The Fiscal Sustainability of the Current UK Pension System

The second aspect is redistribution, which involves shifting lifetime income from one person to another. The third aspect is insurance, which aims to eliminate risks at the individual level, by the transfer of incomes to pool risks.The basic criterion of a good pension system is that they must be able to generate incomes sufficient to provide a socially acceptable standard of living for those who are no longer working. At the same time, it must not be a generous system that is financially unstable. A system that is likely to go insolvent cannot be considered a sound one. (Davis, 2004)The United Kingdom, like several other countries, offers a defined benefit (DB) state pension to retirees, which is linked to their lifetime earnings. Cocco and Lopes (2004) state that longevity coupled with a fall in birth rates has led to serious concerns about the sustainability of these schemes. Another option that has been suggested, by experts in the field of pension reform, is the stress on the defined contribution (DC) system where individuals can allocate their retirement wealth among financial assets in a manner that they feel is most appropriate. (Cocco, Lopes, 2004)Based on a study of several aspects of the pension system, like the age of retirement, funding aspects, demographic issues and nature of pension schemes, this paper will try to estimate whether the current pension policy in the UK is financially sustainable in the long-term. A comparison between the Defined Benefit (DB) and Defined Contribution (DC) schemes will be made to ascertain which of these can ensure sustainability to pension provisions.The second section of the paper will deal with the literature available on this topic. Starting with the Second report of the Pension Commission, the paper will highlight how a range of sources like research documents and reports from institutions like the Pension Policy Institute, HM Treasury, and the Institute of Fiscal Studies play asignificant role in understanding the issues related to pension provisions in the United Kingdom.

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