Private pension markets are not working

Thatcher ended the best pension scheme the UK has ever had, and pensions have never recovered from the consequent decline as constant mis-selling scandals continue abundantly to demonstrate. Barbara Castle’s SERPS schme in the 1970s was generous particularly to the low-paid and to women, highly popular, and provided universal protection against poverty in retirement. Thatcher reduced its generosity by cutting the accrual rate, gave individuals an incentive to opt out of SERPS into personal pensions which turned out to be much poorer quality, broke the link between earnings and the basic State pension, and allowed individuals to opt out of occupational schemes which had previously been a key element of the social wage. These opt-outs led to a great mis-selling scandal as commission-hunting salesman persuaded many to shift to poor defined contribution (money purchase) schemes. The State retreated from guaranteeing earnings-related retirement income to merely providing a low means-tested safety net, and as the State basic pension steadily declined relative to earnings it inevitably led to a large rise in pensioners subject to means-tested benefits.

This broke down in the decades after the 1980s as it became clear that individuals were not responding to market signals and taking on personal responsibility for saving. By 2012 two in three of the private sector workforce were not saving in a workplace pension. This is partly because a third of the workforce are earning at or little above the subsistence level, and partly because at almost all income levels there is always greater pressure, given the option, for immediate spending rather than for more remote investment. The idea that pension provision, just like everything else, was best provided by competitive markets in which private pension providers’ search for profits delivered good product for savers turned out to be a tragic illusion.

A remedy for these glaring failings, whilst still preserving the same pensions architecture, was proposed by the Pension Commission under the Labour government after 1997. It has involved auto-enrolment and the accreditation of schemes under the so-called NEST system, with the State pension once again linked to earnings. But this compromise is still flawed by three main failings. Contribution levels need to be higher if poverty in retirement is to be avoided. It requires more efficient and better-designed pension systems that are run in the interests of members, not employers or big companies providing pensions. And third, most disturbing of all, there is still a misalignment of interests when, as in contract-based schemes, member welfare is sub-contracted to a company running the scheme, however well, to provide a return for their shareholders. It is true that in wider trust-based schemes this problem is reduced, but it is not eliminated. And the logic of large-scale trusts getting a good bargain for their members is that the best bargain, which is the most inclusive for all citizens, will be secured by a new upgraded universal SERPS-type scheme. After disastrous experiments with private pensions markets, the wheel has now returned full circle.