Before the more recent reforms discussed in this thesis, the German and British pension systems fit very well into Esping-Andersen’s (1990) three worlds of welfare capitalism classification of European welfare states. The British basic flat-rate pension as a means of poverty alleviation and the expectation of private provision in line with individual responsibility does map well onto the Liberal welfare state model. Germany’s pre-reform pensions with a high replacement rate provided a high level of security for those well- integrated into the labour market and decommodified benefits for their dependents, which was in line with the principles of the Conservative welfare state regime.
The question of whether Esping-Andersen’s classification still applies despite significant changes as part of a major overhaul in the age of austerity is a common debate in the post- reform literature (Hinrichs 2010, Meyer and Bridgen 2011). It is hardly a new finding that Germany on the whole has moved away from a Conservative welfare state and has increased the Liberal elements in its welfare architecture (Palier 2010), and this applies especially in the fields of labour market and pensions policy. When comparing the systemic changes to both the British and the German pension systems in the context of Esping-Andersen’s typology, it is also evident that the systemic repercussions of the reforms are quite different in the two countries; these become more apparent by way of comparison (see also “On the institutional outcome,” table 3, p. 200).
Meyer and Bridgen (2011) argue that the two systems are not converging, but moving in opposing directions, with the United Kingdom moving towards Social Democracy and Germany towards Liberalism. The auto-enrolment reform is potentially expansive and definitely statist (see 6.2.1). Auto-enrolment introduces a compulsion for employers to contribute to an occupational pension if the employee wishes (i.e. does not opt out), and so definitely steps away from the principle of leaving supplementary pension provision entirely to the market and/or private initiative. The auto-enrolment reform in fact explicitly acknowledges the shortcomings of an entirely Liberal approach by attempting to “harness inertia”, which accepts that a degree of government interference is more likely to lead to the desired results than the purely Liberal approach.
However, while acknowledging the greater degree of government regulation and government action, I would still argue that functionally, auto-enrolment reform does not move the United Kingdom towards a more Continental or Social Democratic model. In fact what auto-enrolment and the reform of the basic state pension that complemented it two years later represent is an attempt to bring the British pensions architecture more properly in line with the original Beveridgian ideal.
A Beveridgian pension system is not incompatible with a Social Democratic welfare state. Pension systems in Scandinavian Social Democratic welfare states operate on the functional logic of a flat-rate basic pension, and they too are counted as “Beveridge” systems (Meyer 2013: 21). In order for the British pension system to move towards a more Social Democratic model, it would not technically have to change its functional principles (post- 2014). However, what makes the difference between a Liberal flat-rate and a Social Democratic flat-rate pension model is the generosity of the benefit, the coverage, and the degree of compulsion imposed on the second and third pension pillars. The Social Democratic variant of a Beveridge pension system is further characterised by the fact that it also serves the interests of the middle classes (Esping-Andersen 1990), which a state pension at the level of the British one most likely does not achieve. Here the bottom line outcome determines the classification: the specifics of the implementation make two very different kinds of systems possible even as they their functional logic can be traced back to the same concept of a “flat-rate pension.”
The improved coverage of occupational pensions (through government interference) and a higher state pension (directly from the government) do not amount to a systemic shift in the United Kingdom. Instead I argue that in addressing exactly those problems that were at the heart of the diagnosis of what is wrong with the British pension system, the reforms were system-affirming rather than system-changing.
The diagnosis of the problems of the British pension system goes back to its origins, spanning the postwar development from 1946 onwards (see chapter 4). Since the modern British pension system was established, the problem narrative has always been the insufficiency of old age provision and that the combination of a subsistence-level state pension plus private savings based on individual responsibility simply was not working out for enough people in reality. In looking at the origins of the British pension system, it becomes very clear that the original concept of a Beveridgian pension was never fully realised due to cost. Therefore the basic element of the British pension system never reached the subsistence levels it was meant to provide. The recent combined reform efforts to bring more people into supplementary pensions by way of auto-enrolment and underwriting this with an actual subsistence-level state pension (see 4.9) are intended to mend this original dysfunction. Depending on compliance, enforcement, and the ability of politicians to refrain from tinkering with the triple lock and re-introducing erosion for the sake of saving money, these reform efforts might in fact be able to consolidate a functioning pension system in the original logic of the Beveridge system.
Despite the higher degree of regulation and government interference that came with auto- enrolment, the supplementary pensions as required by auto-enrolment are indeed a minimum because contribution rates are set so low that without additional savings effort, income maintenance is really a very distant goal. Furthermore, despite compulsory elements, auto-enrolment does not mean such pensions are compulsory for the individual. Employers are compelled to pay occupational pension contributions for their employees, and there is
no denying that this introduces a higher degree of collective responsibility for pensions. But while the legislation is built on the realisation that leaving pension saving up entirely up to individual initiative does not work, it still leaves scope for individual choice in the form of the opt-out possibilities. Auto-enrolment is therefore a hybrid construct with elements that are in line with the Liberal tradition, others that strengthen a collective approach to pensions, and a very limited financial scope.
That is not to say that arguments that locate systemic change in the auto-enrolment legislation entirely lack merit. The compulsion elements of auto-enrolment, in particular with the relatively stringent implementation across all types and sizes of employers, are indeed a departure from a purely Liberal concept of voluntary supplementary pensions. Not only has the problem narrative across the political spectrum conceded that the purely Liberal model of pension saving has failed to deliver; the realisation has prompted a consensual reform that turns this concession into actual policy, a policy which is supported by most major stakeholders, across the political parties, and, if one takes the opt-out rates of the first few years of implementation as indicative, the enrolled workers themselves. The “liberal test-case” (Taylor-Gooby 2006) has conceded the failure of purely liberal pensions architecture to deliver.
In contrast, there can be little doubt that the introduction of the Riester pension and the subsequent changes to the German state pension represent a paradigm shift (see 6.1). Since its defining systemic reform in 1957 the functional logic of the German pension system had been that state provision is sufficient to generally retain one’s living standard in retirement. This principle was abandoned when the Riester pension was introduced and the state pension was lowered with the explicit aim that the old pension level should in future be only attainable with a Riester pension or equivalent on top.
The two major systemic reforms of the German and the British pension system addressed very different reform pressures, and in placing these reforms in the context of systemic change, I differentiate between a system that is “troubled” and one that is “broken”. By this I do not necessarily mean a difference in severity of the flaw, but in the quality of the flaw. The trouble the German pension system of 1999 was in that led to the reforms of the early 2000s was financial viability in the context of the welfare system as a whole. The Beveridgian model as practiced in the United Kingdom had the overriding problem that it did not actually deliver the outcome it had been intended to deliver.
The Bismarckian pension system had not in fact been in any state of brokenness, at least not regarding its functions as a pension system. In contrast to the British system, it was delivering what it had been set up to deliver in 1957. As a welfare system it was very popular. It had, however, become too expensive in times of austerity. This is not a small or insignificant problem, and characterising this as a different type of flaw than the underperformance of the British pension system does not negate the serious reform pressures. Those reform pressures led to the Riester reforms and the subsequent complementing reforms, which prioritized contribution levels over output, breaking with
fundamental principles of the Bismarckian pension system. They did not, however, move it towards a Beveridgian logic. They also did not replace the Bismarckian logic with any other functional logic. Instead, the reforms created a kind of stump version of a Bismarckian pension system that still has recognisable outlines but whose ability to fulfil its intended functions further into the future comes with many question marks attached.
The Liberal system is introducing more Social Democratic elements and the Conservative system is introducing more Liberal elements, which supports arguments of increased hybridity (see 1.1.1). But where the two systems are also moving in opposite directions is on the level of functionality: the systemic reforms of the 2000s have moved the German pension system towards greater brokenness, while the British pension system has moved towards greater systemic cohesion.