Phil McEvoy is a talented pensions manager; he’s writing this blog in his personal capacity.
Thanks to Phil for this interesting take on what makes for fair these days
2018 will see a couple of milestones in the state pension system, with State Pension ages being equalised between men and women for the first time. Since 1948 when state pensions became part of the social insurance framework rather than a means tested benefit, men and women have had differing state pension ages – 65 for men and 60 for women. In response to a decision from the European Court regarding equalising pension provision; the UK Government, through the Pensions Act 1995, said that womens’ state pension ages should rise to 65 between 2010 and 2020.
The coalition government sped up this timetable meaning that equalisation is due to happen by 6 December 2018. They also said that immediately from this date, the State Pension age (SPa) for both men and women (by now on an equal footing) should increase from 65 to 66. So December 2018 will see men’s State Pension age increase for the first time since the National Insurance system was introduced.
So which sex is treated most “unfairly” next year – women who have been seeing their SPa rise over the last eight years and for whom the goalposts have shifted by up to six years? Or men; who have always had a higher SPa and who are seeing their first increase? Or should there be no grounds for gender-related complaint, as the system is soon to be equalised?
And then there is the fact that women tend to be paid less over their working lifetimes – should the pension system exacerbate this discrepancy; should it be used in part to try to offset it; or should it exist completely separately in the hope that inequalities in pay will naturally (or unnaturally) work themselves out?
Gender is but one protected characteristic, and it alone seems to throw up a whole range of perspectives and arguments as to how pensions can be made “fairer”.
Note that fairness is a wholly subjective concept, so perhaps the real challenge is to develop a set of benchmarks for what is “fair”. Or perhaps it should be allowed to rest with elected representatives to stamp their moral code on what is “fair” based on the will of the majority of voters. The best benchmark for fairness that we have now is equal treatment across protected characteristics. But with pensions, equal treatment at the time of accrual (paying in) might not necessarily translate into equal treatment at the time of retirement.
Sexual orientation shows a disparity in treatment for same sex couples (married or otherwise) insofar as workplace pension schemes can treat partners of deceased members differently. This is because private pensions tend to be pre-funded meaning that the rules in place at the time a pension was accrued (i.e. at the time a member made the contribution) are applied, even if these rules contained a discriminatory clause. Pension schemes were not required to provide for equal treatment based on sexual orientation until 2005. For this reason many same sex couples are seeing that partner’s pensions are not historically analogous to partner’s pensions for opposite sex couples.
So, in effect, equal treatment was not a historical requirement, at the time pensions were being paid for. This means that even if equal treatment is more prevalent at the time of retirement, the historical provisions apply, with discriminatory warts and all. This means that historic “unfairnesses” can linger for many years and decades.
This is an area that the last Government commissioned a study on which estimated the cost of levelling up historic provision for opposite sex couples. In 2014 it was thought that the cost would be £20m across the public sector and £100m across the private sector. There has yet to be any decision to mandate equal treatment on this basis in respect of historical pension provision.
Many pension schemes have gone further than the legal requirement of equalising historic provision for same sex couples and have equalised accrued pensions from before 2005.
Aside from all considerations of equal treatment, it is worth noting that private sector pension schemes are also confined by the Pensions Act 1995 in their ability to make retrospective changes to accrued provision, where any such changes would reduce any individual member’s pension. So any historic “equality-proofing” would have to involve levelling up for everyone, or at least not levelling down for anyone.
Which brings us to age. In the private sector the vast majority of good pension schemes have been closed to new, primarily younger, workers; if not to the whole workforce. In the public sector, newer arrangements have been rolled out with older workers protected against changes. It is probably fair to assume that many younger people currently fare less well than older counterparts in terms of pension provision at comparable stages of their working lives.
Would a younger person (A) accept that an older colleague (B) in a better pension scheme receive a lower benefit in order that A might get equal pension provision? Possibly, but would B accept such a trade off? How about if there were 10,000 employees at a company in A’s position and 10 in B’s? Does the call for equality sound more clarion then? Should the 10,000 A’s be able to collective renegotiate the (currently protected) accrued rights for the 10 B’s?
Also should it be assumed that such disparities will prevail over the course of a working life? Just because A has lesser provision than B does now (and than B did when B was A’s age), does this mean that A will always be worse off in pension terms? Will future state provision for older citizens bridge the gap?
And all of this highlights the problems with measuring pension outcomes and trying to instil fairness across a fragmented system for retirement provision – the interaction between unfunded state and (largely) funded private provision; the existence of earnings-related pension saving in a backdrop of lower pay for women; the restrictions on improvements or detriments to historically funded provisions all compounded with the fact that, for savers, the true generosity of their pension scheme will not be felt until the day they retire; and even for pensioners, the true security of their pension cannot be assessed until the day they no longer need it. And don’t get me started on the fact that pension provision has been stampeding away from a collective model in favour of individual savings.
So what is the solution? Well that is for our elected representatives to decide, or not. But ideas such as replacing tax relief expenditure with an enhanced universal state pension based on average earnings levels; or allowing workers to negotiate the collective rights of pension scheme members should not be discounted from considerations towards a coherent pension policy.
Perhaps the only certainty for 2018 is the ongoing uncertainty for the future of retirements. Then again, that keeps many of us in a job, doesn’t it?