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Regulation of Private Pensions - A Case Study of the UK

E. Philip Davis


This paper seeks to outline the major economic issues relating to
regulation of pension funds, using as an example the situation in the
United Kingdom. The UK is a suitable case study given the success
of private pensions in terms of coverage of the labour force on a
voluntary basis (attaining 75%), asset size (over 80% of GDP) and
investment performance (with returns averaging 6% per annum in real
terms over 1970-95, and 10% over 1980-95 ). The UK can thus offer
some positive lessons to other countries wishing to set up funded pension
schemes . But equally, some of the well-known failures of the UK regime
may give some warnings about the pitfalls that can arise from inadequacies
in regulation. This applies particularly to the Maxwell fraud scandal as well
as excessive commissions, inadequate contributions and mis-selling of
personal pensions by insurance companies. Given the UK features both a
sizeable occupational and a personal pension sector, we seek to cover
regulatory issues relating to both types. Whereas regulations of both
defined benefit and defined contribution funds are comprehensive, there
are particular regulatory problems with personal defined contribution pension
schemes - which have seen the most rapid growth in recent years, encouraged
by government policy.

A key background feature to the UK pension system is the low level of
unfunded social security pension. This comprises two parts, the Basic State
Pension which is indexed to prices and worth around 14% of average earnings,
and the State Earnings Related Pension (SERPS), also price indexed and
currently worth around 20% of average earnings. These are set to decline to
10% and 17% of earnings, respectively , by 2020 - although many pensioners
already rely on means tested benefits to keep them out of poverty. A stimulus
to growth of funded pensions has been the tax advantages offered to funded
pensions, with exemption of contributions and asset returns from tax, up to quite
generous levels.

ISSN 1367-580x.