Individualisation has undermined the central purpose of pensions provision – and paradoxically compelled the state to further intervene to support the private pensions industry
Pensions provision in the UK has been quietly revolutionised in recent years. We have seen the introduction of ‘automatic enrolment’ into workplace pensions, replacing the voluntaristic approach to private pensions which has long characterised the UK system—the programme celebrates its tenth anniversary next year. In 2016, the Conservative government overhauled the state pension system, by abolishing the State Second Pension and expanding the Basic State Pension into a ‘single tier’ benefit, ostensibly providing a solid platform for private saving.
The rationale for these changes rests on an understanding of the impact of increased life expectancy on traditional pensions provision. Live longer, save more. However, far from rescuing pensions from demographic doom, recent policies have in fact further endangered our ability to secure a decent retirement income for citizens—in ways, I believe, many policy-makers are barely cognisant of.
As I argue in Pensions Imperilled: The Political Economy of Private Pensions Provision in the UK, we no longer seem to understand what pensions are for. Pensions are not simply about deferring consumption, that is, putting some of our income aside now for a time when we are less able to earn a living from work. This conventional definition assumes that pensions are about preparing for a known future, and furthermore, that the mechanisms of inter-generational co-operation required to enable deferred consumption—an intricate process of capital de- and re-materialisation—remain stable over time.
Instead, pensions are a mechanism for coping with the certainty of uncertainty, that is, the knowledge that the social and economic conditions required to sustain the pensions of tomorrow will be different to whatever we forecast today. This forgotten origin story is why all large-scale pensions provision requires an institutional guarantor—a temporal anchor—to ensure outcomes will accord approximately with expectations. This invariably means the state or, in private provision, a sponsoring employer. Yet in rebalancing provision from the public to private sector, and from collectivist to individualist principles, the anchors have been thrown away.
The market-led model which therefore now underpins UK pension provision might be the right one when times are good, that is, when we can be reasonably certain that our savings will generate an adequate return. The impact of COVID-19 on the economy means these are not those times. But the revolutionary processes of the individualisation and privatisation of UK pensions have been embraced by policy-makers despite the clear warning which the 2008 financial crisis represented.
As such, although the UK’s pension problems predate COVID-19, the pandemic provides a useful, but tragic, illustration of the system’s frailties. In defined benefit provision, a severe economic shock does not directly impact upon member outcomes, but falling asset values create funding deficits, and makes employers less able and/or willing to compensate for shortfalls, which jeopardises future provision.
In defined contribution provision, member outcomes are entirely dependent on how individuals’ own invested savings perform in capital markets—and those closest to retirement are acutely affected as they have little or no time to recover from a period of poor returns. In the absence of any other safe haven assets, pension institutions tend to flock to government bonds—yet gilt yields are at historically low levels, in part as a direct result of macroeconomic policy.
I am sceptical of the idea that UK pensions have ‘been financialised’. The ultimate dependence of outcomes on investment returns indicates that UK provision has always been highly financialised. This has shaped understandings of a ‘crisis’ associated with population ageing. The expectation that employers guarantee defined benefit outcomes—as the ratio of active, working-age members to retired members drawing a pension income has declined—has driven the rollout of defined contribution provision, where individuals alone shoulder the longevity risks.
However, it should be noted that large-scale collectivist pensions provision in the private sector emerged during a period of rapid population ageing in the UK, in the late-nineteenth and early-twentieth century, and moreover, that the longevity gains of recent decades are now showing sustained signs of going into reverse.
We have bet the farm therefore on insulating pensions provision against a phantom demographic crisis, forgetting that pensions have always been about protecting ourselves—and capitalism—against a future which cannot be known. The anchor-less model, encumbered to private providers, is riddled with problems, from chronically low contributions, the exclusion of the lowest earners from automatic enrolment, the build-up of ‘small pots’ as workers move between employers, and historically low annuity rates (defined contribution savers use annuities to convert their savings into a pension at retirement). The coalition government responded to the annuity problem by allowing individuals to ‘liberate’ their savings from schemes—recklessly imperilling the automatic enrolment system in the process, for the sake of a short-lived political gain.
The state is intervening, but in all the wrong ways. Despite opting for a system of private sector providers for automatic enrolment, the Labour government created a default publicly owned provider—now known as the National Employment Savings Trust—to serve the market segments which prove unprofitable for private providers. And expenditure on pensions tax relief (a system celebrating its hundredth anniversary in 2021) continues to balloon, to around £35-40 billion per year, effectively subsidising the activities of investment managers, with no evidence that tax relief serves as a meaningful savings incentive.
The state will continue to be asked to mitigate a crisis of its own making. It should therefore embrace this role and (re)establish a publicly organised, occupational pension system. This would bring financial security to the young workers of today—tomorrow’s pensioners—facing near-unprecedented barriers to long-term saving, while at the same time reflecting the core purpose of pensions provision as a mechanism for addressing the future’s unknowable nature.