The real victims of the “Rape of the National Insurance Fund”

best investing platforms

Some things just make me furious. This post by David Hencke, for example. In it, he claims that politicians of all three main parties agreed to raise the state pension age for women to compensate for the ending of the Treasury’s contribution to the National Insurance fund. This isn’t true.

Not only is it untrue, but it directly contradicts the research upon which the article relies, and dishonours the memory of a man who fought hard for pensioners’ rights.

Hencke based his article on this piece by Tony Lynes, written in 2006 as a basis for a National Pensioners Convention factsheet on the National Insurance (NI) Fund. As readers of this blog will know, the NI Fund is not a pension fund. It is a clearing house for receipt of NI contributions and their disbursement to pensioners and beneficiaries. Tony Lynes describes its workings perfectly:
National Insurance is the system through which contributions by working people and employers are paid into a fund – the National Insurance Fund – to finance a range of benefits, including state pensions (but not the means-tested pension credit), incapacity benefit, widows’ benefits, maternity allowance, guardian’s allowance, jobseeker’s allowance and the Christmas bonus. Part of the contributions is not paid into the Fund but goes towards the cost of the National Health Service; but the money paid into the Fund can only be used for the payment of benefits or the cost of administration.

In addition to its share of contributions, the National Insurance Fund receives income from its investments. When necessary, it can also receive a grant from the Treasury – but this has not happened in recent years, as the Fund’s income has been well above the amount needed for the payment of benefits.

In principle, the National Insurance Fund operates on a pay-as-you-go basis, the contributions received in each year being used to pay pensions and other benefits in the same year. In this respect it differs fundamentally from private pension funds, which need to build up reserves to cover their future liabilities.
 I have emphasised Lynes’ final paragraph for reasons which will shortly become apparent.

Nowadays, the NI Fund’s regular income comes from NI receipts and interest on investments. But in the past, the Government paid a yearly contribution from general taxation, known as the Treasury Supplement. This was gradually phased out between 1981 and 1989 due to a rising balance in the NI Fund.

Depriving the Fund of all Government support left it vulnerable to cyclical variation in NI receipts and benefit claims. In the recession of the early 1990s, the Fund dipped into the red, forcing the Government to top it up with emergency grants. But the Treasury Supplement was not restored. Politicians thought that the Fund was generally self-supporting and would only need topping up in exceptional circumstances.

But in fact, the Fund was only self-supporting because another Government policy was systematically reducing its net outgoings – a policy that is now widely regarded as grossly unfair.

Prior to 1980, state pensions had risen in line with average wages. But in 1980, the Conservative government broke that link. Thereafter, pensions rose in line with prices instead of wages. Linking pensions to prices instead of wages helped to protect pensioners from the worst effects of the early 1980s recession, when inflation shot up to dizzy heights leaving wages far behind. But as the economy recovered, inflation moderated and wages rose. Soon, pensions were lagging far behind earnings.

The effect of this was that the balance in the NI Fund rose far beyond its reserve requirement, as Lynes explains:
In recent years, the Fund’s income has regularly exceeded its expenditure, leaving it with a much bigger balance than the Government Actuary recommends. The amount needed to cover two months’ benefits in 2005-06 would be £10.1 billion. The balance predicted for March 2006 is £34.6 billion – £24.5 billion above the recommended level.

The main reason for this is the policy adopted by the Conservatives in 1980 and pursued by both Conservative and Labour governments since then, of breaking the link between pensions and average earnings, so that, while the Fund’s income from contributions rises roughly in line with earnings, pensions and other benefits normally rise only in line with prices. By 2010, if present policies continue, the Actuary’s figures show that the balance can be expected to rise to over £60 billion, about £48 billion above the recommended level.
Of course, had the Treasury Supplement been maintained, the NI Fund surplus would have been considerably larger. Hencke estimates that the total amount lost to the Fund between 1990 and 2014 is at least £271bn:
We now know that virtually no money was paid into the fund by the Treasury for around 24 years from 1990 to 2014. I calculate – and this will be a conservative estimate – because it doesn’t count the reduced contributions post 1981 – that an amazing £271 billion yes billion extra would have been in the fund.
And he goes on to say that this amount would be more than enough to pay full state pension from 60 to women born in the 1950s.

In Hencke’s view, the ending of the Treasury Supplement rendered the NI Fund unable to build up the reserves to pay women’s state pensions from 60. He says that when politicians realised there would be a future NI Fund shortfall, they chose to raise women’s state pension age rather than reinstating the Treasury Supplement.

Hencke’s argument has circulated widely and rarely been questioned. Numerous social media posts have cited the lost £271bn as evidence that 1950s women have been “robbed” of their pensions. Even some financial journalists have bought the argument: for example, Paul Lewis of the BBC’s MoneyBox said “Evidence suggests [1950s women] have been cheated by successive governments’ mishandling of the NI Fund”.

But there’s a serious problem with Hencke’s argument. Remember this paragraph from Lynes’s piece?
In principle, the National Insurance Fund operates on a pay-as-you-go basis, the contributions received in each year being used to pay pensions and other benefits in the same year. In this respect it differs fundamentally from private pension funds, which need to build up reserves to cover their future liabilities.
The NI Fund is not, and never has been, designed to build up sufficient reserves to pay pensions far into the future. It is intended only to fund current pensions and benefits. So if the Treasury Supplement had been maintained, it should have been disbursed to existing pensioners in the form of a more generous state pension, and to existing beneficiaries (unemployed, sick, mothers, widows etc.) in the form of more generous benefits. Indeed, Lynes suggests that politicians ended the Treasury Supplement to prevent the NI fund from building up such large reserves that there would be political pressure to improve pensions and benefits:
A number of measures have been taken to prevent the Fund’s balance from rising to a level at which pressure to restore the value of benefits would be irresistible. The first of these was the reduction and eventual abolition of the Treasury supplement between 1981 and 1989, followed by the introduction of an ad hoc Treasury grant which was paid only from 1993 and 1998. 
Nowhere does Lynes mention future pensioners, nor women’s state pension age. But he was a thorough and competent researcher, and a man of principle. Surely, if politicians really had raised women’s state pension age in 1995 to avoid reinstating the Treasury Supplement, he would have discovered this and discussed it in his report?

The loss of the Treasury Supplement was indeed terrible, but not for women born in the 1950s. No, the real victims were a different group of women. In 2006, the basic state pension for a single person was £84.25. But had the Treasury Supplement been maintained, the basic state pension could have been considerably more generous, as Lynes explains:
The loss of the Treasury supplement has had a catastrophic effect on the Fund. Reintroducing the supplement now at its pre-1981 level of 18% of contributions would bring in an extra £11.3 billion a year. Together with the Fund’s predicted surplus of £3.4 billion for 2005-06, this would be enough to meet the gross cost of a £109 basic pension, without taking into account the resulting savings in pension credit.
Ending the Treasury Supplement meant that existing pensioners had smaller pensions than otherwise would have been the case. As a result, more of them were forced to claim the means-tested Pension Credit. Most of those would have been women.

Relying on means-tested benefits results in high poverty levels among pensioners. Pensioners are often reluctant to claim means-tested benefits: in 2002-3, just before the introduction of Pension Credit, between 26% and 37% of the poorest pensioners were not claiming the minimum income guarantee to which they were entitled. Pension Credit was more generous, but no more popular: by September 2017, as many as four in ten pensioners were failing to claim Pension Credit to which they were entitled. The oldest pensioners are the least likely to claim the benefits to which they are entitled, and consequently the most likely to be living in poverty. According to recent figures from Age UK, 19% of pensioners aged 80-84 are in relative poverty (living on less than 60% of median income), and 17% of over-85s. The majority of these are women.

Women who are now 80-84 reached state pension age between 1994 and 1999, since they had state pension ages of 60. Older women retired earlier in the 1990s, or in previous decades. These women experienced the squeeze on pensions caused by the breaking of the link to earnings. The very oldest women also experienced loss of pension purchasing power due to the high inflation of the 1970s. The triple lock introduced in 2010 went some way towards restoring their earning power, but they did not benefit from the reforms introduced in 2016. They don’t get the higher flat-rate New State Pension, so they are still having to claim Pension Credit. For all of their retirement, these very elderly women who depend entirely on the state pension have lived on unnecessarily low incomes. And they still do.

Ending the Treasury Supplement has thus caused unnecessary poverty among mainly female pensioners, with the oldest and poorest the worst affected. Had the Treasury Supplement been maintained, larger basic pensions could have been paid, reducing the need for means-tested benefits. This is Tony Lynes’ argument, and mine. If anyone deserves to be paid the missing £271bn, it is the pensioners who have been deprived of income for – in some cases – decades.

Lynes died in a car crash in 2014 at the age of 85. Sadly he did not live to see any of his proposals come to fruition. The New State Pension was not introduced until two years after his death, and it doesn’t go to people who reached state retirement age prior to 6th April 2016. Hencke has now brought his work back into the limelight, but in pursuit of the wrong cause. Lynes clearly wanted pensions to be uprated, so that fewer pensioners were dependent on means-tested benefits. Extending the New State Pension to older pensioners would be the right way to honour his memory.

Related reading:

Gov’t faces fresh political storm over new state pension – Citywire
The rape of the National Insurance Fund – Tony Lynes
The Fund that isn’t a fund
Dangerous assumptions and dodgy maths

Image of elderly woman by Angela Taylor, with thanks.