Select Committee on Economic Affairs Fourth Report



8.1. The structure of British society has experienced fundamental change since the National Insurance system was introduced in 1948. That system, which was based on the social insurance model proposed in the 1942 Beveridge Report, was premised on a world in which:

  • cohabitation and divorce were rare
  • family units consisted of a working husband, a non-working wife and dependent children
  • men were in full-time employment between leaving school and retiring at age 65
  • immigration was minimal, and thus all (male) workers could be expected to accumulate a full NI contribution record across their working life

8.2. That world, if it ever existed, certainly exists no more. This chapter considers the way in which the very different social and economic context of the early 21st century poses new challenges with respect to the financing of retirement and old age. Particular attention is paid to the economic and social circumstances of women and ethnic minorities.


8.3. Most pensioners are women; thus an effective economic regime for retirement will be one that fully accommodates and responds to the fact that women's life histories, in terms of work and caring responsibilities, are on average different from those of men. We agree with Ms Jeannie Drake (Equal Opportunities Commissioner) that a pension system that fails women is one that must be judged to fail in its overall performance (Q487).

8.4. Women pensioners are more likely than men to be poor because of:

8.5. Changes in women's employment patterns and earnings means that it is likely that women with high educational qualifications and earnings potential will in the future retire with pension entitlements close to those of men, even if these women have children. Women with mid or low-level qualifications will continue to accumulate much lower pension entitlements, and having children will continue to have a strong negative impact on their pension accumulation.[85] Improvements to women's employment opportunities and relative pay will help to reduce the male-female pensions gap, but it is likely to remain large.[86]

8.6. The most important cause of women's low pension accumulation is the time they spend out of the labour market (or in part-time employment) in order to provide care for family members (children, sick, disabled and elderly). The contribution-based nature of the basic state pension means that people who do not have a full contribution record cannot qualify for a full basic pension. Fifty per cent of those currently in retirement do not qualify for a full basic state pension in their own right (Q398). Dr Jay Ginn (Centre for Research on Ageing and Gender, Sociology Department, Surrey University) noted that carers (whether male or female) are entitled to carer credits within the state pension system, but that such credits do little or nothing to lift such persons above the means-tested income threshold in retirement, because the basic state pension to which the carer credits contribute is paid at such a low level (Q390).

8.7. A further problem with the existing system of carer credits is that to receive the credit for care other than for a child, the recipient has to demonstrate that the need for care is sufficiently severe to require the payment of a care or attendance allowance. Professor Heather Joshi noted that there is a great deal of caring activity which lowers people's earnings, but which falls outside of the strict qualifying criteria of the carer credit (Q393).

8.8. We conclude that the contribution basis of the basic state pension acts as a significant barrier to the acquisition by women of full state pension entitlements.

8.9. It would be possible to remedy this problem through a more extensive and more sophisticated system of carer accountancy, but we think there is little to be gained by further complicating an already complex National Insurance contribution system. In fact, we see little purpose in this contribution system, which appears to be a now largely dysfunctional legacy of the post-war Beveridge welfare plan.

8.10. Virtually all citizens make positive contributions to the economy and society through their paid and unpaid work in the period between the end of their formal education and their retirement. The Government's success in operating an active labour market policy to extend employment opportunities to all groups and ages within the population means that few people can now shirk their responsibility to contribute positively to the economic welfare of the country. Thus there seems little reason to operate a complex accounting system to track NI contributions and credits over each persons working life in order for them to qualify for a full or partial basic state pension which, in any case, will be supplemented in retirement by means-tested benefits for between a half and three-quarters of all retirees (see paragraph 10.19 below).

8.11. We therefore recommend that the basic state pension should be paid on the basis of citizenship rather than contribution record.

8.12. Many current women pensioners and older women workers have relied on their husbands/partners to make appropriate pension provisions. The financial position of this group needs to be protected, even as pension provision for the future shifts over to an individualised basis (Q487). We believe that our recommendation of a shift to citizenship-based entitlement will do much to protect and enhance the interests of current women pensioners who have derived rather than individual pension entitlements.

8.13. A citizenship pension will also serve, to some degree, to protect the income in retirement of divorced women, but the impact of divorce on pensions extends well beyond the scope of the state pension. The United Kingdom has the highest divorce rate in the EU, and it is estimated that four out of every ten marriages entered into in the United Kingdom in 1996 will end in divorce. Few retirees have yet experienced old age as divorcees, but the proportions are growing.[87]

8.14. The Welfare Reform and Pensions Act 1999 now allows courts to share pension entitlements on divorce. We received evidence from Debora Price, a barrister, which suggested that this law may have little impact on the pension entitlements of most women, for two separate reasons. First, even if pension entitlements are split on divorce (and since this is enabling legislation, there is no legal requirement for judges to consider the retirement prospects of both parties), the value of such entitlements at the median age of divorce (late 30s) is typically low. Secondly, divorced women have a low probability of participating in pension accumulation after divorce because they frequently have young children to care for.[88]

8.15. We recognise that the issue of pension splitting on divorce is complex, and we believe it warrants further detailed consideration. We also recognise that the prevalence of long-term cohabitation also poses issues for the allocation of pension entitlements (Q422). We believe that these are issues that have important implications for gender equality, and thus may fall within the remit of the Equal Opportunities Commission.

8.16. An additional issue of gender equality relates to the market for annuities. The purchaser of an annuity makes a lump-sum payment to the provider (an insurance company) in return for a guaranteed income stream. Since older women can, at any age, expect to live for more years than men, they have to pay a larger lump sum for any given income stream, since they are likely to receive that income for longer. Some witnesses argued that higher annuity costs for women at any given age amount to discrimination. It was pointed out that although there is a clear sex differential in survival rates at 65, there are also clear differentials by socio-economic class, ethnicity, education and occupation, yet these categories are not used to determine annuity rates (QQ432-5, 511).

8.17. The issue of whether annuity rates should continue to be gender specific, or whether they should be provided on a gender-neutral basis, is of growing significance, because the rapid move of occupational pension schemes from defined benefit to defined contribution principles means that many more retirees in the future will obtain their private pension income from an annuity (Q511).

8.18. Furthermore, defined benefit pension schemes offer survivor benefits for dependents (most frequently paid in the form of a widow's pension), whereas most annuities are purchased on a single-life basis, which means that when the annuitant dies, there is no continuing income for any dependent (Q505). It is unclear whether married couples realise the implication for surviving dependents of single-life annuities. The Fawcett Society and Women's Budget Group suggested that when an annuity is purchased by a married person, it should normally be a joint-life annuity unless the non-purchasing spouse explicitly agrees to the purchase of a single-life annuity (Q431).

8.19. We recognise the importance of these criticisms of the way the annuity market currently operates, but we are wary of suggesting any changes which might be seen as imposing greater costs on this market. We agree with the Equal Opportunities Commission that the whole area of gender and annuities requires further investigation and analysis.

Minority ethnic communities

8.20. Public and private pension entitlements among minority ethnic elders are low. This is a function of:

8.21. Although the low income of today's minority ethnic elders is largely the result of the specific labour market experience of this cohort, the current high rates of unemployment and low skills among younger members of some minority ethnic groups (especially black and Pakistani/Bangladeshi) makes it likely that low pension entitlements will endure well into the 21st century for new cohorts of retirees.[90]

8.22. The problem of unemployment and low earnings is compounded by a lack of targeted information about long-run saving. According to the Policy Research Institute on Ageing and Ethnicity, "the financial services sector does not currently connect with the ethnic minority community."[91] However, PRIAE pointed out that the DWP is now developing information on state pensions that is specifically targeted at minority ethnic communities, particularly in response to concerns about the low take-up of means-tested benefits by minority ethnic elders (QQ536-42).

8.23. In general, minority ethnic elders are much more likely to be in receipt of means-tested benefits than are white elders. Data for the period 1991-96 suggest that, whereas one third of white people aged 60+ were in receipt of means-tested income support, 45 per cent of Indian, 58 per cent of black Caribbean and 76 per cent of Pakistani and Bangladeshi elders received means-tested income support.[92] Our proposal for a basic pension based on citizenship rather than a full NI contribution record would significantly improve the economic position of these ethnic elders.

8.24. A citizenship pension could also be designed to ensure that current and future immigrants who, because of their age on arrival, cannot accumulate a full NI contribution record, would qualify for an adequate basic pension without the need for a means test. We believe that this would provide a significant incentive for such people to accumulate additional voluntary savings.

84   Equal Opportunities Commission, volume II, p 175; WBG/Fawcett Society, pp 131-132 Back

85   Joshi, volume II, p 139 Back

86   EOC , volume II, p 176 Back

87   Debora Price, volume II, p 467 Back

88   Ibid, p 470 Back

89   CRE, volume II, p 194; PRIAE, volume II, p 198 Back

90   PRIAE, volume II, p 200 Back

91   Ibid, p 198 Back

92   Ibid, p 201 Back

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2004