The subject of pensions does not excite great interest. It seems boring, technical and remote. But a pension is a key aspect of work, being a form of deferred wage. Of the many inequalities opening up between young and old, access to a reasonable pension is one of the most important. Public policy in this area is quite complicated, and very long-term: decisions made now have their impact decades into the future.
This week, the British Government have decided that those in money purchase schemes will in future be free to spend their pension pots as they like, rather than having to buy annuities. There is some sense in this. An annuity means that you pay a lump sum to an insurance company in return for a lifetime of payments (but you lose the lump sum). Returns are quite low, and the crucial issue is how long you live after retiring: if it is a long time, it is not a bad deal. In a sense it is a kind of insurance product, with pooled risk meaning that those who live a long time are balanced out by those who do not. But annuities are not great value in general because the companies providing them take so much of the investment.
So this reform is being greeted as giving greater choice because the pensioner may do as s/he wishes with the pension pot. S/he might blow it on luxuries or invest it soberly for old age. What is interesting about this is that these money purchase schemes developed when, in the 1980s, the State Earnings related Pensions Scheme (SERPS) was wound down in the name of – consumer choice. Both then and now ‘choice’ is seen as the value that trumps all others.
Yet at the same time, final salary schemes are depicted as an elite ‘gold plated’ advantage, available only to public sector workers and senior executives in the private sector. Why don’t ordinary workers in the private sector have them (as they used to)? Well, because those workers decided (or were seduced into deciding) that it was better to have individual choice rather than unionised negotiations of pension rights.
Choice has been valorised in neo-liberalism as the prime – maybe the only – thing that matters. But that is nonsense, and pension provision shows it to be nonsense. The best way of organizing pensions is via collectivization of risk (in this case, longevity risk). The consequence of not seeing this is the generational gap that has opened up between those who under the ‘old settlement’ have decent pensions and under the ‘new settlement’ do not.
The temptation is to see the old benefitting at the expense of the young. But this is nonsense. It is not that the old prosper at the expense of the young but that the collapse of collective provision in the last few decades has effected a massive transfer from ordinary people to the global elite. Of course that elite would love to pit grandparents and parents against children and grandchildren. But the reason why a 20 year old today has no prospect of a decent pension is not because Aunt Nellie has a few thousand a year from her pension scheme. It is because there has been a wholesale transfer of power and wealth – by virtue of the seductive rhetoric of individual choice.