UK Pensions

Historical UK Pensions

First level of pension development

The basic state pension

The first ever state pension was introduced in 1908, under the Old Age Pensions Act. It was payable to those aged 70 and over, and was subject to a means test and a 'moral character' test. 1925 then saw the introduction of the contribution principle started and from 1928 pensions were payable from age 65 for men.

The Beveridge report (1942) laid the foundations for the modern welfare estate. Beveridge proposed a single flat-rate non-means tested benefit for all in return for flat-rate contributions, although this changed subsequently when contributions were linked to earnings. Beveridge was explicit that the state pension should not replace private provision.

Second level of pension development

Occupational pensions

Initially, these were limited to civil service, military or white-collar workers but they increased significantly at the beginning of the 20th century. In 1921 Government introduced tax relief on pension contributions, which extended their accessibility and affordability still further. And by 1953 28% of employees (6.2m people) were in occupational schemes, increasing to a peak of 50% in 1967.

Today over 10million people are members of occupational pension schemes of which there are around 400,000. Whereas the number of women in occupational schemes is still increasing in line with female labour market participation, the number of men is decreasing. Based on present trends the number of retirees with occupational pensions is expected to level out from around 2007 when current schemes mature.

SERPS

The State Earnings Related Pension Scheme (SERPs) was a compulsory scheme for employees earning above a certain level. SERPs, a Labour Government initiative introduced in 1975 after 10 years of debate, was designed to provide workers with access to pensions in the workplace where there was no occupational alternative. SERPs was initially welcomed with enthusiasm, since it "aimed to bring to an end massive dependence on means-tested.

In fact SERPs replaced Graduated Retirement Benefit (GRB), which was the first example of 'second tier' state-provided earnings related pension for employees but the value of GRB was heavily eroded by inflation.

State Second Pension

Following the change of Government in 1997 the new Labour administration recognising SERPs limited future decided to replace it altogether. Its replacement, the State Second Pension, is designed especially for those who are long-term sick, have been out of the workforce either as unemployed or as a carer. The aim is to provide more generous credits and therefore a redistributive element to enable them to build up a more generous pension for when they retire.

Third level of pension development

Private pensions

The first private pension plans, Retirement Annuity Contracts (RACs) were introduced in 1956, but take up was not high due to their inflexibility. Generous National Insurance rebates ensured a high number of people opted out of SERPs after 1988 when private pensions became available.

Stakeholder pensions

These were introduced by the Labour Government and were the first example of a private pension 'designed' by government. Their administrative costs are fixed in law and the scheme itself is aimed primarily at low earners - those least likely to have a second pension. In practice the low administrative costs will probably set the benchmark for other private schemes and this should result in an all-round reduction in administrative charges - an aspect for which private pensions are frequently criticised.

Summary

The UK pensions system is a hybrid of many different schemes and philosophies, which has undergone many changes and influences over the last 50 years. At the same time the population is aging rapidly so that there will be 16m people aged over 60 by 2020 compared with around 12m today (18m by 2030). The basic state pension introduced following Beveridge remains at the heart of the system although as time has passed its value and therefore its importance has waned.

Every Government since the 1950s has tried to make its mark on pensions but the trend has turned firmly away from large scale state-run and operated schemes to schemes that encourage personal thrift based on personal pension funds.