about 203,000 fewer people with personal pensions contracted out, and the numbers in company schemes who were contracted out of the state system fell by319,000. The only rise was in the public sector, where the effect of a 119,000 increase in the number of employees contracted out is largely an accounting one, as the bill for both state pensions and public sector schemes are met by the taxpayer.
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