The objective for any pension scheme must be to fund the continuation of living standards (appropriately adjusted) available prior to retirement at an acceptable cost. The UK’s pension system, managed by politicians with short time horizons, has lamentably failed to achieve this.
In December 1942, at the request of the Government, Sir William Beveridge produced his report proposing that all people of working age should pay weekly contributions; in return, benefits would be paid to those who were retired, sick, unemployed or widowed. He argued that this system would produce a minimum living standard “below which no-one should be allowed to fall”.
Almost 70 years later, nobody would argue that anything remotely resembling Beveridge’s claim has been achieved, although it would have been much nearer had his relatively limited recommendations been followed rather than escalated. Since then the state system has been reformed and reneged on many times. For example the Basic State Pension is at least 20 per cent down from its 1950 level relative to earnings. (The link with earnings was broken in 1980, for both past and future years of service.)
At the same time, the reduction and then abolition of advance corporation tax relief has helped to destroy Britain’s private sector occupational pension system, which was once regarded as one of the best in the world. This infamous retrospective tax raid has cost pension funds a cumulative £150-£225 billion, through lower-than-otherwise dividends and growth. This was before the recent financial turmoil, and has been a major factor in the 43 per cent fall in the number of active members of private sector defined benefit schemes.