In the good old days, if you were lucky enough to work for a large employer, you were provided with deferred pay (and an incentive to leave and make way for younger people) in the form of a defined benefit pension scheme to which both you and your employer contributed. The defined benefit usually took the form of a combination of lump sum, payable on retirement, and pension (usually a fraction of final salary) payable until death. A fraction of your pension was then usually paid to a surviving partner if you died first, and there was usually some sort of index linking so you were not caught out by inflation. The state encouraged you to save via such schemes by offering full tax relief on contributions, knowing that withdrawal from the scheme (other than lump sums) would later be taxed in full.
This system was designed in the post-war Beveridge years for a society with full male employment, jobs lasting 40 years, and where only one wife in eight did waged work, and where neither husband or wife expected to live more than a few years post his retirement. The minority of women who joined pension schemes contributed much less than men because they were less well paid and they took time out to raise families. The generality of women, the low paid and the self-employed had to rely on relatively modest state pensions plus their own savings.
This all fell apart due to a number of factors:
- Fluid families have subverted the world that Beveridge imagined. Today, half of all marriages end in divorce, more than half of all children are born outside marriage, and women are seldom financially supported by their husband or partner.
- People (to some extent unexpectedly) began to live much longer, thus increasing the period for which pensions fell to be paid and so increasing the liability of employers.
- Real interest rates fell, again requiring employers to fund the shortfall.
- Seeing the large amounts held by then tax-exempt pension funds, politicians began to tax the funds, thus again increasing shortfalls.
- New accounting standards and the aftermath of the 2008 financial crisis have also made traditional pensions too unpredictable and expensive for employers.
- It became clear that traditional pension schemes were great for wealthier men - who received the most tax relief and also typically lived longer - and were not so good for women and for those on low incomes whose pensions were, by definition much smaller, and who tended to die younger than their wealthy neighbours.
For example, a combination of the above reasons led to the pension liabilities of BA and many other companies becoming several times greater than their annual turnover.
The result was that many pension schemes were closed to new entrants, forcing employees into defined contribution schemes - basically savings schemes where the pensions will eventually depend on (a) the amounts paid in before retirement, and (b) the investment performance of the scheme. Governments also increased retirement ages, reduced tax relief for contributions, and improved the attractiveness of the state pension.
Some schemes also failed to pay out their promised benefits after the parent company had gone bust. Sir Philip Green's BHS was a particularly notorious example. The company's collapse led to 20,000 members of the pension scheme facing reduced payouts - a prospect made all the more unacceptable as Sir Philip had removed huge sums from the company before he sold it shortly before it collapsed. It is well worth reading the Pensions Regulator's Regulatory Intervention Report which will help you understand the role and powers of the regulator, and which contains admirable admissions that it could and should have intervened more robustly in this case.
Pension schemes have always been heavily regulated so as to ensure that their funds remain intact for the maybe 60+ years that they need to be invested on behalf of pensioners. But the pressure on pension scheme finances, and scandals such as BHS, have led to the current regulatory edifice being particularly heavy. Some say that the law, regulations, rules, codes, case law and guidance notes amount to around 160,000 pages!
Geoff Meeks has written an excellent guide to Understanding Pension Obligations.