Pensions Act 1995

Publication Date01 Mar 1996
DOIhttp://doi.org/10.1111/j.1468-2230.1996.tb02077.x
AuthorRichard Nobles
LEGISLATION
Pensions
Act
1995
Richard
Nobles”
This Act effects three major reforms to the law of pensions. It introduces a new
measure for regulating occupational pension schemes; it equalises the state pension
ages of men and women; and it restructures the link between state and occupational
pension schemes. The first of these reforms is the long awaited outcome of a
process which began when Robert Maxwell stole
&420
million from the pension
schemes under his control.’ The government responded to this scandal by
appointing the Pension Law Review Committee under the chairmanship of
Professor Goode
(‘the
Goode Committee’), whose report2 is, by and large, the basis
for this part of the Act. But what, other than its inclusion
in
one document, is the
link between the new regulatory regime for occupational pension schemes, the new
state pension age of
65
years for women and the abolition of Guaranteed Minimum
Pensions (the benefits which private pension schemes have to offer in order to
contract out of the State Earnings Related Pension Scheme)?
At the risk of over-simplification, I would argue that these separate reforms are
linked by a common set of assumptions. Namely, that compulsory pension
provision at adequate levels is unaffordable; and that government must encourage
as many of
the
population as possible to make their own private pension provision.
The
government
is
cutting back on the state pension scheme and
will
not make
adequate levels of private pensions compulsory. Compulsion is limited to the
provision of pensions intended only to reduce reliance on means tested benefits.
Because employers are not required to offer pension schemes, and individuals can
choose (or
be
encouraged) to opt out of their employers’ schemes and into more
risky personal pension schemes, there is always the danger that any major reform
of
occupational pension provision
will
lead to a significant reduction in the number
of schemes or the value of their benefits. This is
a
major constraint on pension
scheme reform, and one which the Goode Committee acknowledge
in
the
introduction to their report:
We have
.
. .
refrained from recommending changes which, though they might be logical
or
fair, would cause serious practical problems
or
be
perceived as imposing unacceptable
burden^.^
If employees from high-risk occupational schemes are likely to find themselves
in
even more risky individual pension plans, or an inadequate state pension, then
reform based on the elimination
of
risk
is
severely constrained. On the other hand,
if
employees whose schemes cannot guarantee safe and adequate benefits were to
*Law
Department, London School of Economics.
Many thanks
to
Bryn Davies and
Bob
Simpson for reading and commenting
on
an earlier draft of this
statute note.
For
a
full account and analysis of this affair, see the Second Report of the Social Security Committee,
‘The Operation of Pension Funds,’ 4March 1992, HC Papers
61-11,
1991/2 HMSO.
1
2
Pension Law Reform: The Report
of
the Pension Law Review Committee,
Cm 23424 (London:
HMSO, 1993).
3
ibid
para 1.1.12.
24
1
0
The Modern Law Review Limited
1996
(MLR
59:2,
March). Published by Blackwell Publishers,
108
Cowley Road, Oxford
OX4
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and
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Main Street, Cambridge, MA
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The
Modem
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[Vol.
59
be returned to a fully indexed, safe and adequate state pension scheme, then far
more radical reforms can be justified. Thus, the reform of occupational pension
schemes cannot be seen in isolation, but has to be understood as part of the wider
issue of what pension provision can be afforded and, in particular, what kind of
pension provision the state can afford to provide.
In
this statute note,
I
shall
therefore begin by describing the ‘problem’ which has led this government to
conclude that adequate state pension provision is unaffordable. This is followed by
a description and analysis of the current state scheme, and the changes made to it
by this Act. Against this background, the last section examines the new regulatory
regime for occupational pension schemes.
The ‘problem’
of
unaffordability and the Goverment’s initial
response
The inescapable ‘problem’ for the affordability of pensions is how to deal with the
projected growth of the pension population in the next ~entury.~ Such growth will
lead to
a
deterioration in the dependency ratio: the ratio of actively employed
workers to all those (pensioners, children, the sick and unemployed) who must be
maintained from transfer payments
(taxes,
national insurance contributions) from
their wages.
To
maintain these future pensioners (most of you reading this article)
at the same standard of living as that afforded to today’s pensioners would cost
billions of pounds more (even allowing for inflation) than is paid at pre~ent.~ But
this is not the problem. Even though pensions that were as generous
as
those paid
today would cost astronomic sums, they could be funded at
tax
or national
insurance rates that were equal to,
or
even less than, those paid today.6 But such
‘affordable’ pensions will provide
a
pretty poor retirement. For example, if the
basic state pension continues to
be
indexed to prices instead of earnings
(as
has
been the case since
1979),
it will
be
worth only seven per cent of male average
earnings by 2050.7 The problem really escalates if we assume that these future
pensioners will want to retire on
a
standard of living that is better than that enjoyed
by today’s pensioners: a pension that bears a close relationship to what they earned
during their working lives, or to the standard of living of those who are working
when they have retired. Funding this level of retirement income through state
pensions will not necessarily make the workers of the 21st century poorer than
today’s workers, but it will require them to pay higher rates of
tax
or
national
insurance contributions.* For this government, these higher rates of tax and
national insurance contribution are the ‘problem.’
This is not the place to discuss whether adequate state pensions are, in fact,
aff~rdable.~ The point, from the perspective of understanding the form and content
4
5
It
is estimated that the number of pensioners in the population by the year 2032 will be 40 per cent
higher than at present: ‘Population Projections, 1992-2032’ (Series PP2 No 19)
23.
Even allowing for the cost savings made by this Act, the estimated cost of the basic state pension
will
rise from €29.8 billion
in
2000 to €46.6 billion
in
2050. See
Pensions Bill
1994:
Report by the
Government Actuary
on
the Financial Provisions
of
the National Insurance Fund,
Cm 2714
(London:
HMSO,
1994).
6 The 1994 joint employer/employee national insurance contribution rate was 18.25 per cent. Without
the changes made by this Act, the Government Actuary estimated that
it
would have fallen to 17.6
per
cent in 2000 and 16.8
per
cent by 2050: see
ibid
paras28-29.
See Nobles, ‘Pensions: The New Legal Framework‘ (1986) 49
MLR
42,
44-45
7
ibidpara
23.
8
9 See
ibid
4448.
242
0
The Modern Law Review Limited
1996

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