Until the turn of the 20th century, being poor was seen as a moral failing in Britain.
People living in poverty did so, it was believed, because they were inherently flawed, not because of any external factors.
And, by that metric, there were plenty of morally deficient people about. By 1900 around 25% of people in Britain lived in what was then classed poverty. By today’s metrics it would probably be much higher.
Everyone was believed to have a place in society, and if you didn’t fit into the strict hierarchy of the time, you were a deviant.
So what changed?
The introduction of state pensions certainly helped.
In 1908, the Old Age Pensions Act passed through Parliament giving some over-70s a pension of 5 shillings per week – or 25 pence. Life changing for many, though not quite enough to start popping the champagne.
Of course, we’ve come a long way since then. The 1908 law looks primitive in comparison to the system we have today.
Which is particularly useful, given that we’re living longer than ever.
But today’s pension funds still have plenty of issues to contend with.
Unsurprisingly, coronavirus has been a kick in the teeth for the industry. A recent survey of pension fund executives produced by CREATE-Research, found that 90% of respondents believed that asset returns would be lower over the next ten years than throughout the past decade.
Over three-quarters believe inflation is on the horizon in a post-pandemic world too, and 84% believe that central bank independence will be infringed as governments attempt to knock economies back into shape.
With this in mind, according to the Financial Times, one in five workers between the ages of 60 and 65 are now planning to delay retirement.
A report from Moneyfacts found that the average pension fund is still down 2.6% from the start of the year, and annuities remain lower than in January. There is a silver lining, however – annuities made a modest recovery last quarter, climbing between 0.5% and 1.3% on average.
And there was another nugget of good news that went relatively under the radar in the noise around Brexit and vaccines recently: Rishi Sunak announced that he would hold off scrapping the retail price index (RPI) until 2030. Long used as a measure of inflation, the RPI is widely understood to be a crude metric.
Why does any of this matter for pension funds?
Because it currently dictates the price of inflation-linked gilts, which pension funds tend to hold a lot of. The proposed replacement – known by the rather catchy name of the Consumer Price Index including owner occupiers’ housing costs (CPIH) – generally records lower levels of inflation. So that means potentially lower returns on an asset held by pension funds across the UK.
Perhaps not enough to book a holiday to a Caribbean but given the state of markets this year, any good news is welcome.
And the pressures caused by the pandemic are causing some people to dip into their pension pots early, even as its overall value is depressed. In practice, taking money out now can eat into future returns. The OECD has warned against this, arguing that tapping one’s pension pot should be a “measure of last resort” – though some people have little choice.
The same is true of pension contributions – some savers stung by the pandemic have halted them altogether.
It’s particularly telling that the Danish and Dutch pensions systems – which are two of the most highly rated pension systems in the Global Pension Index – don’t allow people to dip into their pension pots at all.
Mercer, an actuarial firm, published a report in October taking stock of the current state of retirement plans across the world.
Some of the ways pension systems can be made more sustainable are enough to make you wince. Increasing the retirement age. Increasing labour force participation at older ages.
This isn’t to pass a judgement on these suggestions. I’d argue that they’re probably inevitable if the pension system is going to continue functioning.
And, regardless, the UK pension system is better than many of its peers, but it does reflect the fact that the industry as a whole has some work to do.
Research Analyst, Southbank Investment Research
Plenty of people are aware of the flaws in the UK’s current pension system and so are increasingly taking their financial future into their own hands. And that’s why one of Britain’s most controversial politicians is preparing an event he’s calling “Britain’s Great Wealth Revival”. He’ll be covering topics ranging from stocks that look primed to boom post-Brexit to “the great retirement illusion” in this event slated for next Monday at 2pm. Sign up for free here.