Historical reflections on the new pension regime
As the UK gets set to introduce a radical new pension regime – otherwise known as NEST (National Employment Savings Trust) it is interesting to fill in the background to these changes in pension provision.
We have come a long way since Lloyd George introduced the first state pensions in 1909 to keep older manual workers out of the workhouses and off the streets. The first state pension paid out between 1s and 5s a week from the age of 70 and only those with good character were eligible – the work shy and the inebriated were excluded.
Given that it cost 2s to rent a room in 1909, this left very little to live on. And of course a life expectancy of around 45 for men and 49 for women meant that only a few were lucky enough to get to 70. It was a very cautious start to state pension provision; perhaps Lloyd George could see what the future held. In fact the level of payouts in 1909 was set deliberately low to encourage people to make their own provisions. So then, as now, the government preferred people to provide for their old age themselves.
By 1948 when the first contributory state pension was introduced for everyone from the ages of 65 for men and 60 for women, life expectancy was still just under the state pension age so you still had a higher chance of dying before you drew a pension. That situation has changed dramatically. Life expectancy is now 78 for men and 82 for women – more people are likely to spend many years in retirement and, as we all know, the public pension pot is buckling under the strain.
Add to this the private pension grief of those who have made provision for retirement. By the 1990s, Britain had developed a system of occupational pension provision which was dominated by large, collective pensions. Each pension fund received a contribution from the employer, and from the employee and the employer guaranteed that this would provide a certain level of pension.
Gradually however, these schemes have disappeared. Employers felt that they could not afford to pay pensions for people who were living longer and longer, especially when the returns from pension investment were so unpredictable. They wanted the employee to take that risk.
Today our pensions, particularly those in the private sector, are provided in individual accounts, with no employer guarantee. Again, the employer and employee both contribute to the scheme, but the benefit is unknown – no one wants to guarantee anything in a world of such uncertainty. Research shows that employees do not invest in pensions for various reasons – they have little idea of what they will get in the end, they may mistrust financial institutions and they may decide to pay their current bills rather than pay for a pension. Added to that are the employers who cannot afford to run a pension scheme in the first place and you have a recipe for patchy private pension provision – millions of people without pensions or with inadequate pensions.
So, NEST is the UK’s answer to its pension crisis. Over a century on from when Lloyd George handed out a pittance to encourage people to provide for their own old age, recent governments have devised an automatic enrolment scheme that harnesses the power of apathy. People will have to invest in pension provision above the state pension unless they can be bothered to go through the rigmarole of opting out. Over a hundred years of hoping we’d all be sensible has come to an end.