The real victims of the "Rape of the National Insurance Fund"

In a recent article, David Hencke 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 his 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.  


  1. Lizzie Cornish, your comment has been deleted because it violates the comments policy of this blog. You are welcome to comment here provided that your comments:

    - are polite and refrain from personal attacks on me or other commenters

    - are about the topic of this post.

    Sadly your comment was neither polite nor on topic.

    You can find the comments policy on the "About This Blog" page.


    1. I'm shaking in my shoes, Frances.......
      Block away......

  2. Also, I DON'T hear you saying how AWFUL our State Pension is in UK and how DISGUSTING and INHUMAN it is that ALL pensioners are not given the SAME amount, each time it goes up, each older generation being forced to continue to try to exist on the PITTANCE they were given when they first got their SPs, with only the tiniest increases. EVERY pensioner in this country who's paid fully in NI contributions should get the new State Pension, regardless of when they were born. And even the new SP is appalling, the lowest in the industrialized world, STILL, alongside being THE most COMPLICATED as well, thus causing utter chaos for those in receipt of it, who can be ripped off left, right and centre, by a crooked system which couldn't give a DAMN about The People in any way at all.

    But hey, don't let me stop your 'important' research...and I thought you'd like to see this WONDERFUL message from posted by Angus, on Twitter.

    "Interesting that it is DWP asking for postponement. Not #michaelmansfield . One might have thought that #Government side might have all the Facts and figures, so have their Legal Case prepared. Not so! Interesting . #ShoulderToShoulder"

    1. Lizzie,

      1) In the post I called for older pensioners to receive the same pension as younger ones. Furthermore, if you read the first link in "Further Reading" at the end of the post, you will see that I have called for this before.

      2) I am allowing this post to stand only in order to highlight what I actually said. But it is still a personal attack on me, and the comment from Angus Robertson is off topic. I will delete any more posts from you that violate my comments policy.

  3. Excellent article, Frances.

    There are so many fundamental misunderstandings about the National Insurance Fund and the State Pension. Unfortunately articles like Hencke's only make this worse.

    Hencke's conclusions also contradict the findings of the Cridland review, regarding the dependency ratio and the long-term sustainability of the state pension.

  4. Surely the solution is to try and improve take-up of means-tested benefits, not to just abandon them altogether among pensioners?

    Every single thing about the state has been designed around redistribution these days, except the pension system. I really don't see why the state pension should go to rich pensioners at all, when 75% of property wealth is held by over-50s, rising inheritances over the next 15 years threaten to make the worst kind of inequality even worse: inequality of opportunity and the ageing population threatens to make our current pension system unaffordable without saddling young people with higher taxes and more debt.

    Pensioner poverty is a problem, but it's important to recognise the rate of pensioner poverty is significantly lower than people of working age and even lower than children. It's poor working people that have been punished the most by government policy over the past 8 years, and money should be prioritised for them.

    1. I'm sure you appreciate that, as a Universal Basic Income supporter, I can't possibly agree with you. Further expansion of means testing is going in the wrong direction imho. The New State Pension is the nearest we have ever come to a Basic Income and I really don't think it should be means tested. But I would rather abolish the state pension and have a Universal Basic Income for everyone.

      I completely agree that poor working people have been hit far harder than pensioners by the shredding of the welfare state over the last eight years. Indeed I have been writing about this - see my previous two posts. But that doesn't mean we should ignore the plight of the very elderly who are living in poverty. These people, mainly women, also have completely inadequate social care. Their life expectancy improvement flatlined before anyone else's. Go figure.

    2. But what would be the benefit of a universal basic income? Other than diverting yet more state resources to the middle and upper classes? Takeup is obviously an issue of means-tested benefits but it’s something UC tries to address. A minor issue is not an excuse to rip the system apart.

      A UBI has so many holes: too high and it’ll hit work incentives, too low and it’ll leave the poor worse off than now. And it can’t be very high at all because it would cost an absolute fortune.

      It’s a policy that is far more likely to hit the poor than help them, but, strangely, it usually comes from the left.

    3. Wouldn't a UBI need to be combined with a land value tax in order to be affordable, which would tax away the property wealth of the middle and upper classes anyway?

    4. Ben Graham, if it's enough to live on at all, it'd hit work incentives, because it would be like if you could get JSA without having to sign on or any sanctions. The myth already is that the existing benefits system allows people to "choose not to work" and UBI would make that real. Whereas today you have to meet criteria: looking for wotk, single parent with small kids, sick, disabled, etc. You can imagine the results for public support for benefits.

  5. The rationale of the removal of Treasury Supplement stated at the time was to arise from a desire to reduce the overall benefit budget paid from general taxation, which had increased significantly since 1970 from the expansion of various non-contributory benefits. As well as progressively reducing the Treasury Supplement and tying pensions to a slower increasing index, there was a complete removal of many earnings-related benefits replacing them with flat rates (eg for Unemployment benefit), and making some benefits taxable for the first time. There was also an increase in NICs, which is not referred to in the Lynes analysis, so I conclude that this aspect was probably overlooked by him.

    As mentioned by Lynes Treasury Supplement percentage had only been fixed for a few years, a change made under the Heath government. Prior to that it was set at that required to maintain the legal minimum balance. This had been as much as 30%+ in the early days, but had been as low as 13%.

  6. I am proud to say that I was a friend and collaborator with the late and much missed Tony Lynes. I am not aware of anything in what he wrote or said to suggest that he favoured the introduction of the New State Pension and it is entirely wrong for you to suggest that it could, in any way, honour his memory. On the contrary, while he was certainly in favour of a higher basic pension for all pensioners, he continued to argue for a revival of State earnings related pensions that the New State Pension was specifically introduced to replace.

    Sadly, neither you nor I know what position Tony would have taken in current debates about the process of equalising State Pension Age. So, I think you need to disavow any implication that he might not have shared the concerns of many about that treatment of the 50s women.

    1. He did call for a large increase in the basic state pension so that fewer pensioners had to claim Pension Credit. The New State Pension achieves that for many people. However, I agree there might be other, better ways of honouring his memory.

      What is NOT a good way of honouring his memory is to misrepresent what he wrote in order to promote a cause which we do not know if he would ever have supported. That is what Hencke did. Perhaps you should aim your criticism at him.

  7. It seems to me that the treatment of women born in the 1950s and 1960s is part of a bigger picture that is the diminishment of the Welfare State. The value of the State Pension is getting smaller which is not an unintended consequence . Privatisation and handling of services to corporations is the way Britain is going, just like in America. These women and their supporters are highlighting a policy that should be challenged unless you want the chipping away of the Welfare State to continue under this poor Government.

    1. The 2011 acceleration of state pension age rises was part of Coalition austerity and the shrinking of the welfare state, but that only raised women's state pension age by up to 18 months. The rest of the rise was due to the 1995 legislation, which was nothing to do with diminishing the welfare state and everything to do with ending sex discrimination in state pension ages.

      "The value of the state pension is getting smaller" - no, actually it isn't. As I discussed in the post, it got smaller between 1980-2010 relative to average earnings. Since then, the triple lock has ensured that it has got bigger relative to average earnings, not smaller. It is still pitiful by international standards, but that is a much longer-standing problem which is not easy to solve - it derives in part from our long-standing reliance on employers to provide pensions.

      Additionally, qualifying years were cut substantially in 2010, which ensured far more people, especially women, received the basic state pension and did not have to rely on means-tested benefits. The qualifying years were increased slightly again in 2016, and a 10-year lower limit was introduced which I think was wrong - it is simple cruelty towards a relatively small number of recent immigrants. But also in 2016 the New State Pension was introduced, which will progressively eliminate the earnings-related element of the state pension, ending the effective discrimination that this created against women. Unfortunately the New State Pension was not introduced retrospectively, so the poorest older pensioners, mostly women, are still relying on means-tested benefits that they are reluctant or in some cases unable to claim. This is a disgrace.

    2. There is also a problem with Council Tax Benefit, or Support as it now is: previously when ppl applied for Pension Credit the details would be taken for a CTB claim at the same time and sent to that office. With the New State Pension this no longer happens and the number of CTS claims made that way slowed to a trickle.

      I'm sure this results in many if not most New State Pensioners never claiming (only about half of working-age ppl eligible for HB or CTS actually apply). So they have got more money from one hand (SP) and had some taken away with another (a full CT bill).

  8. I am confused. We read so much about wages NOT keeping up with inflation over the past decades, so how do receipts (wage-related) exceed payments (inflation-linked)?

    1. Wage rises in total outstripped inflation in the second half of the 1980s and the 1990s, though people at the lower end of the income distribution didn't necessarily receive inflation-busting rises. The 1980s was a period of sharply rising income inequality. Later, there were rises in NI contributions, particularly from employers.

    2. Do you know of a graph that shows this? I forgot to say that your articles are probably the best written and argued I read. Thanks

  9. I think some people have been reading the coverage of American debates about US Social Security, which has had a fund element as well as a paygo element since the 1980s.


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