Back to the Drawing Board 6th Euroframe Conference June 2009

Back to the drawing board: The economic crisis and its implications for pension provision in the UK

6th Euroframe Conference, London, 12 June 2009

Frank Eich and Amarendra Swarup

Copyright © 2009 Pension Corporation LLP. All rights reserved. 2

UK pensions and public finances pre-crisis

• Partnership between public and private sectors– state pensions main source for most pensioners but nonetheless state spending relatively low

• Major pension reforms in 2006-07 following Pensions Commission recommendation

• Establishment of the Pensions Regulator and Pension Protection Fund to deal with occupational defined-benefit (DB) pension schemes


A Buoyant Picture…

• Public finances superficially in good shape

• Positive net funding position of DB schemes

• Household wealth boosted by rising house prices and buoyant stock market


…But Only Superficially

• Increasing closure of DB schemes in private but not public sector– Accounting changes – Updating of actuarial assumptions– Increasing funding requirements and employer contributions

• Public finances also show widening structural deficit


The Economic Crisis

• A major discontinuity – “things will never be the same again”

• Deep recession and increase in unemployment– more people with broken employment records– younger cohorts could be particularly hard hit


A Debilitating Impact…

• Significant rise in credit spreads and fall in stock markets

• Rapid deterioration in net funding position of DB schemes

• DC schemes have fared badly too: a “lost decade” for many


…Worsened by Public Finances and Policy

• UK public finances: from leader to laggard

• Lower interest rates and quantitative easing hurts pension schemes and annuity purchasers


The Cost?

• Crisis has impacted on all aspects of pension provision– Expectations of an eventual return to pre-crisis world misplaced

– Pensions landscape already unstable pre-crisis– More realistically, crisis is a discontinuity, accelerating trend to new arrangements over

coming years

• Public finances will take many years to recover, jeopardising pension reforms – Future governments will need to cut public spending across the board, including potentially on

state and public sector pensions

– Could jeopardise implementation of pension reforms in 2012 and also usher in more radical public sector pension reforms

– Likelihood of raised taxes across the board (e.g. income tax, VAT, national insurance

contributions)– Negative implications for households’ disposable incomes

– Could jeopardise efforts to raise household savings for retirement


The Death of DB Schemes

• Acceleration of DB scheme closures– Increasing stress on corporate balance sheets

– Introduction of Personal Accounts– Tensions between shareholders and pension obligations

• Further shift of risk allocation towards individuals– Badly placed to deal with diverse risks such as longevity, interest rates, inflation and market

risks

• A detrimental impact on the UK economy– DB pension schemes significant source of domestic savings for UK markets

– Closure and de-risking could make UK economy even more vulnerable to global trends

– Undermine London’s position as leading financial centre


Concluding comments: A new pensions settlement

• All aspects of pension provision weakened

• Government likely to take on greater explicit role in providing pensions in future– Aging electorate and low corporate appetite

– Disappointing pension outcomes for many

– Difficult process as governments keen to keep role limited

• Process will not be smooth– Rebound in equity and house prices could temporarily reduce pressures to reform

• Not only challenges but also opportunities– Create a more efficient, equitable and sustainable system

– Be realistic about most individuals’ ability to pro-actively manage their investments– will require bold policies


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Contact details

Dr Frank EichTelephone + 44 (0)20 7105 2236Email [email protected]

Dr Amarendra SwarupTelephone + 44 (0)20 7105 2234Email [email protected]

Back to the Drawing Board 6th Euroframe Conference June 2009

Documents

Transcript of Back to the Drawing Board 6th Euroframe Conference June 2009