Last Updated: Mar 3, 2001
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Issue no. 31
The Great Pension Robbery
Mar 3, 2001
The following article was excerpted from an article appearing in the March-April 2001 issue of Class Struggle, the political magazine of the British Trotskyist group, Workers Fight. It deals with reforms already made by earlier Conservative governments and with proposals by the current Labour government under Prime Minister Tony Blair all of which go in the direction of progressively eliminating the system of government and employer-funded pensions, replacing them with "stakeholder pensions," that is, personal savings accounts placed in the stock market. The description of the situation in Britain gives an idea of what is being prepared for the U.S. Social Security system.
For many months, thousands of posters and newspaper advertisements have hailed the so-called "stakeholder pensions," but up until now, none was available. Now the long wait is over. Blair's "stakeholder pensions," the final instalment of his "Welfare Reform" package, will see the light of day on April 6th, when the Post Office unveils the first of these new plans. Off-the-shelf packages will be put on sale in post office branches and supermarkets up and down the country. Along with other brainchildren of this government, they will represent the climax of Blair's version of "popular capitalism."
Officially, these pension plans are aimed at the 4.5 million or so workers whose annual income is in the Å?10- 20,000 ($14,000 to $28,000) range but who do not belong to any pension plan at their job, either because they work for very small companies or because they are in casual employment most of the time. According to the official blurb, these plans are supposed to be "cheap, cost effective and flexible." They are touted as allowing members to switch from one job to another or take a "contribution holiday" as they need, without losing any of their rights. In short, they are supposed to enable almost everyone (except the very poor who will still not be able to afford them and the better off who will not need them) to plan for their old age "responsibly" i.e. without having to rely on the "nanny state."
Together with the string of accompanying measures which are to be implemented over the coming two years, these stakeholder pensions are supposed to address once and for all the chronic plague of poverty among retirees.
But will they really? And is this Blair's objective? The answer to both questions is a definite "NO." Indeed, as in so many other fields, not only is this Labour government following the track of Margaret Thatcher's attacks against workers' pensions in the 1980s, but in fact it is going much further than the Tories (Conservative Party) were ever able to go. The packaging may be different since Thatcher never bothered with the hypocritical "compassionate" posturing used by Blair and his ministers. But the anti-working-class content and pro- business logic are the same, and the consequences are bound to be even worse if this government is allowed to proceed with its plans.
Decades of Old-Age Poverty
Before going any further into Blair's plans, it is worth looking at today's pension system and how it was shaped.
For all the talk about the grand "welfare state" of Britain, working class retirees have always had a particularly bad deal. The idea of the "good old days" of the pension system is nothing but an illusion.
There was, however, at least one positive feature in the system that was put in place in the postwar years: that the generation in work would provide for the pensions of those in retirement through their National Insurance contributions and that the government's income from taxation would be used to fill the gaps if necessary. It was taken for granted, therefore, that society as a whole was responsible for the livelihood of its senior members and that this fundamental solidarity between generations would enable the system to perpetuate itself.
Social solidarity, however, was not the main concern of the postwar Labour administration. Its primary aim was to provide the capitalist class with a low-cost labor force, while paying for the investment in industry that the capitalists were not prepared to make through the nationalization program. All social benefits were calculated so as to make low wages just about bearable, including the state pension, which was designed only to relieve low-paid workers from some of the burden of having to support their parents or grand-parents. The flat-rate state basic pension was set at a mere 19% of average earnings. And there were no statutory provisions for upgrading it at least not until the 1970s when pensions began to be indexed according to average earnings.
The justification for such low pensions which is still used today was that they could always be supplemented by means-tested benefits (like the U.S. welfare system) for those who had no other income as if there could be any justification for forcing workers, who had slaved away all their lives, to beg for their livelihoods in Department of Social Services (DSS) offices when they should at last have been able to enjoy a rest! Besides, these benefits never amounted to much and they certainly did not pull retirees out of poverty any more than they did the poorest layers of the working population.
The other main form of pensions "occupational pensions" predated World War II in many industries and large companies. Unlike the state system, these plans were not based on the solidarity between generations. Rather they operated more or less like individual savings accounts. Each worker paid something into the plan out of his paycheck. The role of the plan's trustees was to ensure a regular increase of the fund just like in any mutual investment fund and with the same unpredictability. When a plan member reached retirement age, his savings were "returned" to him either in the form of a lump sum or as a weekly payment. Plans like those of the miners and British Rail had only two or three rates of payments, whereas in other plans, the payments were more or less proportional to workers' wages. However there was generally no guarantee as to how much pension would be paid. Besides, whenever a plan member moved from one job to another, it was difficult if not impossible for him to get his contributions back. By and large these pensions were merely a supplement to the basic state pension, and their payment often depended on the relationship of forces between the companies and their employees.
Only in the 1970s were occupational pensions regulated by law. Membership became compulsory in all the workplaces where a plan existed. It also became compulsory for employers to pay a contribution into the fund for each employee (out of the workers' wages, of course). In most cases, workers' contributions were proportional to their wages and guaranteed pension levels became the norm (at least on paper as the Maxwell scandal showed later).
In addition to this, the Labour governments of the 1970s created a compulsory second state pension for those not in an occupational plan the State Earnings Related Pension Plan or SERPS as it was called. SERPS was based on the same solidarity principle as the basic pension, except that it was not a flat-rate pension. For employees in the middle-earning band, it provided a pension equivalent to 25% of their average past earnings.
Overall, pension levels improved in the 1970s but not for very long. Indeed there was no mechanism to protect either SERPS or most occupational pensions against inflation, so that with the high level of inflation which lasted throughout the 1970s and well into the 1980s, these additional pensions shrunk very fast after a few years in retirement, particularly for the low-paid.
The result of this was that by 1979, when Thatcher came into office, retirees' incomes were so low that 57% of them were entitled to supplementary benefits from the welfare office.
Pensions for Sale
One of the first gestures of the new Tory (Conservative Party) government in 1979 was to launch a full-scale review of the pension system. Out of this came, in 1980, the apparently innocuous decision to link the state basic pension to the Retail Price Index instead of average earnings. But given the way that the official inflation index was manipulated during the subsequent years, this change reduced the value of the basic pension from 23% of average earnings in 1978 to 16% today Labor did not reverse the 1980 decision after it took over the government in 1997. According to calculations made by the National Pensioners' Convention, if the basic pension had continued to be linked to average earnings, it would be worth 50% more today. Besides, with the increasingly precarious nature of employment over the past period, it has become more difficult to qualify for the full amount of the basic pension: 14% of male and 51% of female retirees do not qualify today. And this is not likely to improve, judging from the numbers of workers whose earnings are below the Social Security threshold: last year there were officially 2.47 million employees in that situation!
The Tories' second major attack on the pension system came with the 1986 Social Security Act. This Act was entirely driven by one objective: to reduce the role of the state in the pension system while redirecting National Insurance (NI) contributions towards private financial institutions. SERPS was the first target. The 1986 Act effectively paved the way for the winding up of SERPS by reducing its value in stages. In the short-term, Thatcher's objective was primarily to discredit SERPS by portraying it as a low-pay and potentially precarious plan. The same objective was pursued with regard to occupational plans. Compulsory membership became illegal, thereby weakening the financial basis of these plans while the obligation for employers to contribute to new occupational plans was repealed. On the other hand, the contracting out of occupational pensions, giving them to insurance companies to manage, was strongly encouraged.
At the same time the Tory government launched a huge campaign in support of personal pensions (something like a 401(k) plan in the United States). Workers were encouraged to opt out of SERPS or out of their occupational pensions and to set up personal pensions. A whole range of lures were deployed to make this option more attractive. In addition to a rebate on their NI contributions, which would be paid directly into their new pensions for several years, they were offered 3% of their wages as an incentive. At the same time pensions salesmen were offering what seemed to be huge bonuses for new personal pension holders, usually in the form of a lump sum, which, given the difficulties of the times, was attractive, particularly to low-paid workers.
Thus began the biggest scandal ever in the insurance industry. In a matter of six years, almost four million people opted out of SERPS and another one million out of occupational pension funds. Among them were over 1.5 million low-paid workers. Soon these new personal pension holders began to notice the small print in their contracts. For instance, the "bonus" they had been offered as a lure had been taken out of their pension; the opt-out itself had cost them up to 4% of their total fund; their future pension could be reduced to nothing by the ups and downs of the stock market (there was no guarantee whatsoever of any return); and so-called "administrative fees" were eating up the small contributions they could afford. In other words, they were doomed to contribute all their lives to a second pension which might give them barely a penny's worth in return.
Of course, when the scandal broke out in 1994, forcing the Tory government to open a public investigation, pension salesmen were blamed for the mess. But who had written the small print into the pension contracts and paid huge commissions to salesmen, if not the financial companies which were taking the pension money? And who had orchestrated the media campaign in support of personal pensions, if not the government?
In the face of the scandal and to avoid a large-scale shift back into SERPS, the government and the insurance giants agreed to set up a compensation fund partly financed by the industry. Public funds were involved as well, but to what extent still remains a well-guarded secret. The investigation found 1.4 million cases for which some form of compensation would be needed. December 1998 was chosen as the deadline for all these cases to be settled. But two years after the deadline, in December last year, the Financial Times reported that over 500,000 cases were still pending.
This was not the only scandal of the Tory years. At the same time, occupational pension fund surpluses were being systematically raided by the large companies. The origin of this scandal was the breach the Tories opened up in the rules governing occupational pensions when they decided that the employers' only statutory duty towards these funds was to ensure that on the basis of the financial market's current performance, they would be able to meet their duty in future. The employers were allowed to decide what to do with any surplus. Given the on-going rise of the stock market at the time, it was easy to make very optimistic estimates on such a basis. Instead of using the estimated surplus to increase current pensions, many employers decided either to take a "contribution holiday," which many did for years, or even to help themselves from the till. For instance, the privatized electricity companies took 1.2 billion pounds out of their pension funds, most of which was used to make tens of thousands of workers redundant!
But in the case of this scandal, unlike the so-called "mis-selling" of personal pensions, there were never any public enquiries nor talk of compensation, except in one case the Maxwell scandal. Given the spectacular collapse of Maxwell's business empire and his subsequent mysterious "suicide," it would have been difficult to hide anyway. Besides, given Maxwell's well-known links with the Labor party, the Tories could only benefit by exposing how he abused his employees' pension fund. But even then, the successive governments were in no hurry to find a way to compensate the Mirror Group's workers and retirees. Nearly ten years after Maxwell's death, the DTI has finally completed a report which exposes without any doubt the fact that Maxwell's main business partners including major banks like Midlands (today's HSBC), NatWest, Lloyds and Goldman Sachs were aware of his dubious dealings. But there is no proposal to prosecute these accomplices, let alone force them to pay compensation to Maxwell's victims. Predictably so: neither under the Tories nor under Labor was there ever any question of challenging the right of employers to rip off workers in their own companies.
Blair began preparing his plans for pensions as early as July 1997, only two months after taking office, by launching his own review of the pension system. He left no doubt as to his objective: as a DSS study consultation document produced in November 1997 pointed out, the aim was to reduce the share of the state in pension provision from 60% of the total to 40%. A year later, during the discussion of the government's Green Paper on pensions, Social Security minister Alistair Darling put it even more crudely when he declared in the Commons: "it is my intention to ensure that we amend the system further so that, if people stay in the state system, they will lose money."
His election manifesto may have committed Blair to "retain SERPS for those who wish to remain in it." But it was clear that Blair's aim, just as Thatcher's had been, was to run down the state pension system in order to channel the savings made by working people for their old age towards the claws of the financial giants.
What is this stakeholder pension really about? In short, it is a "cheap" personal savings plan. It is cheap in the sense that contributions can be as low as 20 pounds a month. But it is not all that cheap in terms of real cost. The rule is that so-called "administrative costs" must be "at most 1% a year." On the face of it, this does not sound exorbitant, and it would not be if the 1% in question was taken out of each year's contribution. But the phrasing is deliberately misleading: In reality, this 1% is to be calculated EACH YEAR on the total sum accumulated in the pension plan since it was started. According to calculations made by the National Pensioners' Convention, this means that, at current rates, the company managing the pensions will pocket 25% of all the contributions the worker makes into his pension over a normal working life!
As to offering any sort of security to future retirees, the stakeholder pensions certainly do not. Indeed these money-purchase plans offer no more guarantees than Thatcher's personal pensions as to how much finally will be paid out. A sharp drop of share prices on the stock market could potentially reduce drastically the value of such pensions. And even if this does not happen, when the time comes to convert the money accumulated in the pension into an annuity at retirement age, low interest rates may well result in a very low pension. In either case the pension holder has no possibility of redress, even if what he gets is much less than what he paid into his pension over his working life. The only thing that is guaranteed is the regular cut that the finance sharks will be able to award themselves year after year, regardless of the ups and downs of the market.
Many of those targeted by stakeholder pensions will be unable to measure the risks involved. Not only do the new pension rules explicitly protect the companies managing the pension funds from having to spell out these risks to potential buyers, but they give these companies immunity against any court action on this account. This is a recipe for a re-run of the pension "mis-selling" scandal, except that this time the mis-selling is endorsed in advance by the government itself. If and when tomorrow's retirees find that their stakeholder pensions are worth nothing, they will have no one to turn to.
Of course, the government claims that retirees' interests will be protected by its appointed regulatory body currently the Personal Investment Authority (PSA).
Yet the catastrophic experience of the railways already showed how useless such bodies are in protecting the interests of ordinary people; the primary concern of these state regulation agencies is for business interests. In the pension industry there are numerous examples of this as well. For instance, there is the case of Equitable Life, the country's third largest and oldest life insurer. Last year, due to mistaken estimates, Equitable Life decided to freeze the funds of most of its policy holders for seven months in order to offset the cost of paying the guaranteed returns it owed to a small minority of better-off customers. This was an outright breach of regulations. Yet the regulatory body, the PSA, did nothing to protect the interests of all policy holders. Ironically, Equitable Life manages the occupational pension fund of the PSA's own staff, not to mention that of the House of Commons. In any case, it is obvious that future stakeholder pensioners cannot expect any protection from the PSA.
Far from protecting workers' rights, as the government claims, the stakeholder pension rules protect only the profits of finance companies. No wonder the big finance institutions have all been getting ready for this bonanza. Starting on April 6th, all the main banks and insurance companies will be lining up to offer their own plans in total 26 of them, plus Marks and Spencers the retail chain, Richard Branson's Virgin and the National Farmers' Union mutual fund.
The TUC and the Pension Reform
The government is obviously concerned about the bad name that private pension funds have made for themselves as a result of the pension mis-selling scandal, particularly among workers. This is why Blair has chosen a popular outfit like the Post Office to launch the first officially approved stakeholder pension. But in fact, this pension plan will be effectively managed by Standard Life, one of the biggest players in the insurance market.
For the same reason, Blair invited so-called "membership" organizations to launch such plans. Predictably, he got an enthusiastic response from the TUC (the Trades Union Congress, the British equivalent of the AFL-CIO). The TUC's leader, John Monks, responded to the government's first legislation on pensions in November 1999 in the following terms: "We warmly welcome the government's proposals on pensions reform too few people are saving enough for their retirement. But we want to make sure that those in work today have the best opportunity to save for an adequate retirement. That is why we think employees with occupational pensions should also have access to the stakeholder plans so they can build up bigger benefits in a cost effective way.... Properly set up, they represent a real opportunity for millions of working people to save for a decent pension. And unions could have a key role to play in providing the stakeholder plan. They could play a part in delivering valuable services to union members, adding value to the union card, providing modern and much needed services for the 21st century workforce."
So, in addition to package holidays and mortgages, stakeholder pensions are now going to be promoted in union journals. Already the engineering union AEEU has set up its own plan managed by Friends Provident, and so has the media union BECTU, while others are preparing to launch their plans.
The union leaders' disregard for the collective interests of the working class as a whole including its most basic attribute, working class solidarity and their willingness to push workers into the claws of the City (Britain's financial center in London) are not new, of course. After all, the union machineries were, and still are the strongest supporters of the occupational plans. And although these plans were not originally managed by financial institutions, they were based on the same principle as personal pension plans, in that they relied on the financial markets to handle the needs of retirees rather than on the solidarity between generations.
Having been pushed aside from running a large number of occupational pension plans under the previous Tory governments, union leaders are keen to make a comeback in the pension field through the new plans. Blair's plan gives them a way to raise their profile in business circles, secure positions in the many administrative and regulating bodies of the pension industry and, generally speaking, increase their social influence without having to rely for this on the consciousness and militancy of their members which they fear more than anything else.
Can't Society Afford to Support its Seniors?
During the review process in 1997-99, the government explicitly dismissed the idea that stakeholder pensions should provide guaranteed benefits on the ground that this would make them "too expensive" for workers, given the cost of the insurance policies required.
If Blair and his ministers were concerned about expense, they should have eliminated the extortionate 25% of workers' contributions which pension providers pocket this certainly adds to the "expense." And since the only justification for this "administrative cost" was the need to gamble with pension money on the stock market in order to increase its value, there was only one possible conclusion that all pension contributions should be put into the National Insurance fund, which would then be able to provide decent pensions for all retirees today, without having to rely on costly and unpredictable financial speculation.
The government objects to such an obvious conclusion by saying that sooner or later the proportion of active workers compared to retirees will become too small to enable the active workers to support the retirees. Therefore workers have to save during their entire lives in order to build up enough cash to pay for their old age. Such is the official wisdom among politicians, business circles and economic commentators.
However, the figures on which this argument is based simply do not add up. According to official statistics, in the twenty years between 1971 and 1991, the size of the population of working age relative to the population aged 65 and over decreased by 15%. However the pension system did not collapse and most of its provisions were tied to the state contribution-based system. In the twenty years between 1991 and 2011, the decrease is expected to be 11% significantly less. Why on earth then should the pension system be more in danger today than it was in the previous two decades?
Underlying the official argument is the assumption that a smaller working population generates less wealth and therefore cannot handle the increasing needs of a larger number of retirees. But for more than two decades, ministers have boasted of the "growth" of the British economy as if this was the result of their policy and not that of the labor of millions of active workers. Despite all the talk about Britain's "low productivity," workers' productivity has increased a lot faster than their numbers have shrunk. Take any of the major industries. In car manufacturing, for instance, the number of workers has shrunk significantly over the past two decades, but the number of cars produced kept increasing. Otherwise how would companies and shareholders have been able to increase their profits on such a scale? Sitting in board meetings does not produce wealth, does it?
The truth is that, despite its smaller size, the working class produces a lot more wealth today than it did twenty or forty years ago. So why can't this wealth be used to provide a decent living to a rising number of retirees?
There can be one and only one possible reason. But it has nothing to do with demographic constraints. The capitalist class (aided by its politicians) is determined to increase its share of the wealth produced by society. Indeed, this is exactly what they have done over the past two decades, by reducing the standard of living of working people, forcing the unemployed into casual labor and running public services into the ground, while at the same time cutting the taxes paid by the wealthy. Blair's plan for workers' pensions has exactly the same objective to increase the share of the wealth going to the capitalist class by handing over part of the income of the working class to the City (Britain's financial center), instead of using it to pay decent pensions.
If the capitalists are allowed to get away with such attacks, the working class's share of the wealth it produces may become too small to cover the needs of its retirees. But there is nothing inevitable about this. And rather than allowing their old age to be subjected to the irrational hiccups of the stock market and the greed of the City sharks, workers would have everything to gain by placing their bet on their ability to fight back against these attacks, using the weapons of the class struggle.