Pensioners and Poverty: the British Pensions Crisis

By Rachel Page

Old age poverty is a problem facing many pensioners in Britain today. Instead of living safe in the knowledge that that they will have what they need to live out a peaceful retirement, many of Britain’s 11 million pensioners face uncertainty about their futures after they retire. According to official data published by the Office for National Statistics (ONS) on Inequalities and Poverty in Retirement, 2 million pensioners were estimated to be living in poverty in Britain in 2007/8, while over 30% of households made up of single people over the age of 60 were reported to have been suffering from fuel poverty, meaning that they would have to spend more 10% of their income on fuel in order to maintain a satisfactory level of heating. Actual figures for today are likely to be higher than this due to rises in fuel prices and the impact of the economic crisis.

In Britain there is a state pension. This means that upon retirement pensioners may receive a weekly income, which they are supposedly able to use to support themselves with. This paid for out of National Insurance contributions and taxes. Today the full state pension is £95.25 for a single person and £152.30 per week for a couple, and is payable to women from the age of 60 and men from the age of 65. To receive the full state pension workers have to have worked and paid National Insurance contributions for a number of qualifying years – currently 44 years for men and 39 years for women. This means that not everybody will receive a full state pension and some may not be paid anything at all. Women are one group particularly badly affected by this due to time taken off work raising children. The ONS reports that a larger proportion of women receive less than the full basic state pension than men.

The right to a state pension in Britain is something that was won by the labour movement. This began in 1898 with a meeting held in London that subsequently led to the establishment of a National Pensions Committee. A national movement grew up involving trade unions, cooperatives and friendly societies and in 1908 the Old Age Pensions Act was introduced. The first state pension were “means tested” however, which meant that only the very poorest were entitled to receive it after their eligibility had been assessed based on income. As a result only half a million pensioners received a pension in the first year after it was introduced. It wasn’t until the introduction of the Welfare State by the Labour after the World War, which was introduced because of the government’s fear of strikes and social unrest, that a universal state pension for all became available.

Today British pensioners receive one of the lowest state pensions in Europe. The Basic State Pension is inadequate to support people through their old age and many pensioners are therefore reliant on company and private pensions. Around 80 percent of pensioners rely on some form of savings and investment income while 1.3 million are solely dependent on the state pension and state benefits. Private pensions have led to growing inequality as they are less affordable to those with lower incomes. More than half of workers on below average incomes are not part of a company or private pension scheme.

The government is also planning to attack the rights of workers by raising the retirement age to 68 for both men and women. Justification for this is usually presented in terms of a “pensions’ crisis”. They claim that due to increasing life expectancy, people will have to work for longer and should rely more on their own savings and investments. In other words the government wants people to be less dependent on the state and more dependent on individual efforts. Such steps will particularly badly affect workers with lower incomes who do not have the savings to live off and support themselves with through their retirement. Furthermore the argument that an increasing life expectancy should mean that people have to work longer does not add up. Although people are living longer, more people have been entering the workforce and productivity has increased over the past decades. This should mean that there is more money to pay for pensions but instead the government is worried about cutting expenditure.

Those workers with company pensions have also found their pensions under attack as employers have been keen to move employees from final salary pension schemes into defined contribution schemes. A final salary scheme offers a much more reliable pension as it is based on the final salary of the employee. With defined contribution schemes both the employer and employee still both pay into a fund which is invested, but this is at a fixed level and the value of the pension received by the employee is dependent on the value of the contributions and investments at the time when the employee retires and not the final salary. In other words if investment returns are poor then the employee will receive a much smaller pension. A large number of companies have cancelled their final salary schemes and many have stopped offering them to new employees altogether. Employers claim that these pensions are too expensive to keep going and blame the falling stock market, as with final salary schemes they are bound to prop up the scheme to match the final salary if the market falls. They prefer the defined contribution scheme instead as it is workers who are made to pay for any shortfall.

The reasons given by employers to attack final salary schemes are hypocritical. During the 1990s many employers took advantage of the stock market boom by taking “pension holidays”. This meant that they took a break from paying their contributions into pension funds and thereby saved themselves billions of pounds. Yet as soon as the stock market began to fall, they were quick to use it as an excuse to attack workers, who had not previously enjoyed the same break from their contributions. In other words while employers were happy to profit from the stock market when it was doing well by holding back the contributions that they should have paid, they are now blaming it for the “need” to close final salary schemes. This has thus meant that thousands of workers have been  cheated out of the pensions that they expected to retire with. Furthermore many employers have not spent so much contributing to defined contribution schemes. A 2002 report by the Trade Union Congress (TUC), states that for an employee receiving average wages an employer typically contributes £2115 less per year to a defined contribution scheme than to a final salary scheme.

These attacks on deferred wages of workers can be seen as an attempt to compensate for falling profits. As the rate of profit has fallen capitalists have been trying to take back any of the concessions that have been made to the working class so as to recover some of the profits they have lost. This is not unique to Britain but can be seen as part of a trend since the mid 1970s when the world economy began to slow down. Attacks on pensions and social security have taken place across Europe and workers in a number of countries such as France, Germany, Greece and Austria have taken actions to try to fight back.

Attacks on pensions along with job cuts and wage freezes have also been one of the major reasons for industrial action in the last year in Britain. Strike action by Fujitsu IT services company workers provides but one example. Despite still making a profit of more than £200 million before taxation, the company has been using the recession to restructure itself and this has meant placing more than 6000 jobs at risk as well as plans to close its final salary pension scheme, which according to Unite the Union will amount to a 20% pay cut for the 4000 employees affected. Fujitsu workers have responded by taking national strike action in December 2009 and January 2010.

The economic crisis has had a further devastating effect on workers’ rights to a fair pension. Not only have thousands of worker been made unemployed, therefore reducing any ability to save for their future and look after themselves as the government seems to desire that they do, but the crisis has also been used as an excuse to further attack existing pension schemes. At the same time, companies still seem to be able to protect the pensions of their top executives. In 2008 directors still managed to receive an average of a 23% to their pensions. Similarly when Visteon car workers lost their jobs in March 2009 Visteon’s management managed to protect its pensions by transferring them to Visteon Engineering Services, while leaving the pensions of former employees in the UK Visteon pension scheme with its huge deficit which threatened the value of its pensions. Since winning their redundancy payment through occupying their factories, Visteon workers have continued to protest after the collapse of their pension fund which has meant that some workers will lose up to 40% of their pension. As the pension schemes of many other companies in Britain also reportedly have huge deficits, many workers now face similar threats if the companies they work for go bust. The 200 biggest defined pension schemes (including final salary schemes) are now said to have a collective deficit of £103 billion, and according to the Pension Protection Fund at the end of November 2009 eight out of ten defined benefit schemes faced a short fall.

There is therefore a crisis with the British pensions system, but this is not because people are living too long or because pensions are too expensive to fund. Instead a crisis exists because many pensioners, at the end of their working lives, are forced to work well into their retirement in order to avoid poverty since pensions which provide for their everyday needs are not available. Survival through old age should not be dependent on pensions linked to the stock market nor should it be about company profitability or making profits for private pensions companies. Rather in old age workers should be provided for based on need so that they can rely on being free to live out a comfortable, peaceful retirement at the end of their working lives.