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What can history tell us about the pensions crisis?

15 June 2005

The issue of pensions and pension security is one of the most urgent political issues in Britain today.

Not a day goes by, it seems, without a further installment in Britain's great debate about the way forward on pensions. The fact that Britain is facing a major crisis seems now to be generally accepted. How this crisis can be solved is the subject of intense discussion. Yet, although analysts are hard at work dissecting Britain's current pension system, as the 1st report of the Pensions Commission put it in November 2004:

"The problems of the British pension system today reflect the cumulative impact of short-term decisions, of commitments made, and of policies rejected, sometimes under the pressure of electoral cycles, by governments over several decades."

In other words, if we are to understand the present crisis in British pensions, and if we are to solve it effectively, we have to understand the history of the development of the UK pension system.

Surprisingly, relatively little attention has been paid to the role of history in creating the current crisis, and to the ways in which history constrains channels present policy options. As an example of why history matters, take a look at the state basic pension. In reality, those who know and understand pensions realise that it was financed on a pay-as-you-go basis from the start. Yet most British citizens don't know this. Why?

Little attention has been paid to the role of history in creating the current crisis

Because when the new pension was implemented in 1946, the Labour government took a decision which was to have far-reaching consequences: they dropped Beveridge's 20-year 'golden staircase' to full pension rights, the cabinet having judged it politically impossible to deny new retirees a full pension. But this shift to PAYG was effectively concealed from contributors who continued to believe that their contributions would build up a fund out of which a future pension would be paid, as Beveridge had proposed. Hence, in the minds of British workers, a firm financial contract was created between them and the state, and the illusion that such a contract exists persists today.

This is important. It explains why the basic pension, for all its inadequacies, has endured. And it suggests that those advocating the introduction of a 'citizen's pension' will face major resistance from those for whom such a pension will essentially negate all the contributions they have made to date.

Or take complaints that Britain's overall system of pension profoundly disadvantages women - who tend to have much less complete contribution histories than men. That this is the case is also the product of the past, of a world in which the 'family breadwinner' was assumed to be male. Yet, although that world has largely gone, the product of those old assumption have shaped the present position. And because the financial costs of addressing such discrimination, and the political costs of effectively transferring funds from men to women, are large, history may also impose limits on the options available to today's policy-makers.

History may  impose limits on the options available to today's policy-makers

So history matters. And our lack of understanding of that history matters. If we are to craft an effective and enduring solution to the pensions crisis we have to understand how history has shaped that crisis; we have to learn the lessons of history (not least the very long-term consequences of decisions taken for short-term political advantage); and we have to recognise the ways in which history has closed off some of our policy options.

To fill this gap in our understanding in the role history has played in today's pension crisis, a conference was held on 15 June 2005 at the British Academy in London. Entitled 'Why has it all gone wrong? The past, present and future of British pensions', leading experts on the past and present of pension were brought together with policy-makers, representatives from the financial services sector, think-tanks, pressure groups and trade unions to debate the nature of the current pensions crisis and the way forward.

This article was first printed in Money Week and we are grateful for being allowed to reproduce it here.

Dr Hugh Pemberton/Department of Historical Studies

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