This article was originally commissioned and published in November 2013 for Investment Life & Pensions Moneyfacts publication.
Tom Murray, Head of Product Strategy at Exaxe, explores Lloyd George's state pension legacy and assesses whether its promise has been fulfilled or whether further reform is needed.
Lloyd George’s legacy - Has its promise been fulfilled?
One hundred and five years ago, Henry Asquith stood up in the House of Commons to introduce his second budget. Under pressure from the rise of the labour party and the reformist wing of the Liberal party, he announced the introduction of a non-contributory pension for the first time in the history of the UK.
This marked a major transition from the treatment of poverty as a crime in the Elizabethan era to its treatment as a moral degeneracy in the Victorian era, best treated in workhouses. With the dawn of the twentieth century, the main parties were reaching a position where they believed that poverty should not be stigmatised and that it was necessary for the state to intervene to reduce it among those who were too old to earn their own way out of it.
Due to the intervening assumption of the prime ministership by Asquith, it fell to David Lloyd George as the new Chancellor of the Exchequer to introduce the Pensions Act 1908 and thus to become synonymous with the old age pension, for a few decades afterwards, people referred to retiring as “going on the Lloyd George”.
Given that the state pension was introduced over 100 years ago, it is pertinent to reassess its effectiveness in achieving its basic aims and whether the approach that grew from it managed to bear fruit and bring us to the nirvana of ensuring that all citizens of the state are in a position to enjoy a comfortable retirement after a lifetime’s work.
The aim of the introduction of the state pension was simple, to alleviate the poverty of the elderly who could no longer earn enough to live on sufficiently and who had earned too little during their working lives to save for their old age. How to achieve this was much argued over by politicians and social reformers from the 1870s onwards as they sought to reconcile the existence of so much elderly poverty with the fact that the United Kingdom was then the richest country on the planet.
It was the subject of a number of reform initiatives by individuals such as Charles Booth and Joseph Chamberlain, as well as the Trade Unions and the growing Labour Party, and their efforts to stimulate public debate resulted in a large amount of pressure on the Liberal Party in the 1906 election, prompting them to move to resolve the issue during the lifetime of their government.
Lloyd George’s speech introducing the Old Age Pensions Act of 1908 was described as ‘apologetic’ by The Times of London the next day, as though he was personally embarrassed at how limited the actual measure was. The reason for the limited approach, which restricted the amounts to be given to a maximum of 5 shillings per week, the qualification age of 70 years, the residency test of 20 years, the British citizenship test and the test of good character, was that while there were large sections of society who agreed that something needed to be done, there was a lot of fear about the long term effect of introducing taxpayer funded pensions.
Firstly there was a fear that the system would become too expensive to support. Those who believed this supported an insurance system to fund pensions, which while costly in the short run would ultimately be self-financing. However this ignored the fact that not all people who would need the pension were in a position to contribute to it. The position of women, in particular, was difficult. Many of them had not worked in paid employment during their life or had been in low-paid casual work and therefore their needs could not easily be accommodated within an insurance system.
However the idea of a non-contributory solution was also a polarising notion. Those who supported it believed that it was a fair reward for a lifetime of work while those opposed believed that government funded pensions would encourage dependency and discourage self-help. Lord Roseberry believed that the notion of non-contributory pensions was the “final passing of family pride in caring for the elderly … part of the almost daily transfer of burdens from the individual to the state”.
The fear that any involvement by the state would mean complete abandonment of personal and family responsibility was the reason for a lot of the opposition from conservatives in the Commons and in the Lords.
There was also a reluctance to see the taxes of the “honest worker” be used to support the dissolute drunkard who had refused opportunities to earn during his working years. This lay behind the desire to ensure that there was a test of good character included as part of the state pension qualifying criteria – a test which was in practical terms unworkable and seems to have been rarely applied and left to wither away.
Another fear was that the pension would not achieve its aim because of the stigma that was previously attached to assistance via the Poor Law scheme and that this stigma would deter the “deserving poor” while leaving the “undeserving poor” to get all the benefit.
Despite all these reservations, the bill was passed and thus the first payment to UK citizens as of a right began in 1909 and marked the beginning of the pensions system.
From the mid-twenties onwards, the system was bolstered by a contributory pension scheme which came into effect when any worker reached the age of sixty-five. This was paid for out of the compulsory contributions to the national insurance fund established by Lloyd George in 1911. Those who had not contributed sufficiently to qualify for a contributory pension could still claim the non-contributory pension from the age of 70.
Alongside these, numerous pension reforms were introduced across the twentieth century to encourage private provision to top up the basic state pension by giving tax relief, to introduce earnings-related elements to the state pension and to encourage employers to provide group schemes that would efficiently serve large numbers of workers in their employment.
How have we measured up?
Of all the issues that concerned those setting up the pension scheme, the concern over a sinking into a state of dependency by the general population was the gravest concern. In the event, when one sees the situation today, that over 50% of the population do not save for their pension shows that the people have come to expect the state to provide all of their income in their old age and no longer consider their position in their old age. This situation became so bad that the government felt the need to intervene and create the auto-enrolment system in order to push people into saving for their retirements. In fairness, it looks like the fears of the original opponents of the system were well founded and the intervention of the state, combined with the electoral strength of the grey vote to prevent change, has ensured that the state is currently being held hostage by the elderly to their old age.
The difficulty of pensions for women has still not been currently abated. While far more women are in paid employment than at the beginning of the 19th century, women are still paid less than men and are more likely to have interrupted careers due to caring needs for children or the elderly. As a result both state contributory pensions and private pension savings are interrupted and therefore there is a major difficulty in amassing a suitable lump sum in order to provide a decent income in retirement.
Stigmatising of poor
Stigmatising is the only area that has been a complete success. There is no longer a trace of shame in accepting a non-contributory pension from the government and it is never heard that people will not sign up for it.
However, this has also contributed to the problem of so few people regarding retirement as a problem that they should consider themselves. Nobody wants to die but at the same time nobody seems to consider that they will live long into retirement, that they will need a lot of money in order to live through it and that therefore they should make sufficient provision for that scenario.
From the beginning the primary problem with state provision of pensions has been how to prevent dependency among the population. The elements included in the 1908 Pension’s Act was designed to make sure that this would not happen but gradually across the years a sense of entitlement came in and the general mood among the population became that retirement was somebody else’s problem and not a problem for themselves. Thus while there was good saving among the wealthy and the middle classes, there is a very low level of saving for the future.
The consumer society has also played a big part in making this happen. People are encouraged to spend today by both industry and the government in order to grow the economy and this precludes saving for tomorrow.
However, one other factor that also comes across is the fact that the pension system is a victim of its own success. Victorian and Edwardian people saved because they saw what happened to those who didn’t. Nowadays, people are less aware of other people in poverty and due to the general breakdown of communities, there is far less likelihood of them being aware of other people’s personal conditions and what they are going through. Thus the incentive to save is diminished.
Should it be seen as a success? Yes it should in that it met its primary aim of lifting people out of extreme poverty in their old age. However, it has also transferred a huge burden to the state which didn’t exist before and created a dependency culture for pensions which has obviated against a more self-reliant approach. This was fine as the population was increasing and the ratio of workers to retirees remained high. However, rapidly increasing longevity means that this ratio is going to collapse over the next few decades meaning that supporting the elderly is going to swallow an increasing amount of the national budget until it reaches the point of unsustainability.
Given that the system has ‘growed like Topsy’, it falls to the current government cycle to get this under control and the only two approaches are to either reduce expenditure by pushing people back towards poverty or to keep them out of it by making them save a greater proportion of the cost themselves.
The one thing that makes this difficult is that old people vote in disproportionate numbers towards the rest of the population making it extremely difficult politically for any government to start to rein in the ever-increasing budget for the elderly.
The pensions system has now become a major source of national expenditure. If we are to keep to the worthy aims of the original sponsors of the 1908 Pensions Act, we need to go back to basics. We need to reform the pensions system to reduce the dependency level, accommodate women’s work life better, and keep the costs down at a sustainable level.
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Photo Credit: The National Archives