December 2005 – Death of the nanny company

It is inevitable that the debate surrounding the proposed reforms from the Pensions Commission, chaired by Adair Turner, will become enmeshed in economic and political argument.

Concerns continue to be expressed in the language of gloom, foreboding and fear. Employers are already resisting what they characterise as the “burden” of the contributions they would be expected to make if employees opt to stay in a proposed national pension scheme.

Pension provision is perceived generally as a problem for government, society and individuals. Rarely do I see it expressed as a happy problem brought about by the prodigious success of our society in raising living standards, average incomes, material wealth and the standards of health care.

It is part of human nature, perhaps, that the cloud receives more attention than its silver lining. In the case of an ageing western society that is no longer seeking to replace itself in the way that demand-led, growth-obsessed economists have grown to admire, the cloud has changed its appearance.

Attitudes to pensions and retirement were shaped at a time that Britain’s towns and cities were struggling to overcome the pressure of cramped housing, pollution and disease associated with rapid industrial change that had outpaced the social systems and legislation necessary to ensure a stable and healthy society. Politicians were fearful of Malthusian predictions of overpopulation and famine.

This was the age when Charles Booth, the social reformer, invented the idea of the “poverty line”, an arbitrary level, below which people might be recognised as poor. His great statistical work, Life and Labour of the People of London, published in 1889, may have been packed with dry statistics, but it provided him with the essential evidence he needed to make a case for old age pensions. Almost one-third of the poverty he found in some boroughs, he concluded, could be put down to old age.

Many of the elderly at that time were forced in to workhouses designed originally as relief centres, but which very quickly became recognised as degrading institutions where no effort was made to handle the different needs of young and old. Booth fought against this separation of the elderly poor from their families.

Not only was it plain wrong, older people, as Booth recognised, still had much to contribute in their communities. They could still provide neighbourly favours, mind babies and do various manual jobs, he argued. Surprisingly Booth did not conceive of any greater role for the elderly yet in so-called “primitive” tribal societies age has always been associated with wisdom and accorded a level of veneration and respect.

Even in capitalist society a sense of corporate community was retained for much of the 20th century where large companies and their employees signed up to the concept of deferred pay and final salary pensions that rewarded a lifetime of loyal service.

But the notion of the company as a community appears to be in retreat. Baroness Thatcher’s famous remark that “there is no such thing as society” is particularly applicable to the modern company. Nor do I quibble with the line of Lady Thatcher’s reasoning in that she went on to say: “There are individual men and women and there are families.”

In a free democratic society the responsible interests of the individual and the family should come before the company. But if we recognise companies, like communities, as the building blocks of society, it is reasonable that they should shoulder a degree of social responsibility.

The pensions debate has brought in to sharp focus the extent to which companies should be responsible for the future welfare of their employees. Rising employment costs, not just those of salaries, but of holiday entitlements, pensions, sickness, maternity and, now, paternity cover, in addition to the ease of access to other cheaper labour markets, have led to an outsourcing revolution in business.

A greater pension burden - if that is how it will be perceived by small employers in particular- is likely to encourage even more contracting out of work among outsourcing companies or with self-employed suppliers who must look after their own pension and other arrangements for social support.

Ronald Coase, the economist, explained the existence of companies as mechanisms for reducing the burden of transaction costs involved in doing business. As long as it is cheaper to have work performed internally the company will continue to exist as a community of centrally-rewarded and managed employees. When those internal costs can no longer be justified internal employment is no longer sensible.

Robert Laubacher and Thomas Malone, both academics at the MIT Sloan School of Management, have argued that within a few decades the integrated company might be viewed as nothing more than a transitional arrangement for the supply of work. Just now, as companies continue to grow by merger and acquisition this prediction looks as remote as it ever was.

But it should also be recognised - and Mr Coase does not include this in his list of transaction costs underpinning the purpose of companies - that many people like to work for a company. They enjoy a regular income and some, even though they may complain at times, prefer to devolve responsibility to their bosses. It is as intrinsic a part of human nature as the parent-child relationship.

In that sense companies have become greater than the sum of their parts. They have developed a life of their own to the extent that I wonder if some, at least, are simply there because they are there.

Now the world has changed. As competitive pressures increase alongside the success of information-rich enterprise shorn of most fixed assets, many companies have chosen to source much of their labour where they can find the best people at the best prices. The practice has become so ingrained I read that one outsourcing association was worrying about the “growth of insourcing”. I assume it meant employment.

There was a time when some big companies appeared to glide serenely within the marketplace. But in most of today’s corporate swans the feet – represented by employees - are paddling furiously beneath the surface. The pace of work is killing us softly, so much so, we might be forgiven for seeking alternative employment and pension arrangements.

If Lady Thatcher was doubtful about Society, she was unshaken in her belief in Victorian values. If, by this, she was referring to the idea of “self-help” espoused by Samuel Smiles I think she had a point. However, there must remain a safety net for those who need it. But should this include a state pension for all, regardless of their income, simply because they paid a National Insurance stamp? National Insurance should be nothing more than an insurance against ill health and poverty, underpinning the health service, not supplementing the better off.

Those who can look after themselves should be encouraged to build their own pensions, making their own provisions in individual self-administered tax-friendly funds, if they choose to do so. A nanny company is no more desirable than a nanny state.