A brief history of workplace pensions – Part 2

This is the second 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’s 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.

A quick recap of Part 1

The first part outlined the early decades of workplace pensions,  including the part the Pensions and Lifetime Savings Association (PLSA) played in their development, following its formation in 1923.   The salient points included:

• The early development of workplace pensions, which included railway companies, public sector workers, including the civil service, teachers and the police, and private sector companies such as WH Smith, Rowntree and Cadbury
• Following lobbying by those who established what is now the PLSA, the 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 the 1920s, an era of industrial action
• Growth of group policies offered by insurance companies in the 1930s for smaller to medium sized companies

You can read Part 1 in full on the PAT website within the News and Events section: https://pensionsarchive-org-uk.stackstaging.com/2024/07/30/a-brief-history-of-workplace-pensions-part-1

The 1940s

• Finance Act 1947 applies limits to some private sector pension benefits
• Universal State Pension without means-testing introduced in 1948

There were significant changes to state pension benefits during the 1940s. Firstly, in 1940, women’s state pension age reduced from 65 to 60. Following the influential 1942 report, Social Insurance and Allied Services by William Beveridge, the National Insurance Act 1946 established from 1948 a contributory state pension for all without means testing. This was funded by significantly increased National Insurance contributions, together with savings in some means tested benefits.

Men aged 65 or over had to retire from full-time and any significant part-time work in order to receive their state pension.

For private sector company sponsored pensions, the Finance Act 1947 imposed limits on lump sums and tax favoured pension benefits to the level provided in public sector schemes, although tax reliefs were not consistent between different types of schemes. In the public sector, those working for the industrial civil service (“blue collar” workers) acquired pension rights.

The 1950s

Nationalisation and pensions

• Growth in employees of local or central government with pension rights

This decade saw a rapid growth in employees of local or central government with pension rights, boosted as a result of the nationalisation of railway, gas and electricity companies, all of whom offered pension schemes.

By the mid-1950s, the government had established pension schemes for all the major nationalised corporations. Local authority and nationalised corporations’ funds resembled schemes in the private sector most closely as they used a funded model (i.e. scheme contributions were invested to drive growth). Other public sector schemes were unfunded (i.e. scheme contributions from current members are used to fund pensions in payment).

Although the number of companies offering pension schemes grew, eligibility conditions meant schemes rarely covered the majority of employees. Female employees, for example, were often excluded. Blue collar workers were often excluded too, and where they were admitted, had less generous benefits. Some did not join schemes due to increased National Insurance deductions resulting from the introduction of the contributory state pension scheme in 1948, and the potential means testing of some supplementary benefits. (1)

For larger companies who offered more comprehensive employee coverage, it was common to have separate Works, Staff, and Executive Schemes. This approach continued into the 1980s and 90s, when increased governance costs and time led to scheme amalgamation.

Tax in the spotlight (again)

• Finance Act 1956 aimed to provide more equitable tax treatment of pensions

The growth of company schemes was assisted by significantly increased taxation rates for both companies and members after the second world war, which increased the relative value of pension scheme tax benefits.

Four interested bodies, including the Association of Superannuation Funds (now the PLSA), established a committee in 1948 to examine anomalies in the tax treatment of pension funds. The aim was to have an equitable and coherent tax treatment of retirement benefits. This eventually resulted in the Finance Act 1956, which introduced:

• Limited tax concessions on pension contributions for the self-employed for pension benefits but not on the payment of lump sum benefits, which were typically provided through endowment policies;
• Tax charged only on the interest element and not the capital element of annuities;
• Tax concessions extended to employee contributions and fund investment income for insured schemes, only having been previously available to self-administered schemes.

Tax free lump sums were still not permitted in either insured or self-administered schemes. To overcome this, schemes began combining tax privileged pension benefits with separate lump sum benefits. The Finance Act 1956 contained no provisions to prevent this.

1960s

• 1961: State Graduated Pension Scheme introduced; schemes can contract out
• Association of Superannuation Funds renamed the National Association of Pension Funds (NAPF), 6 June 1962
• More employees have access to pensions, partly due to high employment rates
• Changes to investment strategy

Changes to the state pension in the early 1960s had a knock-on effect on company schemes, resulting in wider access to occupational pensions.

The National Insurance Act 1959 introduced the State Graduated Pension Scheme in 1961. Flat rate contributions secured an increased flat rate state pension. Higher earners paid further graduated contributions up to a limit broadly in line with average earnings that provided limited graduated benefits of 6d a week for every £15 of contributions.

Company schemes were permitted to contract-out of the graduated element of the state scheme. Reduced rate National Insurance contributions were payable in return for minimum scheme benefits equal to maximum graduated benefits in the state scheme. These were known as an Equivalent Pension Benefit. No inflation proofing was required as state graduated pensions were not inflation proofed.

The introduction of the State Graduated Pension Scheme resulted in the growth of insured pension schemes for companies who, if they did not start their own pension scheme, were required to contribute to the State Graduated Pension Scheme. Self-administered schemes began extending schemes to a wider range of employees, where coverage increased from around a third to nearly half the workforce during the decade.  The growth in company pension schemes in the 60s and 70s was in part driven by full employment.

From the 1950s and 60s onwards, pension scheme investment strategies began to change. There was the beginning of a move from fixed interest towards equity investment, with the aim of achieving higher rates of return to meet scheme liabilities. This was largely due to the influence of George Ross Goobey, who was later elected president of the National Association of Pension Funds in 1972.  In the 1960s, property became part of the investment strategy for some pension schemes.

To be continued…..

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