Britain’s pensions are low and in crisis. Dennis Leech makes the case for an effective lifeboat
The party is developing a radical socialist manifesto to transform society for the many not the few. Yet it has little to say on one of the most important areas of social policy: pensions. This matters because UK pensions are in a crisis that will harm not only many current workers but future generations too. But Labour seems not to be interested.
Occupational pensions provide security for working people after they retire – yet that is decreasing even though more are being enrolled. Traditional guaranteed pension schemes are being replaced with inadequate market-based alternatives that are cheaper for employers but problematic for workers. There is a danger that in future years millions of older workers will find their pension pots falling short.
All are entitled to a government pension. But in the UK the state pension is inadequate. It is a minimal safety net, worth only about 29 percent of average earnings, the lowest of any European country. It is much higher in other countries, for example Netherlands: 101%; France: 75%; Germany: 51%. The OECD average is 63 percent. Only Mexico, within the OECD, has a lower state pension ratio than Britain.
The gap between the state pension and a decent income is filled by occupational pensions, for those who have them, or means-tested state benefits for others. But traditional occupational pensions – where a worker would receive over half their salary after forty years (defined benefits) – have been disappearing as employers have withdrawn them for cheaper inferior alternatives.
This trend has several causes: pensions have become more expensive due to increased life expectancy; as an unintended consequence of current very low interest rates and quantitative easing. More broadly it is an aspect of the changing factoral distribution of income from labour to capital due to neoliberalism. More specifically it is an unintended effect of legislation by the last Labour government.
The Blair government passed the Pensions Act 2004 to ensure defined benefit pensions would be adequately funded. It set up the Pension Protection Fund as a lifeboat to support schemes if an employer becomes insolvent. It also set up the Pensions Regulator with powers to proactively oversee schemes to make sure the lifeboat was only used in case of real need and that employers did not abuse it.
The result has been disastrous. The legislation was intended to halt a trend decline in provision. Instead the greater burden of guarantees and excessive prudence it placed on employers accelerated it. Employers found the cost too expensive, and scheme after scheme has closed. Instead of protecting pensions, the regulatory framework New Labour devised has had the opposite effect. In 1993 every FTSE company provided a defined benefit pension scheme to new employees. In 2019 virtually not a single one does and about half are closed to accrual for existing members.
A major factor is that the Pension Protection Fund is not fit for purpose. It is privately funded by a levy on all pension schemes and has no government guarantee. It fails in its purpose which is to reduce risk. Its assets are mostly invested in low return ‘safe’ government bonds rather than providing capital for industry.
If it had a government guarantee the PPF would be able to perform the job it was intended for. Freed of the need for extreme caution it could invest for the long term to finance productive industry and receive better returns. Its funding would improve and would be better able to do its job as a lifeboat.
As a sovereign wealth fund, publicly owned but managed at arms length as a socially responsible commercial enterprise, it would be able both to support defined benefit pensions and provide investment funding for a Green New Deal alongside the National Development Bank. It would benefit the economy as well as pensions.
We are told that defined benefit pensions are finished and that their replacement, defined contribution schemes, are a great success. Over 11 million members are now in DC schemes thanks to automatic enrolment.
Yet DC schemes are highly problematic in many ways. Firstly, they do not directly provide a pension: on retirement a member gets a ‘pot’ of money and must make financial decisions about it to turn it into an income. Many find this difficult because they are not experienced investors. They need financial advice but there are many scammers looking to charge exorbitant hidden commissions on the unwary. Second, they do not know how long they will live and must make decisions about managing their pot of money under this uncertainty. Third, they do not know what their pension is likely to be since the pot’s value depends on the performance of their investments. Fourth, defined contribution schemes all have low contribution levels that might not be enough for a decent pension. Many workers will not be able to afford to retire.
The pension system now forces workers into the Thatcherite mould. They have no alternative but to join the property-owning society, having to make one’s own investment decisions and live with the consequences. It seems that pensions policy is the perfect manifestation of the truth of Margaret Thatcher’s claim that her greatest achievement was Tony Blair.