A brief history of workplace pensions – Part 1

This is the first in a series of instalments adapted from a much longer article originally produced by the Pensions Archive Trust (PAT) for the Pensions and Lifetime Association’s (PLSA) centenary celebrations in 2023. This highlighted the PLSA’s role in the development of workplace pensions and the full original article is available on the PLSA’a website: https://www.plsa.co.uk/Policy-and-Research/Document-library/PLSA-at-100-The-past-present-and-future

We hope you find it enjoyable reading and that it assists in increasing recognition of the benefits of learning from the past when finding solutions to today’s workplace pension provision challenges.

Introduction

A hundred years ago, workplace pensions were only just starting to gather pace and there was no formalised approach to personal pension saving. State pensions had existed for around 15 years but were there only for the few who made it to genuine old age. In other words, for most, retirement was a frightening concept fraught with financial peril.

Roll forward to 2024 and there are around 27m people in workplace pensions with close to £2tn of assets saved toward retirement. Retirement can still be daunting but, for most, there is now a working system that should mean they avoid financial peril. Workplace pensions are one of the great welfare success stories of the 20th and early 21st century.

In this first part, you can read about the early decades of the 100 year history of workplace pensions  including the part the Pensions and Lifetime Savings Association (PLSA) played in that history.   The PLSA has proactively developed and launched many ideas that have helped pensions: from seeding organisations like the Pensions Management Institute to, more recently, launching the Retirement Living Standards.

In the final part we’ll speculate about what could happen to workplace pensions over the next 100 years. While it’s clearly very difficult to do this, one thing we know for sure is change is and will continue to be a constant. This change will only be successful if the legislators and regulators are held to account and supported by a knowledgeable pensions industry.

100 years of workplace pensions

The early history of pensions

For many businesses, pensions are a 20th century innovation (and in some cases, even a 21st century addition). But enlightened employers who wanted to support their employees when they became too old for work date back many centuries. Even in Tudor times, there was a tradition among some landowners and lords to reward faithful servants with ex-gratia pensions and gratuities.

The earliest occupational schemes date back as far as the late 17th century for firms associated with the government, such as the Bank of England and the East India Company. And by the 18th century, friendly societies, with savings made for funeral costs, old age, sickness and unemployment were starting to appear.

Workplace pensions started to evolve more significantly in the 19th century, with railway companies beginning to establish pension schemes for their employees. Towards the end of the century, public sector workers such as teachers and police were also given pensions based on the existing civil service scheme.  Private sector companies followed, such as Reuters and WH Smith, with Rowntree and Cadbury establishing schemes in the early 20th century.

The arrival of the state pension in 1909 gave people who lived into (what was at the time) extreme old age another way of funding retirement.

Tax relief: a catalyst for pensions and formation of the PLSA

In July 1917, John Mitchell of the Omnibus, Railway and Equipment Companies’ Staff Superannuation Fund chaired a meeting of a Conference of Representatives of Superannuation Funds, with the aim of lobbying for pension funds to be relieved from income tax. Their campaign was successful, resulting in the Finance Act 1921(see ‘The 1920s’, below).

The 1920s

• The Association of Superannuation and Pension Funds (ASPF) formed on 18 January 1923. The original name for the PLSA, its first elected chairman was John Mitchell
• Finance Act 1921 introduced tax relief on pension contributions and investment income
• Pensions Act 1925 started to change the relationship between state and workplace pensions
• Growth in company-sponsored pensions, in an era of industrial action
• Dorothy Spiers becomes the first woman in the UK to qualify as an actuary, in 1923

The Finance Act 1921, the result of the Representatives of Superannuation Funds lobbying campaign, introduced tax relief for pension contributions and investment income, subject to a number of conditions. The most notable was that the assets must be held in a trust separate from the relevant company.

Tax was levied only on pensions when paid, although many pensions were within the exemption limit. This system remains broadly in place today.

More company-sponsored pension schemes began to appear in the 1920s, drawing on the experience of the railway companies and friendly societies. In part, this helped with employee retention and labour relations, in an era where strike action cost 85 million working days in 1921 alone, and 1926 saw a General Strike across the country.

But employees lost their pension rights on leaving service and it was common to grant refunds of employee contributions, often with interest. This type of scheme design helped to fund pension promises, and also supported employee retention. Refunds were popular with employees, many of whom appreciated cash rather than a future promise.

 State and workplace pensions

The relationship between company sponsored pensions and state pensions has affected both the growth and design of workplace schemes over the last 100 years.

The Pensions Act 1925 removed some means testing from state provision, allowing employees to receive workplace pension payments without a reduction in their state pension.

However, the better-off were still excluded from state pensions. This was a significant factor in the growth of company schemes. In 1928, the state pension age for those who were entitled to receive it, fell from 70 to 65.

The 1930s: pensions growth post-Depression

The 1930s saw an increase in group pension policies offered by insurance companies, using economies in transaction costs and pooling of investment risks. These “insured” schemes typically offered a percentage of average salary for each year of service, combined with life assurance. Larger employers ordinarily, but not exclusively, ran their own, self-administered schemes.

From the early 1930s to the early 1950s, the principal growth in membership of private sector schemes was in those offered by insurance companies. This included Legal and General, Prudential, Eagle Star, Friends Provident, and Standard Life. Membership grew from 120,000 in 1934 to 500,000 in 1944, reaching 2.25 million in 1956. (1)

Pension savings continued to grow in the 1930s. Despite unemployment rates of over 20% at the beginning of the decade as a result of the Great Depression, over time the number of people in employment increased, mostly working for comparatively larger companies. Real incomes went up rapidly, so increasing the demand for retirement savings.

For larger companies operating self-administered schemes, the Association of Superannuation and Pension Funds circulated lists of consulting actuaries willing to take on pension fund work.

To be continued….

• Source: Leslie Hannah – Inventing retirement. The development of occupational pensions in Britain. (1986 Cambridge University Press).