Before Mrs Thatcher destroyed Britain’s post-war pension consensus, Beveridge had given us a decent state pension that kept up with earnings, and Barbara Castle had added an earnings related state pension (SERPS) to those whose employers did not provide a decent workplace pension on top.
However while this gave most the prospects of a reasonable retirement income, it depended on long-term collective thinking and an active – and not exactly cheap – role for the state. That is why the post-1979 Conservative government broke the link to earnings, hacked away at the value of SERPS and encouraged personal pensions.
Employment changed too as the economy restructured. Large traditional industries shrank. Companies globalised and reduced their core workforce as jobs were contracted out or moved abroad. New companies no longer felt under any duty to provide earnings linked pensions – or indeed any pension at all.
With the state and the employer retreating the onus switched to the individual worker to build up their own personal pension. Efficient markets were meant to provide optimal outcomes in this as in everything else.
But this second consensus failed almost from the start. The 1997 Labour government tried to make it work with the introduction of straightforward personal stakeholder pensions, and much more generous – if means-tested – benefits for those retiring in poverty.
But with pensions mis-selling giving the industry a bad name, the retreat by employers and the sheer refusal of most workers to think as market theorists say they should – by rationally weighing up the benefits of future income against contributions – made it more and more obvious that we needed a new start.
This came from Tony Blair’s decision to set up the Pensions Commission under Adair Turner. By a skillful marshalling of the evidence and some thoughtful realpolitik, they delivered what Craig Berry and myself identify as a third, and potentially progressive, pensions consensus in a new Touchstone pamphlet, Third Time Lucky.
This was based on linking the state pension to earnings once again; making it compulsory for employers to provide and contribute to a pension unless the individual worker opted out; and setting up a new low cost pension scheme with an obligation to serve every company – what is now NEST. The Commission wanted to move gradually towards a flat-rate state pension, although this has been speeded up by the coalition.
We say this provides a progressive architecture. The state provides everyone with a foundation income in retirement, set above means-testing levels, and everyone gets the opportunity to build up a workplace pension on top.
But that is only the start. There are two challenges still to be met:
Most importantly the new system will not provide big enough pensions. This is because the coalition is introducing the flat rate pension at too low a level – indeed it will be cheaper than the old system. Minimum contributions to workplace pensions are set too low – on average the minimum will be about five per cent when three times that has been seen as a reasonable contribution. Increases in state pension age have not been based on longevity and demographics but deficit reduction.
Secondly we are using too many hangovers from the failed second consensus to try and make the new system work. While NEST is a beacon of good practice and has raised standards across the board, the system still relies on pension providers selling pensions in a competitive market to employers who may be neither qualified nor committed to getting a good deal – especially beyond the first rung of big employers in the first few waves of auto-enrolment. We agree with Greg McClymont MP and Andy Tarrant that we need fewer, bigger pension schemes run by trustees with no interests other than those of their members. And while properly funded and run DC pensions can provide good outcomes, collectivizing risk and reward can offer a real advantage.
But while there is much to do to ensure secure future retirement incomes – and a generation who have missed out on saving as the second consensus unravelled – we should still celebrate the changes that have been won in recent years, to which unions have made a major contribution.
And the great advantage of having a decent architecture with wide support is this: progressive change requires political will rather than a complete rethink of how we deliver future pensions.