Paul Johnson warns pension policy-makers of complacency

 

 

In an article originally published in the Times but now free to read on the IFS website, Paul Johnson explains just how terrifying inflation is to low-income households.

Johnson begins by explaining the political logic behind the Spring Statement but then becomes stumped.

There is one decision I can’t get my head around, though, and that is to do nothing more for those dependent on welfare benefits. The current system of uprating benefits each year in line with inflation the previous September works fine when inflation is low and stable. Not this year. It is particularly problematic when, as now, inflation is being driven by surges in energy and food prices that hit the poor hardest.

Perhaps Sunak felt that, with most people in work taking a hit, it was only fair for benefit recipients, including pensioners, to share some of the pain. If that’s what he was thinking he should tell us. I just can’t work out what was going through his mind.

….the plain fact remains: those not working and struggling to get by on state benefits are going to be worse off next year than this, and Sunak could easily have mitigated that.

This much we know, I threw my toys out of the pram when as soon as Rishi Sunak sat down from delivering his Statement. But Johnson continues

I want to talk about one particular group though: pensioners. Or more particularly what the recent inflationary surge tells us about pension policy.

It tells us that we haven’t learned our lessons from the past

Back in the 1970s it was pensioners who suffered most from rampant inflation. Many of those with savings saw the value of their savings decline dramatically. There was little inflation protection even for the final salary occupational pensions that many benefited from. A feeble flat rate state pension was barely enough to live on.

But , thanks to heroes of this blog- Barbara Castle, Tony Lines, Bryn Davies, John Shuttleworth and Andy Young, things then got better

For the next 20 years much pension policy was designed to help mitigate those sorts of risks. The state earnings related pension scheme, Serps, was introduced in 1978, giving an earnings-related, inflation protected, pension to anyone without an occupational scheme. Various pieces of legislation provided for inflation protection within occupational schemes. Since the 1970s pensioners as a whole have moved from being the poorest group in Britain to being among the richest.

But that was in the clement years when DB schemes were at their zenith, it has led to many prosperous pensioners .

Today many pensioners will have some protection from inflation, though like their working-age peers their state benefits will rise only by 3.1 per cent. There are still large numbers who depend on state benefits for most of their income. They are going to have a tough year. Most of those with occupational schemes will have some protection against rising prices, but often limited to a level below current inflation rates.

But Johnson has a concern that goes to the heart of worries that I have about our new found  pensions success story  – the DC workplace pension,

It’s what’s happening to those with new-style defined contribution pensions that worries me most, though, because it is a window on to the troubles we are storing up for the future.

Nearly all the infrastructure designed to protect pensioners against inflation has been dismantled. Serps has been abolished. Outside of the public sector there are essentially no defined benefit occupational pensions. Defined contribution pensions are the only game in town. But, as I have written here before, they aren’t really pensions at all. There is no compulsion to turn the accumulated pot into an annuity. Those who do buy an annuity almost never buy one with any inflation protection: it just looks too expensive.

It looks too expensive because inflation proofing is expensive, think twice before you take sexy-cash for pension increases.

Johnson then goes into full Cassandra mode

In the future then the huge majority of pensioners will be dependent on their own pots of savings. Some will have annuities which don’t rise with prices. Only retired public sector workers will have any protection for inflation beyond their state benefits. It’ll be a return to the 1970s where inflation can quickly undermine a lifetime’s careful husbanding of resources.

It’s hard enough to navigate this new world of personal responsibility, individual savings pots and drawdown options in a world of low and stable inflation. In a world of high inflation, it will become nightmarishly difficult. (my bold)

What’s worse, the amount that can be saved in a pension is being squeezed harder year by year as both the lifetime and annual allowances on what can be contributed are frozen in nominal terms. Just as the chancellor is banking the extra tax from keeping the income tax personal allowance frozen, he is accelerating the decline in private pension provision.

The article ends with a lesson for Guy Opperman and John Glen, men  who control pension policy in the UK.

Because most current pensioners are doing pretty well, and because the policy of auto-enrolment into private pensions has worked so effectively, I detect a dangerous complacency around pension policy. If we are to take any benefit from this year’s tribulations, then shaking off that complacency would be a good place to start.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Paul Johnson warns pension policy-makers of complacency

  1. Bob Compton says:

    Points well made by Paul Johnson. DC members, without a CDCpension option in the near future, as future retirees, will be faced with massive retirement income problems if inflation takes off as it did in the 70’s.

  2. Dr+Robin+Rowles says:

    Good article with points well made. The trouble is that all those in power who can influence pensions and benefits have no need to worry about these things themselves. So they don’t care. Or rather, they do care. They do care that they and their rich friends (donators to their political parties) might have to pay more tax to subsidize the pensions and benefits of those too lazy invest in their pensions, or who were so stupid they were born to poor parents who couldn’t afford to buy them high academic qualifications and therefore highly paid jobs. Under this government, the poor whether working or retired, are sunk!

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