PensionsMar 23 2012

50 years in pensions

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Accounts vary, but there is little doubt that the UK has one of the largest pension industries in the world.

According to the OECD’s most recent estimates, pension assets accounted for 80.5% of gross domestic product (GDP) in 2009 - and that figure only included private sector occupational pension schemes.

Towers Watson put the proportion as 101% of GDP in 2011, although the actuarial firm did not fully allow for personal pension plans. A more comprehensive estimate of the total pension savings in the UK, including all types of funded pension arrangements, is at least 120% of GDP or £1,800bn. And even that figure ignores unfunded public sector and State benefits, which are almost equivalent in size.

By any account, pension schemes of all types have become vastly important and influential. But that has not always been the case and a look back over the past 50 years in pensions shows how the UK pension system has grown to be not only one of the largest but also the most complex in the world.

When the workplace ruled outright

When our 50 year window into the UK’s retirement provision opens, pensions in the UK are almost entirely dominated by workplace (or occupational) schemes and the State sector.

In 1962, the basic state pension (BSP) had been in operation for just 14 years and alongside it were the forerunners to personal pension plans – retirement annuity contracts (RACs). RACs had been introduced just six years previously and were available only to workers with no access to an occupational scheme and to the self-employed.

It was the workplace pension, however, that ruled the roost. In 1963 there were 7.2m employees with private sector occupational pension schemes and nearly 4m in public sector schemes. Private sector schemes reached their peak in terms of actively contributing members in 1967 at 8.1m members - falling to 5.8m in 1987 – while public sector scheme active membership peaked in 1979 at more than 5.5m, where it has largely remained to this day.

In 1963, private sector pensions were a mix of different types: final salary, average salary, flat sums per year of service and defined contribution. But over the next decade that picture changed radically, with final salary schemes exploding in popularity until, by 1979, they accounted for more than 90% of all workplace schemes – with defined contribution making up the rest – having accounted for just over 20% in 1963.