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

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

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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

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…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

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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

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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

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…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

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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

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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

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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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Disclaimer

This document is being delivered as an information only document by Pension Corporation LLP ("PC"). No offer is
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opinions of the author(s) only.
This publication has been prepared for general guidance on matters of interest only and is intended for
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© 2009 Pension Corporation. All rights reserved. 'Pension Corporation' refers to the Pension Corporation LP and its
affiliates each of which is a separate and independent legal entity.

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Contact details

Dr Frank Eich
Telephone + 44 (0)20 7105 2236
Email eich@pensioncorporation.com

Dr Amarendra Swarup
Telephone + 44 (0)20 7105 2234
Email swarup@pensioncorporation.com

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