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Paul Johnson: this could be the end of private pensions

Insights from the Pensions and Savings Conference 2019

Pension Board and Trustee Consulting|Pensions Corporate Consulting|Pensions Technology|Retirement

December 3, 2019

The UK’s retirement system is facing an unprecedented challenge, thanks to a long period of sluggish economic growth, said Paul Johnson, director of the Institute for Fiscal Studies.

The afternoon keynote speaker at the Pensions and Savings Conference 2019 painted a bleak picture of the UK’s finances. “The economy is about £300bn smaller than we might have expected it to be today, a decade ago,” explained Johnson.

Worse, the growth gap is expected to widen. “This is the first time ever that growth is expected to be below 2% every year for the next five years,” said Johnson.

Productivity growth and household income growth have also suffered, especially young people’s earnings, which have done the worst. Interest rates remain at historically low levels.

“We have layered more uncertainty on top of this by voting for Brexit,” added Johnson. “Whilst UK growth wasn’t very good, nor was it in the rest of the world, but since 2016 we have moved to the bottom of the league. Since 2016 global economies have grown, but the UK has lagged behind. Most worryingly, there has been a complete collapse in business investment. At this stage in the cycle, we would expect business investment to be up considerably but in fact it is lower.”

Paul Johnson addresses crowd at the 2019 Pensions and Savings Conference
Paul Johnson addresses crowd at the 2019 Pensions and Savings Conference

UK public finances are already under strain because of a long period of economic stagnation. Health spending is also going to need to increase, as a 1.2 million increase in the number of pensioners is expected over the next five years.

“The amount we spend on health and pensions has risen dramatically over the last 50 years. We have paid for it by abolishing defence spending. There’s nothing left of defence spending to abolish,” explained Johnson.

We have moved dramatically away from a world in which pensions were the obvious place to put your money for tax advantages”

-Paul Johnson

Austerity has impacted almost every impact of public spending except health spending, which has risen. “It doesn’t seem to me there is much space to cut further, which means that taxation will have to increase. Something we won’t hear much about in what I assume will be an upcoming election,” predicted Johnson.

What does all this mean for pensions? The state pension age will keep rising, said Johnson. “Had state pension ages remained the same, there would be something like four million more people over pension age by the mid-2020s than there will be. That is a very significant saving to the public finances. We need to continue that process of increasing the pension age over time to keep a lid on public spending.”

Working for longer may also become a reality. At present people underestimate their life expectancy, which is improving all the time. “You can think of someone in their late sixties today as [equivalent to] someone in their mid-fifties in the 1970s,” said Johnson.

We could be witnessing the end of private pensions, argued Johnson. “Through a series of policy decisions, we had one of the biggest private pension sectors 30 years ago and today, we have barely anything at all.”

Very few people now purchase annuities. Meanwhile the tax treatment of pension savings has changed dramatically. “We have moved dramatically away from a world in which pensions were the obvious place to put your money for tax advantages,” said Johnson.

“We don’t have anything which looks much like a pension any more, partly because of mistakes over things like the RPI, partly because of low interest rates and partly as a result of government policy,” he concluded.

“We have shot ourselves in both knees economically,” was Johnson’s stark conclusion. Ageing and health will put pressure on public finances over time. “We have some big political questions to ask about how big the state will be in ten years’ time – this is starting to impact in a serious way.”

Paul Johnson discusses the current state of private pensions
Paul Johnson discusses the current state of private pensions

Next chapter: Brexit, the DB funding code and intergenerational inequality: in conversation with an expert panel

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Pensions and Savings Conference 2019 Overview PDF 1.5 MB

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