100 years of the UK state pension in the UK past and future issues

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• 100 years of the UK state pension in the UK -
  past and future issues
• Roger J Gray
• Heriot Watt University, Edinburgh
• 6th Fall School
• Hungarian Actuarial Society
• November 2009

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• This talk is inspired by a new book written by
  four UK pensions experts (including two
  actuaries) and a talk based on it given to the
  Faculty of Actuaries in Edinburgh in March 2009
• ?

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CATM
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PENSIONS

• The Book arose from a number of stimuli
• UK Pensions Commission 2002-06
• Ageing Population Interest Groups discussions
• Mark the 100th anniversary of the state scheme
• (and it certainly is a cause to celebrate)
• The desirability of having a history of the
• first 100 years

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PENSIONS

• The books guiding principles
• Aim to appeal to both specialist general
  reader
• Set the development of pensions in its economic
• and social contexts
• Provide an account of what happened and the
• thinking behind what happened
• Enable lessons to be learned from the past

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PENSIONS
Actuaries working in the pensions industry (and
others in the savings and insurance industry)
need to understand the state scheme and how it
interacts with their work.
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PENSIONS
The book was commissioned and published by the
UK Actuarial Profession
One objective is to highlight the role and
involvement of actuaries in the story over
the last 100 years
which has been considerable
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PENSIONS

• The context
• 1908 Old Age Pensions Act provides the first
  state
• pensions in the UK (paid in January
  2009)
• 1925 Limited contributory state pension scheme
• introduced (widows and orphans)
• 1942 The Beveridge Report
• proposed a social security
  system to provide
• protection from the
  cradle to the grave

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PENSIONS

• The context
• 1945 Post-war Labour government
• 1946 National Insurance Act
• 1948 Full implementation of pensions financed
  from
• the NI fund NHS the welfare state

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PENSIONS

• The context
• SERPS (State Earnings Related Pension
• Scheme)
• 1979-90 Thatchers governments emphasis on
• containing (reducing?) public
  expenditure
• - in particular social security
  spending
• link with earnings broken
  promotion of the
• provision of personal (private)
  pensions

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PENSIONS

• The context
• 1997 After 18 years of Conservative
  administrations
• (new) Labour under Blair wins the
  election
• 1998 Green Paper A New Contract for Pensions
• 2002 S2P (State Second Pension Scheme) replaces
• SERPS payments not linked to earnings
  
• assists some poorer pensioners

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PENSIONS

• The context
• 2003 Pension Credit (means tested) replaces other
• minimum income guarantee benefits (all
  means
• tested)
• 2006 White paper Security in retirement towards
  a
• new pensions system proposes major
  changes
• over the next 50 years

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PENSIONS

• The context
• The way it works
• The NI contributions I have made over 40 years
  have not been deposited and invested for my state
  pension they were used up as they were made.
  Future contributors will pay for my state pension.

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PENSIONS

• The context
• 2007 - present
• Pensions Act 2007, Pensions Bill 2008
• The pensions timebomb addressed
  major
• changes announced with long-term
  implications
• for state pension entitlement and
  provision for
• both genders

put crudely - too few workers (tax payers/NI
contributors) to support too many retired
people adequately
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PENSIONS

• The context
• 2009 -
• Cost-savings measures are required and the main
  one is in place -
• increase in pension age men 65 ? 68
• 
  women 60 ? 68
• (in effect by 2046 process may be accelerated)
• This has a double benefit for the viability of
  the scheme - an individual has to pay NI
  contributions for more years and gets his pension
  for fewer years

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PENSIONS

• The history of reform has been largely conducted
  and discussed in technical and actuarial terms,
  and within the context of political policy.
• Less attention has been paid to the issue of the
  aims
• of the state pension.
• The big question remains
• What is the state pension for?
• -- see for example articles in The Actuary
  magazine
• Deborah Cooper (October 2006), Steve Bee
  (November 2009)

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PENSIONS

• Some issues throughout the past 100 years
• and for the future
• ageing population
• pension age
• balance between means tested and universal
• benefits
• the decreasing real value (spending power) of
  the
• pension (continuously since 1980)

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PENSIONS

• Some issues throughout the past 100 years
• and for the future
• the link with earnings (restoring it by 2012?)
  and
• sustaining the value of the basic state pension
• relative to average earnings
• lessening inequality in retirement
• managing the link between income at work and
• adequate pension income in retirement

full individual pension currently 95.25 per
week if the pension had been increased in line
with earnings it would be about 145
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PENSIONS

• Common theme throughout the period
• Demand-side versus supply-side
• The failure of the Poor Law

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PENSIONS

• Common theme throughout
• Demand-side
• Economic welfare
• Citizenship value
• Pressure from activists, trades unions,
• social reformers (Booth, Rowntree)

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PENSIONS

• Common theme throughout
• Supply-side
• In line with meeting labour market needs
• Social needs and discipline
• Political realities
• Pressure from the top (J Chamberlain, Churchill,
  Beveridge, N Chamberlain, Wilson,
• Thatcher, Blair)

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PENSIONS A BIT MORE BACKGROUND

• The Beveridge report
• a minimum standard of living below which no one
  should be allowed to fall
• Universal benefits and pension scheme
• Flat rate benefit
• Aim to eliminate poverty
• Contributory principle
• Aim of minimum of subsistence
• Same contributions and benefits for
• poor and rich

Sir William Beveridge (1879 - 1963)
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PENSIONS A BIT MORE BACKGROUND

• Beveridge quotes
• Want is one only of five giants on the road of
  reconstruction the others are Disease,
  Ignorance, Squalor, and Idleness.
• The object of government in peace and in war is
  not the glory of rulers or of races, but the
  happiness of common man.
• Bread for everyone before cake for anyone

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PENSIONS A BIT MORE BACKGROUND

• The Beveridge report
• Universal pension scheme
• Flat rate benefit
• Aim to eliminate poverty
• how to define?
• proportion of average
  earnings?
• proportion of the population?
• Contributory principle
• Aim of minimum of subsistence
• Same contributions and benefits for poor and
  rich

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PENSIONS A BIT MORE BACKGROUND

• 1948 Scheme
• Rationalise 1908 and 1925 schemes
• Economic restraints
• Benefits a third lower than Beveridge
  recommended

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PENSIONS A BIT MORE BACKGROUND

• 1970s
• Barbara Castle
• First aim to lift all off supplementary benefits
• Social Security Pensions Act SERPS
• No significant improvement in basic state pension

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PENSIONS A BIT MORE BACKGROUND

• 1980s onwards
• Pension policy became subordinate
• Supply-side measures became dominant
• Priority to education and training

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PENSIONS A BIT MORE BACKGROUND

• Value of basic state pension in relation to
• national average earnings
• 1909 18
• 1979 26 (highest ever attained)
• 2008 16

These figures are relevant to the debate on
poverty
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PENSIONS A BIT MORE BACKGROUND

• A historical comparison
• 1891 estimated that 40 of elderly chargeable
• to the poor rates
• 2008 estimated that 40 qualified for means
• tested Pension Credit

and a recent related development major
decline in final salary workplace pension
schemes
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PENSIONS

• The books authors main conclusions
• The question remains What is the state pension
  for?
• Frequent legislative change leads to instability
  and lack of continuity
• Recent decline in state and private final salary
  schemes leading to under provision
• Lack of suitable savings products
• Inequalities persist into retirement
• Need revitalised state scheme

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PENSIONS

• What is the state pension for?
• It is generally agreed by all involved in the
  pensions world that the purpose of the state
  pension is for the state to have a role in
  alleviating poverty in old age.

but It is generally agreed by all involved in
the pensions world that the purpose of the state
pension is for the state to have a role in
alleviating poverty in old age.
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PENSIONS

• What is the state pension for?
• Currently the role of the basic state pension
• appears to be to provide a supplement to private
• saving that makes retirement feasible for those
• who can afford it. Those who cannot have to rely
• on additional means-tested benefits.
• after Cooper 2006

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PENSIONS

• What is the state pension for?
• Is it intended as minimum provision for a
  civilised
• existence for all in retirement?
• Is it intended to ensure retired people do not
  live in
• poverty?
• Is it intended principally as a safety net for
  those who
• do not have other provisions (e.g. savings,
  occupational
• pension, private pension)?

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PENSIONS

• To plan for the future we need to decide what
• type of society we want
• What standard of living do we want for the
• elderly?
• Who should bear the cost?
• Redistribution?
• Equity between generations?
• From what age should pensions be paid and how
• do we deal with increasing longevity?

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PENSIONS

• To plan for the future we need to decide what
• the role of the State should be
• How much should the State intervene?
• Universal benefits v Individual provision
• Better social insurance/more means testing/more
• reliance on the private sector?
• 4. Continuity and stability

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PENSIONS

• To plan for the future we need to decide what
• the role of the State should be
• 5. Any future scheme must be contributory and
• include higher rate of pension through
  combination
• of tax and social insurance
• Can Government afford to uplift universal
  state
• pension so that there are no means tested
  benefits?
• (extra cost 7.3bn in the first year 1/3 of
  private
• pension contributions tax relief)

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PENSIONS

• Options worth considering (1)
• Should the pension be increased substantially but
• paid from a much older age (perhaps 75)?
• (with the period retirement pension age being
• funded by a fixed-term annuity purchased from
• savings made while working)?

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PENSIONS

• Options worth considering (2)
• Should private/personal pension provision by
• individuals while working be compulsory (by law)?
• (but is this realistic? would it be enforceable?)

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PENSIONS

• Options worth considering (3)
• Should the universal right to a state retirement
• pension be removed, excluding people with
• savings/income/worth over a threshold?

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PENSIONS

• How do we build a sustainable system that ensures
• an adequate income for all in old age?
• The challenge and responsibility of this
  generation of
• financial analysts, actuaries, sociologists, and
• thinkers is to answer this question and implement
  the
• answer in an equitable and sustainable way

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• end