[Skip to content]

Sign up for our daily newsletter
The Actuary The magazine of the Institute & Faculty of Actuaries

100 Years of State Pension - sessional meeting review

The sessional meeting on 26 January 2009 discussed ’100 Years of State Pension’ by Tony Salter, Andrew Bryans, Colin Redman and Martin Hewitt

Written to celebrate the 100th anniversary of the first State Pension payment on 1 January 1909, the book aims to give a history of the State Pension since its inception, while at the same time understanding and learning from the challenges faced in the past. The book’s secondary title Learning from the Past reflects this.

The session gave the authors the opportunity to describe the book, and to open up a discussion on the questions arising from it. The discussion that followed was lively and opinionated. The number of speakers and the variety of backgrounds and opinions on show demonstrated how contentious the issue of State Pensions remains today.

Two common (not mutually exclusive) themes resulted from the authors’ presentation and the discussion following:

(1) What is the purpose of the State Pension?
(2) What problems do we currently face, and can we learn anything from the past when addressing them?

The authors note that the central aim of the provision of the State Pension is to alleviate poverty in retirement, currently represented by the Pension Credit and the Basic State Pension. A similar benefit has been provided throughout the State Pension’s history, usually on a means-tested basis, which is intended to use the resources available most effectively by only providing to those most in need. It is interesting to note that the first pension in 1909 added an additional element to the means test, by requiring recipients to be ‘of good character’.

The alternative is to provide universal pensions to all. The flat rate State Pension implemented in 1942 was based on the policies of Beveridge, whose principle was ‘bread for everyone before cake for anyone’. However universal benefits have been accused of being inefficient as they are provided to some who don’t need them, and so are a waste of resources.

Instead of simply alleviating poverty, State Pensions can also aim to provide a level of income in retirement comparable to that received whilst working. The SERPS pension was a good example of this. Introduced in 1978, it provided an earnings-related pension based on the best 20 years of work.

The trend in State Pension policy over the last 30 years has seen a move away from universal State Pensions to private and personal provision. The Personal Accounts system to be introduced in 2012 offers a market-based pension where retirees receive an income based on contributions made and the investment performance of those contributions.

The current system is not without problems. One speaker, Deborah Cooper, argued that our current system is ‘the most complicated and least trusted and understood in the world’. The view of many of the speakers was that the current system, and intended future changes to it, does not, or will not, serve the needs of the retired population. There was a worry that individuals will not have sufficient total income from all sources to live comfortably in retirement due to a lack of awareness of the need to save for the future.

It is surprising that, in real earnings terms, the current basic State Pension is now worth less than when it was first introduced in 1909 at just 16% of National Average Earnings. This may indicate that the State is failing in its aim to alleviate poverty, perhaps echoed by Deborah Cooper’s opinion that it has become acceptable to tolerate poverty in retirement.

Sally West, a guest attendee from Age Concern pointed out that different forms of State Pension implemented throughout history have been consistently lower than that recommended. For example, the Beveridge pension was one-third lower than recommended in the Beveridge report, and remains at a comparable real level today. She conceded that the restoration of the link of increases to the Basic State Pension to earnings (rather than price inflation) would be a step towards improving the level provided, if implemented.

Means-tested benefits were criticised for their attached stigma (the Department of Work and Pensions estimated in 2007 that there were up to 1.8 million unclaimed Pensions Credit benefits). Michael Pomery argued that a means-tested benefit can also be expensive to administer and provides a disincentive to save for those at the margin, resulting in a downside push on the level provided. He offered that to reduce the latter problem means-testing could be based on income received throughout an individual’s working lifetime rather than in retirement, although recognised it may be complex to implement in practice.

Alternatively, a universal pension could be provided, such as the system introduced following the Beveridge report which intentionally set benefits at a level adequate to live on, yet low enough to encourage additional saving. A flat universal pension like the one recommended by Beveridge gained support for its simplicity and predictability.

The highest level of benefit provided was the SERPS pension when initially implemented. Though other earnings-related top-ups have existed, such as the S2P pension, none are comparable in terms of the level of pension received. Many of the speakers were keen supporters of a SERPS-type pension, asserting that the purpose of the State Pension is to provide a comparable replacement income in retirement.

It is not surprising that the most generous form of pension proved the most popular, yet it was not without criticism. Bryn Davies noted that SERPS has been accused of being too costly, but argued that if the purpose of the State Pension is to provide a level of pension adequate to live on, then it will, as a consequence, come with a higher associated cost. He proposed that a SERPS-style pension could be provided through the Personal Accounts vehicle by diverting contributions from Personal Accounts into a SERPS-style scheme.

Roy Colbran, a current recipient of the original SERPS pension, countered that it is not as generous as other speakers had indicated, particularly for those who have contributed for more than 20 years, who, after that point, only benefit from higher revalued earnings but not higher accrual. He believed that the SERPS pension was too complex and that it is not the State Pension’s role to redistribute wealth.

Shane Whelan drew parallels with the Irish State pension system, where a higher level of benefit has been provided for much of its history. He offered that providing a higher benefit means it is more difficult to cut back on in the future, and can lead to political unpopularity.

There was strong support for increasing the awareness of the need to save for retirement. This issue is very much relevant with the introduction of Personal Accounts. Trevor Llanwarne the Government Actuary agreed that the communication of the impact of a new pension regime to individuals concerned is key to its success, and that actuaries can play a positive role in achieving this. He added that legislation must also be clear and understandable, with the Pensions Act 2008 given as a good example. Sally West argued that State Pensions must not only be understood by people, but communicated in such a way so that they are a valued benefit.

Cost will always be a contentious issue. Peter Turvey stated that there is a downward pressure on costs, as the UK spends a higher percentage of GDP on public services than many comparable countries. It is therefore important that the cost of pensions provided is managed effectively. Paul Greenwood agreed that there must be some measures in place to control affordability, but argued that the implementation of a market-based system for Personal Accounts was an attempt at affordability and sustainability.

Peter Turvey put forward an alternative approach to managing cost. He reasoned that State Pensions should be designed using a reverse approach, by first determining the estimated cost that the state can afford and then deciding on the best way of providing benefits based on this cost. A flexible retirement age determined by this cost would be one way of using this approach.

Despite the clear agreement on the issues faced by the current system, it is not surprising that no common consensus on the future of the State Pension was reached. I would hope that the discussion served to emphasise the need to re-address the State Pension system. By defining and understanding the problems faced in the past we should be able to make informed decisions in an uncertain future.