I get occasional emails (as well as messages). When I get an email it is always to be cherished, having the experience of a man who spent most of his life deliberating how we could organise the payment of pensions and balance them against the cost of doing so. This is the latest and I hope there will be a sequel
A few quick random thoughts.
Until 1960’s few employers provided pensions. Pretty much all were public sector or very large (and as you say unionised).
Most paid good pensions to people who retired from the business but people who left early mostly did pretty badly.
A few people saved in other ways and some were treated for tax purposes as pensions.
Government was from 1950 onwards under pressure
(1) poor value for early leavers
(2) people with no private pension.
Both of these were “solved” in the 1970’s and 80’s. By and large.
The former opened a door on government making requirements in benefit design, at a cost not fully thought through by those providing pensions.
The latter was flawed in ways which are obvious now even though sensible then, or at least were designed to counter criticisms. For me, crucially, any talk of a national funded scheme for people with no private pension was claimed to undermine already successful investments in other schemes.
So SERPS was unfunded, unlike CPP in Canada say.
But as with the early leaver door, SERPS opened the door to more government prescriptions on benefits design and contracting out was a big part of that. Any scheme (eventually including DC) which contracted out had to be as good as what members had given up.
As the letter in my loft to DHSS says, the changes in late 1980 were an encourage for every insurance salesmen from John O’Groats to Lands End [ to miss sell].
So we then had scandals and the rise of protected members. (The EU too helped but this could not cover everything.)
DC was in essence financial and even more so post misselling.
DB came to be protected and more expensive (including protecting early leavers and indexation and longevity and was beginning to be understood.
Then insolvency. And it all became financial with accounting changes.
With the demise of DB on the horizon and state pensions falling relative to earnings and future costs more visible, getting more people in DC started.
Andy Young on a summer’s day a few years ago.
“There is nothing more important than understanding how reality works and how to deal with it. The state of mind you bring to this process makes all the difference. I have found it helpful to think of my life as if it were a game in which each problem I face is a puzzle I need to solve. By solving the puzzle, I get a gem in the form of a principle that helps me avoid the same sort of problem in the future.”
Ray Dalio
When will the U.K. admit that the dilemma that Andy describes cannot be solved with productivity per capita too low to satisfy the aspirations set out 80 years ago. The pragmatic solutions have favoured the long grass and/or risk shifting.
Unfunded public sector schemes rely on future tax revenue from shrinking working populations.
The Solution: Gradually transition new public sector joiners into funded CDC frameworks, backed by real assets (infrastructure, productive capital) rather than purely unfunded future tax revenues.
Robbing Peter to pay Paul is clearly not facing the reality so lessons will not be learned. At least the gravy train survives despite 40% adjustments for LDI
The fear in the 1960s and 1970s, I think, was not that occupational schemes would literally shrink overnight if the state created a funded earnings-related pension. Rather, policymakers and employers worried that a large national funded scheme would compete with, displace, and eventually replace employer provision.
The argument went something like this:
Many larger employers had already built substantial occupational pension schemes. If employees and employers were required to contribute to a new national funded scheme, there would be less money available for existing occupational pensions.
Over time, employers might decide that the state scheme was “good enough” and reduce or abandon their other provision.
A larger and larger state investment fund would concentrate economic and political power in government hands, something that many business groups and some politicians disliked.
So the concern was about long-term crowding out, not the immediate destruction of private sector occupational pensions.
What actually happened under SERPS was rather different.
Because SERPS was designed with a contracting out option, many occupational schemes expanded their responsibilities instead of shrinking. Employers that contracted out had to provide additional benefits at least equivalent to those forgone under SERPS.
In effect,
SERPS established a benchmark level of earnings-related pension.
Occupational schemes could substitute for that benchmark.
Employers and employees received National Insurance rebates in exchange for occupational schemes absorbing responsibility for SERPS-equivalent benefits.
In that sense, SERPS arguably strengthened occupational pensions, especially defined-benefit schemes, because it effectively made them part of the state’s pension architecture.
Large occupational schemes became larger and more comprehensive.
The irony is that this apparent victory for occupational pensions came at a price. Once many occupational schemes were standing in for part of the state pension, government inevitably became much more interested in tinkering and interfering in their design:
preservation rights for early leavers;
guaranteed minimum pensions;
revaluation and indexation rules;
survivor benefits;
actuarial certification;
reductions in NI rebates, which meant that contracting out changed from being marginally profitable by additional investment of rebates, to being “loss-making” because rebates were no longer cost/value-neutral, and then rebates were eventually removed altogether.
So the occupational pensions sector was not undermined in terms of scale; contracting out often made schemes bigger and potentially more effective.
But it was undermined in a different sense: employer pension schemes ceased to be entirely voluntary and discretionary arrangements, and became quasi-public institutions carrying statutory obligations which became more and more onerous through repeated government and regulatory interference.
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