Pension Reform in Britain

This paper examines the evolution of the pension system in Britain. In particular, it focuses on the shift from pay-as-you-go, state-run defined-benefit pensions to individual, private-sector, funded defined-contribution accounts. It looks at three issues in this reform: the financing of the transition from pay-as-you-go to funded provision; the fiscal impact of voluntary switching and adverse selection; and the question of the degree to which personal pension accounts were'over-sold'to individuals for whom they were not suitable. The paper examines recent reform proposals and the prospects for reform under the new Labor government elected last year. It concludes that the British system has avoided a future financial crisis arising from the demographic transition, but that problems of incentives and retirement-income adequacy remain.