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Last Updated: Tuesday, 31 May 2005, 10:05 GMT 11:05 UK
Business seeks pension shake-up
A second state pension can still help workers, the CBI says
The second state pension should be reformed in order to give lower-paid workers more money in retirement, the CBI employers organisation has said.

The body said reform could raise the retirement income of someone earning 20,000 a year by up to 2,000 a year.

Returns would be boosted by savings the state could make on administration costs, the CBI said.

The proposal will be put to the Pensions Commission, which is seeking a solution to the UK's pension problem.

The commission - which is due to publish its final report in the autumn - said last year that more than 12 million people are not saving enough for their retirement.


The current State Second Pension (S2P) replaced the previous system - the State Earnings Related Pension Scheme (Serps) - in 2002.

However, some pension experts believe the system is far too complex and should be scrapped.

By pooling money collectively and managing those resources through the state, we can get a much better rate of return
Anthony Thompson, CBI pensions policy adviser

The National Association of Pension Funds has proposed getting rid of the second state pension in order to create a universal state pension.

However, the Pensions Commission chairman, Adair Turner, has said he is "unconvinced" that this is the best way forward, and now the CBI has come out in support of revamping rather than abolishing it.

The CBI said the second state pension should act as a savings top-up linked to earnings, to supplement the basic state pension.

Cutting costs

It advocates a state-run scheme aimed at those without access to an occupational pension.

By pooling individuals' contributions the state can cut administration costs, the CBI says, which can then boost retirement incomes.

Pensions Commission chairman Adair Turner
Mr Turner's commission is seeking a long-term pensions solution

The Pensions Commission found that administration costs can eat up to 30% of private pension funds for low earners.

"Once you get down the income scale to low earners, the actual return becomes less and less, and more and more money gets taken up in administration costs," CBI pensions policy adviser Anthony Thompson told the BBC.

"We think that by pooling money collectively and managing those resources through the state, we can get a much better rate of return for those people through a revamped second state pension".

The CBI cited an example of someone earning 20,000 a year, who could increase their pension pot from about 100,000 to more than 135,000 under the new system, a move which could raise their retirement income by nearly 2,000 a year.

Flexible approach

Mr Thompson added that the CBI believed that workers were going to have to change their attitudes towards retirement.

"We do believe that as we get older as a society people should accept we should be working slightly longer and that we should take our pension at a slightly older age," he said.

"I think we've got to get much more flexible about when people stop working, maybe work part-time when they get to their old age and not retire at 60 or 65 as people do now."

Work and Pensions Secretary David Blunkett said earlier this month that he had ruled out none of the options for pensions reform.

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