¹Professor of Economics and Finance, Brunel University, Middlesex, UK; Visiting Fellow, National Institute of Social and Economic Research; Associate Member of the Financial Markets Group at LSE; Associate Fellow of the Royal Institute of International Affairs and Research Fellow of the Pensions Institute at Birkbeck College, London.

^*An earlier version of this paper was presented as a keynote address for the Japan Pension Research Council meeting, Tokyo, 18–19 September 2003. The author thanks Isaac Alfon, David Blake, Ian Neale, Mike Wadsworth and participants at the Japanese Pension Research Council conference as well as an anonymous referee for helpful comments. The paper also benefited from debate at the LSE Financial Markets Group Regulation Seminar and U.K. House of Commons Treasury and Civil Service Committee.

Abstract

The U.K. pension system is traditionally seen as offering a good example to other countries, having features such as low social security pension expenditure and a high coverage of well-financed voluntary private schemes. But recent developments suggest that the model has shown weaknesses. The most pressing current issue is underfunding of defined benefit occupational schemes following the bear market; but there is also the ongoing crisis of mis-selling of personal pensions and the failure of the Equitable Life insurance company. In this paper we seek to investigate whether there is indeed a crisis and what the locus of the difficulty is. We find that there are important longer-term weaknesses of the U.K. system as well as these current difficulties, focusing on social security and private pensions. Pitfalls faced by U.K. policymakers offer important lessons to other countries seeking to set up or expand private pension provision.