British pension provision has long been recognised to generate two nations in old age. One comprises people who enjoy continuous prosperous employment and reach retirement with a full state pension and typically also an occupational or personal pension. The second ‘nation’ includes people who have never worked and those who have had a history of low-paid and intermittent work, and as a consequence need to rely on means-tested supplementation in old age. The image of two nations remains apt, despite various policy developments over the years. Indeed, on occasion, policy changes have tended to reinforce inequalities in old age, with those in secure employment benefiting most from improved pension provisions.

The intention in this chapter is to explore the institutional factors that have forged these two nations: the availability and coverage of the different kinds of pension and the impact of this on pensioners’ incomes and on their need to seek means-tested supplementation. Each of these issues is considered in turn. Doing so provides a partial explanation for the division between people arriving in old age with a portfolio of pension provision and those who do not and, hence, of the relative size of the two nations in old age.

State and private pensions

Pension reform exemplifies the history of Britain's welfare state, with an initial growth in state provision and later state encouragement of the private sector to help fund the growing financial burden.

Current pensioners may be receiving state pensions derived from contributions paid under the 1925 Contributory Pension Scheme, the 1948 Insurance Scheme, the 1961 Graduated Pension Scheme (terminated in 1975), and the 1978 State Earnings Related Pension Scheme (SERPS). The original intention of SERPS was that the combination of basic and earnings-related pension would generate a pension equivalent to half a person's wage for people retiring after 40 years of employment.