For more than forty years, the British, like Americans, financed their retirements based on the familiar model of a three-legged stool consisting of public funds, employer pensions, and personal savings. Following the rise of Margaret Thatcher's conservative government in the early 1980s, however, Britain embarked on a far reaching and often troubled experiment with privatizing their pension system. The argument for British privatization was built on many of the same premises as American privatization: empowering individuals to invest for their retirement without government interference while freeing the government from considerable expense.

In 1981, the government began indexing the flat rate benefits which all pensioners receive according to prices instead of wages. This change in benefit formulas, which would likely be part of an American privatization plan as well, drastically reduced the value of minimum benefits. In the last year before the formula change, the basic state penion replaced around 27 percent of income for the average male earner. In 2004, the benefit only replaced 19 percent of earnings, and by 2050 will only replace 7.8 percent of earnings.

In 1986, the government started allowing workers to opt out of the second, earnings related benefit (SERPS) in favor of private market investment accounts. At the same time the government scaled back the benefits from the SERPS program. But the private investment accounts which many workers used to replace their government benefits have been plagued by scandal, and the management costs associated with the accounts can eat up 30 percent of account value at retirement.

After more than a decade of privatization, the government decided to reverse course under the new Labour government of Tony Blair, in an attempt to address the pensioner poverty which persisted under privatization. The guaranteed minimum benefit (now the Pension Guarantee Credit) as well as the government earnings-related pension (formerly SERPS, now "S2P") were increased. A new Savings Credit was also instituted to ensure that the minimum income guarantee wouldn't act as a disincentive to private saving. In addition, many of the workers who contracted out during privatization's heyday are being encouraged to return to the state system.

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