How to rescue a failing pension regime: the British case

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Notes

Robin Blackburn, Department of Sociology, University of Essex, Wivenhoe Park, Colchester, Essex CO4 3SQ, UK.

I would like to thank Lucinda Platt, Adair Turner, Diane Elson, Anthony King and others present at the Vice‐Chancellor's Seminar at the University of Essex on 8 March 2004 for helpful comments on an earlier draft. I would also like to thank Rodney Bickerstaffe and all those who contributed to the lively discussion following my delivery of the Norman Melbourne and Barry Amiel Memorial Lecture in London on 13 July 2004, where I drew on the ideas presented here. The foregoing are not, of course, responsible for any mistakes or the particular conclusions I reach.

I analyse the failings of the US pension regime in ‘The Pension Crisis and How to Tackle It’, Challenge, July–August 2004, pp. 119–32.

The World Bank launched a call to dismantle pensions systems with a ‘dominant public pillar’ in an influential report, Averting the Old Age Crisis, Oxford University Press, Oxford 1994. I discuss this study and the wider global drive to commodify pension provision in chapter 4 of Banking on Death, or Investing in Life: The History and Future of Pensions (Verso, 2002).

The argument that generational justice requires us to strive to maintain the ratio of per capita pension income to average income is made by John Myles in ‘A new contract for the elderly’, in: Gosta Esping‐Andersen et al. (eds), Why We Need a New Welfare State (Oxford University Press, 2002).

Secretary of State for Social Security, A New Contract for Welfare: Partnership in Pensions, Cm 417, December 1998, The Stationary Office (TSO), p. 103.

Memorandum by PricewaterhouseCoopers, Select Committee on Economic Affairs, House of Lords, Aspects of the Economics of an Ageing Population, Volume II, Evidence, TSO, January 2004, p. 77.

It is worth bearing in mind that all ‘property income’ generated by corporations in 2002 amounted to £122 billion or a little over 12% of GDP. See Monthly Digest of Statistics, January 2004, p. 9.

Department of Work and Pensions, Work and Pension Statistics, 2003, p. 86. The top fifth of pensioner couples received median income of £510 a week, or £255 each, while single pensioners received £261 a week. There are much greater inequalities within this top quintile than in the others.

Sara Arber & Jay Ginn, ‘Ageing and Gender’, Social Trends, No. 34 (2004), p. 9.

Ibid., p. 10.

Ibid.

Alan Pickering, A Simpler Way to Better Pensions: An Independent Report, TSO, July 2002, p. 70. For figures drawn from an Amicus survey that found slightly worse coverage, see Derek Simpson, ‘The pension thieves’, The Guardian, 11 March 2004. The weakness of provision was acknowledged in the DWP Green Paper, Simplicity, Security and Choice: Working and Saving for Retirement, Cmd 5677, TSO, December 2002, pp. 29, 51. But the main remedy, apart from some welcome simplifications, was still to urge people to save more within the framework set out in the earlier Partnership for Pensions. Despite yeoman service from the experts commissioned to supplement information contained in the Green Papers and DWP publications, the government has not invested serious resources in clarifying the deficit in pension wealth held by the population as a whole. Myners, Sadler and Pickering were expected to produce recommendations relying on their own expertise and with a negligible research budget.

See Robin Blackburn, ‘The Great Pension Crunch’, The Nation, 16 February 2003.

DWP, Simplicity, Security and Choice, p. 40.

I survey this research in chapter 2 of Banking on Death.

Editorial, ‘Pension crisis comes to the boil’, Financial Times, 26 July 2004.

Anthony Hilton, ‘Pension sums don’t add up', Evening Standard, 20 February 2004. See also Philip Coggan, ‘Safety net still has holes in it’, Financial Times, 23 February 2004.

Ed Crooks & Nicholas Timmins, ‘Official view of size of economy in doubt’, Financial Times, 31 January–1 February 2004; and Nicholas Timmins, ‘ONS revises figure donated to pensions pot’, Financial Times, 1 July 2004.

The DWP, basing itself on Eurostat, told the House of Lords enquiry that overall (state plus private) pension expenditure in the UK was 11.5% of GDP in 1999, while public provision was 5% of GDP. However, it warned that one could not necessarily impute a private expenditure share because the figures are from different sources. See House of Lords, Select Committee on Economic Affairs, Aspects of the Economics of an Ageing Population, II, Evidence, p. 23.

John C. Bogle, ‘Not‐so‐mutual funds’, Wall Street Journal, 14 November 2003.

I explore these issues and the double accountability deficit of what I call ‘grey capitalism’ in Banking on Death, especially chapters 2 and 3.

This was one of the main recommendations made by the employers' organisation, the CBI, in its report Securing Our Future: Developing Sustainable Pension Provision in the UK, July 2004.

UN Population Division, Replacement Migration: Is It a Solution to Declining and Ageing Populations?, United Nations, New York, 2001, pp. 71–6.

For other improvements to the state pension, see Bryn Davies, Hilary Land, Tony Lynes, Ken MacIntyre & Peter Townsend, Better Pensions: The State's Responsibility (Catalyst, 2003). While concurring with the point made by the title of this pamphlet, I will be exploring further ways in which private employers can be obliged to contribute to public provision of better pensions.

Andrea Boltho, ‘What’s Wrong with Europe?', New Left Review, No. 22 (2003), pp. 5–26; and Robin Blackburn, ‘Eurodenial’, New Left Review, No. 18 (2002), pp. 131–40.

See Jonas Pontusson, ‘Sweden’, in: Perry Anderson & Patrick Camiller (eds), Mapping the West European Left (Verso, 1994), pp. 36–62. In Britain capital levies to meet social needs have been canvassed by such eminent thinkers as Sidney Webb, J. M. Keynes and James Meade, as Martin Daunton explains in Just Taxes: The Politics of Taxation in Britain, 1914–1979 (Cambridge University Press, 2002), pp. 71–2, 187–9. In the 1950s Richard Titmuss and Richard Crossman for a time won the Labour Party over to the idea of meeting secondary pension provision by means of a publicly‐controlled, share‐holding, social fund. See National Superannuation: Labour's Policy for Security in Old Age (1957). See also Richard Titmuss, The Irresponsible Society (Fabian Society, 1960). I have more on this in Banking on Death, chapter 5 and the Conclusion.

Public companies might be required to issue ‘convertible bonds’ rather than simple shares—these are bonds which convert to shares above a certain price. An instrument similar to these ‘convertibles’ could allow the pension fund to gain from any large rise in overall share earnings but would set a bond‐like basic return.

Gautam Malkani, ‘City shares scheme to aid failing schools’, Financial Times, 29 June 2004. I believe this funding method would be far more appropriate for pension provision than for the purpose under consideration in this report, which was to facilitate corporate contributions to the government's plan for City Academies.

By this I mean that a national pension reserve fund would allocate resources to regional pension boards which would manage these funds. Allocations would reflect the size and characteristics of each region's population.

TUC, Prospects for Pensions, May 2002, pp. 20–9.

For details of this campaign, see the TUC website.

Of course, companies can always raise money from banks or the stock market. But since they do not exist in a frictionless world, they prefer to finance investment out of their own revenues if possible, and the obligation to reduce a pension fund deficit detracts from available revenue. In recessions the need to stump up cash for the pension fund has led to job‐shedding as well as slashed investment.

The workings of path dependence in this area are explored by Jacob S. Hacker, The Divided Welfare State: The Battle over Public and Private Benefits in the United States (Cambridge University Press, 2002).

Nicholas Timmins, ‘CBI calls for change in proposed pension savings restriction’, Financial Times, 10 March 2004.

Gerard Hughes, ‘Financing pensions by stealth’, in: Gerard Hughes & Jim Stewart, Reforming Pensions in Europe (Edward Elgar, 2004), p. 182.

In an otherwise acute discussion of pension finance Nicholas Barr makes the point about future production but omits non‐pensioner asset‐holders' claims on future income. See The Welfare State as Piggy Bank (Oxford University Press, 2002), pp. 149–56.

Office of National Statistics release, July 2003. Following the collapse of the share bubble in 2000 pension funds reduced their holdings of shares. According to this release, UK individuals, banks and other financial institutions owned 27% of publicly quoted shares, while ‘foreign’ owners accounted for 32%; however, British subjects could well be the beneficial owners of many of these ‘foreign’‐held shares by dint of using overseas tax havens. Insurance companies owned 19% of public shares—a portion of these holdings, perhaps a third, could relate to provision for retirement and might qualify for a rebate.

Michael P. Devereux, Rachel Griffith & Alexander Klemm, Why Has the UK Corporation Tax Raised So Much Revenue?, Institute of Fiscal Studies, May 2004. However, John Plender and Michael Simons published an expose of widespread tax avoidance by finance houses and some other concerns in the Financial Times, 21 and 22 July 2004.

Paul Myners in H.M. Treasury, Institutional Investment in the UK; A Review, TSO, March 2001, pp. 95–6.

John Plender, ‘Milked at 75’, Financial Times, 5 April 2004.

See Richard Murphy, Colin Hines & Alan Simpson, People's Pensions: New Thinking for the 21st Century, New Economics Foundation, February 2003. These authors suggest that the rate of interest would be set between a government bond, on the one hand, and the higher rates received by banks that subscribe to PFIs or PPPs on the other. They also discuss ways in which the people's bonds could be structured to reinforce the Second State Pension. In Banking on Death, on pp. 338 and 492, I have a much less detailed discussion of the need for assets of this type.

UK GDP growth was 2.6% a year between 1990 and 2003. While I believe that the new regime will enhance the ability of the tax authority to discover profit I have made no allowance for this. The year 2031 is an appropriate benchmark because the ageing effect will by then have reached a new level. I have a similar computation for the US in ‘The Pension Crisis and How to Tackle it’.

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Robin Blackburn

Robin Blackburn, Department of Sociology, University of Essex, Wivenhoe Park, Colchester, Essex CO4 3SQ, UK.