David S. Simon

State Earnings Related Pension Scheme in the U.K.: A premature demise

Abstract The 1987 United Kingdom Social Security legislation concerning pensions deliberately sets out to reduce state involvement in earnings-related pensions by making the State Earnings Related Pension Scheme less attractive and by offering employees an incentive to opt out of the scheme. One of the reasons advanced for this change is that SERPS has become too expensive. In this article an alternative analysis of the costs and benefits of SERPS is presented in order to answer the vital question: could a privately funded scheme offer the same level of benefits as docs SERPS for the same, or lower, level of contributions. The analysis suggests that in the long term the answer is yes. but in the short term no. Thus, the escalation of costs in the early years of SERPS was to be expected, but in the long run an equilibrium would be achieved. The attempt to phase out SERPS is therefore seen as premature in financial terms, which points to the importance of non-financial economic considerations such as social welfare issues.