Insurance Law

Insurers Could Benefit if the New UK Government Can Reform the Pensions System

By Robert O'Connor, Editor, A.M. Best Company

Insurers involved in the U.K. pensions market are reacting with caution to the new U.K. government's call for a simpler, more stable pension system, as some believe constructive reform is easier to talk about than to implement.

Paul Goodwin, head of pensions at Aviva plc, said calls for simplicity in pensions are made on a regular basis in the United Kingdom. The all-too-common response to this is: "As long as you don't touch what I've already accrued, you can have it as simple as you like," he said.

The result of these kinds of pressures may be a new simple structure overlaid on an existing complex setup -- and more overall complexity. Goodwin described the signals coming from the government as "hugely more positive than we have seen in the last 10 to 15 years in terms of simplicity. But at this stage they are only signals."

Goodwin said he would welcome a simplification of state benefits. "We've got people walking blindfolded into retirement at the moment," he said.

He would also like to see better coordination among the various government departments whose work involves pensions.

The United Kingdom needs "a fairer, simpler and more sustainable" state pension system, said Steve Webb, the government pensions minister, at a recent London conference.

"What do we need in pensions? We need stability," said Webb. "And we need, I think, the government to see the big picture."

Webb spoke during a debate hosted by the International Longevity Center-UK and the Actuarial Profession. The longevity center describes itself as "an independent, nonpartisan think-tank dedicated to addressing issues of longevity, aging and population change." The Actuarial Profession is the professional body for actuaries in the United Kingdom.

"Right at the top of the in tray, in my view, is the state pension, getting the state pension right," Webb told the audience.

U.K. pensions policy suffers from "the curse of incrementalism," having originated before World War II and been developed piecemeal since in response to successive crises, said Webb. He wryly noted a recent observation that changes brought in during the 1970s have not yet taken hold. Webb also pledged to work closely with the U.K. Treasury in developing a pensions policy.

Webb is a member of the Liberal Democrats, the junior partners with the Conservatives in the newly elected coalition government. Alluding to his previous role as the pensions spokesman for the Liberal Democrats when they were in opposition, Webb said, "I see myself as a sort of poacher turned gamekeeper."

The lengthening of life expectancies will be considered in setting the age at which people can collect state pensions, Webb said. The expertise of the insurance industry can be helpful here, he said. In 1926, the average U.K. male life expectancy at birth was 64.3, Webb said. It is now 89.1.

The government is committed to automatic enrollment in company pensions, Webb said. This, he argued, would get many people into pension saving for the first time. Webb would also favor a change to allow people to tap into their pensions savings. Such a provision might have allowed homeowners with relatively small mortgage arrears to avoid repossessions, he suggested.

"It's a complex issue," Webb said. "But it's something we're keen to have a look at."

Alasdair Buchanan, a spokesman for U.K. mutual Royal London Group, expressed some skepticism at Webb's arguments. Webb delivered "the usual fine words, the high-level things, the motherhood and apple pie statements, which we're not going to argue with," Buchanan said. What is needed are details of how the goals will be reached, Buchanan said. Webb has strong credentials in the pensions arena. "He's clearly a very capable individual who's got a good grasp of a lot of the issues," he said.

Buchanan expects the government to support automatic enrollment in workplace pensions and to carry out a review of the existing pension structure. He would like the government to make it easier for people to combine their various pension pots as they move from job to job during their careers.

There is evidence that younger people are not strongly interested in saving for pensions, Buchanan said. Reasons can include the burden of debt incurred in education and the desire to start families and buy houses. Employer involvement can encourage younger people to save for old age, he said.

Goodwin said the existence of a coalition government has not created any noticeable problems in pensions policy. He described Webb and his boss, the Conservative work and pensions secretary, Iain Duncan Smith, as "two quite radical thinkers."

Longer life expectancies will mean the government will have to pay out more in benefits and that individuals will have to save more "at a time when you've got massive complication in a system which is making people switch off," Goodwin said.

Copyright 2010 (c) A.M. Best Company, Inc. All Rights Reserved.

Robert O’Connor is the London editor at A.M. Best Company. He can be reached at

See Mr. O’Connor’s other blog posts, Europe's Insurers Enter New Stage in Solvency II Process and Chubb: New Lloyd's Syndicate is a Natural Step on the Insurance Law Community.