I.INTRODUCTION
Today, occupational pension trusts are ubiquitous: membership of an employer-sponsored scheme, coupled with reliance on the state pension, is the way in which most of us provide for our old age. Yet both occupational pension trusts and the state pension are relatively recent phenomena. Before the late nineteenth century few organised pension schemes existed, and some of those which did – such as the civil service scheme – operated largely on a discretionary, ex gratia basis.1 Large-scale occupational schemes run by private employers developed slowly in the nineteenth century, and became common only in the early years of the twentieth, while the state pension was not introduced until 1908.2
This chapter explores the historical development of the trust as the default legal mechanism for holding and administering pension schemes. It has been suggested that a novel feature of the early-twentieth-century occupational schemes was their ‘use of the private trust as a legal vehicle for pensioning’, and that ‘[T]rust law had been developed for quite other purposes but, from being virtually unknown in large pension schemes in the nineteenth century, it became the most favoured vehicle in the twentieth’.3 Here it is argued that in fact the trust relationship underpinned various methods of pension provision during the nineteenth century. This is unsurprising, given the trust’s obvious utility in holding funds and facilitating the provision of concurrent benefits to groups of people. From a legal perspective, therefore, the widespread adoption of the trust in early-twentieth-century pension schemes was neither novel nor surprising. Rather, it was an obvious incremental step in pensions law and practice.
The chapter also discusses how the courts conceptualised pensions during the nineteenth century. Ultimately, this seems to have been an exercise in interpretation, which depended on the terms of the instrument creating the relevant pension arrangements. If the terms suggested that pension payments were a discretionary matter for the employer, the courts treated them as ex gratia; if the terms gave employees an entitlement to pension payments, the courts would give effect to that entitlement. Thus, the law tracked and accommodated employers’ decisions as to whether and how to help their employees in old age.
II.METHODS OF PENSION PROVISION IN THE NINETEENTH CENTURY
Historically, provision for old age was neither as systematic nor as comprehensive as it is now. During the nineteenth century, it was largely regarded as a matter of individual responsibility,4 and a variety of methods were adopted: some were individual, others were collective, and the type of provision depended on one’s class and occupation. Despite the patchwork of different types of assistance and provision, inevitably there were many who could not save for their old age at all, and so there was a close correlation between old age and poverty.5 The development and proliferation of occupational pension schemes towards the end of the nineteenth century was therefore of profound social significance.
The most obvious methods of individual provision were private savings and investment. These took different forms. An active share market did not develop until the late nineteenth century but in the meantime government bonds were perennially popular as they offered security of capital and interest rates of 4–5 per cent.6 During the eighteenth century, landowners and middle-class investors had started to engage in the practice of lending against the security of mortgages over land,7 and commercial life insurance houses had developed in both England and Holland.8 The Victorian values of self-help and thrift led to a dramatic expansion in the life insurance business during the first half of the nineteenth century.9 Although the industry was unregulated and unstable for most of the century, it was nevertheless popular. From 1853 income tax relief was available on premiums for life insurance and deferred annuities,10 which made them an attractive form of saving for old age, and after legislative reform in 1870 the market became safer for investors.11
As far as collective provision was concerned, the livery companies had a strong philanthropic tradition, which sometimes involved the payment of pensions. By 1880 approximately one-third of their extensive income came from gifts and wills constituting trusts for benevolent or charitable purposes.12 It seems likely that by 1884, the companies had approximately 10,000 members. Membership entitled an individual to be received into the company’s almshouses, to pensions and relief out of the trust funds which had been left to the company for that purpose, and to apply for general relief out of the company’s corporate income.13 Workers also tended to contribute to friendly societies and, later, trade unions.14 By the end of the nineteenth century approximately 50 per cent of adult males in the UK were members of friendly societies,15 but the contribution rates were higher than many unskilled workers could afford, and so – much like livery companies – the societies tended to operate for ‘an artisanal elite’.16 Some societies operated superannuation schemes towards the end of the century but there was a low take-up among members, perhaps because there were more immediate demands on working-class saving, such as food, education and shelter, and because friendly societies supported their older members through the provision of sickness benefit anyway.17 Widows’ and orphans’ funds, which effectively facilitated the private provision of widows’ pensions, were also popular during this period.
Before the 1680s, it had been conventional for officers in the civil service, the armed forces18 and the professions who wished to retire to sell their office to their successors for a lump sum or an annuity.19 In the late seventeenth century, pension schemes were put in place for former members of the armed forces and private entities whose fortunes were closely associated with those of the British state, such as the Bank of England and the East India Company.20 In the early eighteenth century, customs and excise officers benefited from the first civil service superannuation scheme.21 These early schemes were not always comprehensive,22 and payments were usually discretionary. In the private sector, paternalistic employers would often look after their ageing employees by giving them easier jobs to do.23 Sometimes they would make contributions to friendly societies on behalf of workers who were members.24 Others exercised their discretion to reward long-serving employees with an ex gratia pension.25
There was little in the way of formal, organised pension provision in the private sector until much later in the nineteenth century. Utility companies were some of the first private sector employers to instigate formal pension schemes: for example, the Imperial Gas Light and Coke Company paid discretionary pensions during the 1830s26 and introduced a superannuation scheme for its employees in 1842.27 By the 1860s many railway companies had also established superannuation schemes.28 Large-scale manufacturers, such as Colman’s, Lever Bros, Cadbury and Rowntree followed suit at the turn of the twentieth century.29 In 1900 there were approximately one million employees in formally constituted schemes across the public and private sectors, and by 1936 this number had more than doubled.30
The impetus for the proliferation of occupational pension schemes appears to have come from employers, particularly large ones.31 There were at least four reasons for this. The first was rooted in the quest for greater productivity and efficiency. There were hidden costs in not providing pensions and keeping on older employees as they became less productive.32 Employers wished ‘to be able without hardship, to get rid of employees when they are past efficiency and vigorous work’,33 and an employer-led pension scheme facilitated this goal. Pension schemes that operated on the basis of deferred remuneration which could be withheld (for example, whereby employers’ contributions were not returned to leavers) also helped them to extract loyalty and longevity from younger workers who had specialist skills, or were in positions of financial responsibility, such as clerks in banks and railways.34
The second reason was the need for employers to improve industrial relations. The Trade Union Act 1871 relaxed some of the c...