How is the government’s levelling up agenda going to work when so many forces are pushing in the opposite direction? The economic developments over the next year or so look set to hit hardest the parts of the country the government claims it wants to help. As George Eaton said, the Universal Credit cut is likely to have most impact on the Red Wall areas and according to recent modelling by the Resolution Foundation, the increase in fuel prices will also be felt most keenly in the midlands and north.
When it comes to levelling up, the UK’s tax and benefits system does a lot of heavy lifting, redistributing income from the more prosperous areas. What is less often commented on, though, is the role played by occupational pensions. As the Resolution Foundation noted in 2019, the regional disparity in productivity has increased significantly over the past two decades but that hasn’t been reflected in a similar geographic divergence in household incomes. This is partly because of the redistributive effects of the benefits system but also because of strong pensioner income growth.
The distribution of pensioners’ incomes, after housing costs, now broadly matches that of the working age population. By the late 2010s, the median pensioner income was slightly higher than the median working age income. The stereotype of the poor pensioner has been out of date for some time. That’s not to say that there are not poor pensioners, only that a pensioner is no more likely to be poor than someone of working age.
State pensions have played their part in raising retirees’ incomes but so have generous occupational pensions. According to the Resolution Foundation, occupational pensions account for over a third of pensioner income growth this century. Many of today’s pensioners lived (and more importantly worked) through a period when middle-earners did relatively well. Employers’ Defined Benefit (DB) schemes, based on good salaries, have left them well provided for in retirement. In a sense, then, the economic changes which left so much productivity concentrated in London and the South-East still haven’t played out when it comes to pension schemes. In many areas, the factory, the mine or the steelworks may be long gone but its ghost is still there in the form of its final salary pension scheme. It is still paying its pensioners based on their earnings from years ago. Or, to put it another way, in pension-land it is still the 1970s.
The effect of this has been to maintain a flow of income to areas where it might otherwise have disappeared. A large proportion of retirees in an area, then, may reduce its per capita productivity but strong pensioner income growth maintains the area’s overall spending power. As pensioners tend to have more disposable income and spend more of it than those of working age, it is likely that pensioner-spending is providing a significant boost to the economy in many areas.
Together with state benefits and pensions, occupational pensions make up a significantly larger proportion of household income in those regions where the government wants to level up. In some localities the proportion is over 30 percent.
The trouble is, DB pensions are now almost a thing of the past. The next cohort of pensioners will not be so well provided for. As the DB pensioners die off, their generous pensions will die with them. The Defined Contribution pensions which have replaced the DB pensions are much less generous. Employers pay less into them and they transfer both the investment risk and the longevity risk to the employee.
As IFS director Paul Johnson said:
It is an astonishing fact that most pensioners today are financially better off than they were during much of their working life. Once you take account of housing costs and the costs of bringing up children, they have a higher disposable income in their late sixties than they had when they were in their forties. Today’s 40-year-olds should not look at their parents’ generation and expect anything remotely similar.
In the UK, the proportion of employees in DB plans declined from 46 percent in 1997 to 27 percent in 2020. Around 87 percent of those currently in DB plans are in the public sector. According to the Pension Protection Fund, in 2021 the number of active members of private sector DB plans fell below 1 million for the first time. With 90 percent of private sector plans now closed to new members, this figure will continue to fall. The pensions story of the last two decades has been the almost complete disappearance of private sector DB pensions.
While the overall pension coverage has increased (the introduction of auto-enrolment in April 2012 has meant that three quarters of employees are now in some form of workplace pension arrangement) these new workplace pensions are all Defined Contribution plans and therefore much less generous.
As Paul Johnson put it:
We should celebrate the success of auto-enrolment in getting millions more private-sector workers building up savings accounts. We should not kid ourselves into believing that auto-enrolment is achieving what it was originally designed to achieve, which was a huge extension of pension provision.
In July 2021 the Pensions Policy Institute (PPI) published a report warning that most of those currently over 50 do not have adequate funds to achieve a ‘comfortable’ retirement as defined by the Pensions and Lifetime Savings Association and a quarter will not meet the minimum requirements as defined by the Joseph Rowntree Foundation.
These pressures are likely to increase as a result of changing social and economic factors since the 2008 financial crisis. As the PPI notes:
“A number of social and policy changes are increasing the demands made on assets originally saved to provide a retirement income. These include:
- A widening gap for some between leaving work and receiving the State Pension,
- Paying for rent in retirement as fewer expect to retire as owner-occupiers,
- Paying off debts carried into retirement, and
- Supporting other family members with regular financial payments, housing deposits and loans.”
A new cohort of retirees with less generous pensions and needing to service higher housing costs will not be as free spending as the current generation. The gradual loss of occupational pensions from those areas in which they currently make up a large proportion of household income will have a significant effect. Occupational pensions have been quietly levelling up the UK regional disparities for some years. Their diminishing impact will add to the other negative economic factors which disproportionately affect parts of the midlands and north of England.
Talk of levelling up is all very well but the tide seems to be flowing in the opposite direction. Left to its own devices, its difficult to see the UK economy doing anything other than increasing its regional disparities. The decline of occupational pensions is only one aspect of this, albeit one often overlooked. It will take a hell of a lot of investment to counteract this. Nothing I have seen so far suggests that the government really has the appetite for it.
Flip Chart Fairy Tales 
Another interesting and in some ways a counter-intuitive piece. Worrying as well, but what are the proposals to do something about it and how does the UK compare with other Western European economies regarding pensions?
I think this is a complex picture which is about to come under a lot of stress from various directions.
The great deflating seems to be underway, in that the 14 years of QE is about to end in a chaos of high inflation and increasing rates. And by the way, find anyone, from anywhere, who when QE started in 2008 said an era of zero rates and low inflation would be in place for over a decade?
The UK has chosen to restrict access to cheap labour. Labour supply is going to become a significant factor. Hence a lot of old people are going to get jobs. So they will augment their pensions.
Just a small question: How many people in private sector DB schemes are actually getting those benefits? Quite a lot of schemes seem to have gone into administration with cuts in benefits.
Finally, the ability of people with degrees to predict what happens in complex systems with many moving parts and where bits of the system act based on what is happening in other bits of the system would, on the basis of recent experience, be roughly zero. So worth bookmarking this and revisiting.
Whilst a scheme entering the PPF is unpleaseant/regrettable, if already retired you get 100% and if still working the cuts in benefit for lower/mid income pensioners (sub £40k) are not huge, and one would assume most people in the PPF will be getting a much better pension than someone who had a defined contribution scheme.
Not sure that’s correct; from one large employer ‘the Pension Protection Fund (PPF), stepped in and benefits were reduced to PPF levels of compensation.’ which was not as good as the original according to my source a retired ex employee with a maths degree. Hence his employment as my taxi driver.
Dipper: “Nobody knows anything so listen to me”
Nothing comes for free. Pensions are a tax on employers. A reduction in the tax through replacing DB with DC pensions means more money for business to invest, which will have consequences.
Poverty isn’t (just) about geography, it is primarily cultural. To be effective, Levelling Up has to make inroads into that culture. Moving middle class people round the country may improve the statistics but may not do much for the indivduals in poverty.
Pingback: Weekly Roundup, 31st January 2022 - 7 Circles
Pingback: Weekly Roundup, 31st January 2022 – Premium Bond Winners
Pingback: The puzzle of media influence – MassachusettsDigitalNews.com
Pingback: Wöchentliche Zusammenfassung, 31. Januar 2022 – HUSTLING WORLD