Our pension system, little-changed since Roman times, needs updating

The life of a Roman soldier wasn’t exactly perfect – a lot of marching and a lot of fighting. But for those who survived it wasn’t all bad; they benefited from the first ever formal pension scheme.

In 13BC Caesar Augustus put in place a system – financed from taxation – that paid all those who had served for 25 years a lump sum equivalent to 13 years of salary, replacing a previous system of small grants of land.

You might also have had various bonuses for campaigns you had fought, plus savings and bits and bobs of loot to chuck into the pot.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Non-Romans got a nice little kicker to the whole thing too: they received Roman citizenship, which gave them the right to vote, own property and stand for office.

Add it all up and, with the loot, land and lump sums, some veterans ended up pretty well off – which was nice given that on retirement they were allowed to marry someone to spend it all with, or at least to recognise the wives and children they effectively already had – Roman soldiers were technically not allowed to marry.

The interesting thing about all this, is just how little – at first glance at least – has changed (the marrying and the loot bits aside).

Roman pensions were fine for Romans; not so fine for us

Most workers in the UK will now be in an auto-enrolment pension scheme. If they contribute the minimum and their employer does the same, and work for 30 years – which seems fair given life expectancy – with their state pension chucked in, the combined value will be about the same as the Roman soldier’s. I’m assuming the UK median income and returns of 5% a year.

That sounds nice, and it is. But there is a vital difference: the average life expectancy of a Roman man was 41; the life expectancy of the average UK person is rather more. Around half of the babies born in 2007 in the UK will live to be 103 on current trends, according to Professor Sarah Harper, founding director of the Oxford Institute of Population Ageing, who spoke at an F&C Investment Trust event this month.

That’s a good thing, of course. Who doesn’t want to live longer? But it comes with a pension-related sting in the tail. For the first time ever, the rise in the global population is being driven as much by longevity as it is by new births. And by 2070, on UN forecasts at least, low birth levels will lead to global population shrinkage and accelerated ageing.

The year 2070 feels far away. But if you are 20 now, that will be the time at which lack of births over the previous decades means the dependency ratio takes a further turn for the worse – there won’t be many workers left to pay the taxes to finance your state pension and medical costs.

Also, it will also be exactly the time when you will want to access your pension savings – to finance the 30-odd years of R&R ahead.

Financial education for adults, not children

All this brings me to current concerns. A report this week on financial resilience from an all-party parliamentary group looks, among other things, at improving pension saving. It is astonishing, says Shaun Bailey, MP and chair of the group, “just how close large groups of the population are to experiencing a crisis in their personal finances”.

I like the mid-life MOT scheme that the government is currently looking at expanding. The idea here is for workers in their 40s and 50s to sit down with someone who can help them take stock of their finances, skills and health so that they can better prepare for retirement.

There is much talk these days of teaching schoolchildren about personal finance and the like. This is no bad thing. But it is often, as Richard Thaler, author of the book Nudge, put it to me a few years ago, “ineffective.” Kids mostly don’t remember these things when they actually need to know them. If you are taught about mortgages at 15, do you really know anything about mortgages at 30?

Better then to provide just-in-time education when and where it is needed. One’s late 40s is the perfect time to discuss pensions: no one is listening in the immortal years running up to being 40.

It is also the perfect time to discuss ongoing education and skill sharpening: we can’t rely on the state or anyone else financing us from 70 so it makes sense for education to be less about the one and done degree system we currently have and more about long-term learning.

The MOT scheme has just been given a £5m boost to get it out to a wider audience. I’m rarely one for encouraging more state spending – on the basis that there is no money left – but here I would make an exception. Yes to mid-life MOTs and yes to later-life MOTs if we can stretch to that as well. Anyone over 50 can currently get free guidance from Pension Wise, the national service, but an expansion of that to finances as a whole would be a good move.

The dangers of throwing money at things

Finally, we should note that we should be careful what we wish for when we think about how much the state should or should not do to help us finance our retirement.

Those Roman soldiers and the 13 years of salary? The concept was part of the beginning of the end for Rome. When Septimius Severus was dying in 211AD he instructed his son to be sure that he took good care of the army: “Be harmonious, enrich the soldiers and scorn all other men.”

His son Caracalla, did just that: he increased army salaries by 50% and increased the lump sum they got on retirement by 66%, from 3,000 to 5,000 denarii, despite the fact that there had not been much in the way of inflation for 200 years.

This, as economic historian George Maher points out, added the equivalent of some £8bn to the annual bill for the army – and led directly to the debasement of Rome’s once super-stable currency and contributed to the eventual failure of the state. We must be careful with our bribes – something the current crop of would-be prime ministers might like to bear in mind.

• This article was first published in the Financial Times