The adequacy and optimality of retirement provision: household behaviour and the design of pensions

The UK is currently in the midst of sweeping changes to both state pension provision and private pension arrangements. Recent policy reforms include the introduction of the 'new state pension' from April 2016, further increases in the state pension age and the introduction of 'auto-enrolment' into workplace pensions. These changes are happening against a backdrop of continuing long-term trends, including a decline in the generosity of many employer-provided pensions and increasing life expectancies. These trends and policy reforms have significant implications for households' saving and retirement decisions. In very general terms, the environment is one in which accumulating resources to finance retirement is increasingly important, but the responsibility for ensuring such accumulation happens is shifting ever more to the individual as the state and employers take a step back.

We propose a programme of research that will study the implications of this changing environment and recent policy reforms for household behaviour and well-being. Our two central sets of research questions are:
1) Are working-age households saving appropriately for retirement? What will be the likely standards of living in retirement of successive generations of pensioners?
2) What are the likely long-run impacts of recent reforms and other long run trends on household saving and retirement decisions?

Different cohorts of individuals (those born in the 1940s, 1950s, 1960s, 1970s) have faced very different incentives to save privately for retirement (and to do so in different types of assets), and will face different incentives to retire as they approach what would traditionally have been the end of working life. This had led to considerable policy concern that while those recently retired have, on average, done so with relatively high levels of resources, those currently in working life are not saving enough for their retirement.

We aim to add considerably to the evidence base available for policy makers by exploring what can be known now about the future retirement living standards of currently working age households. We will do this by using the best available data on the decisions that these cohorts have already made, taking into account their past earnings and the structure of state and private pensions that they face, to estimate their future behaviour. We will then consider how their likely retirement standards of living will compare to those enjoyed during working life and to absolute thresholds of poverty in order to assess the 'appropriateness' of the household saving. An important feature of our research will be to study how this differs across different cohorts, given the different incentives they have faced and will face in future.

We will also analyse separately the impact of various changes to the pensions and savings environment - including specific policy reforms - on household saving and retirement behaviour, and consequently on households' resources. This will allow us to assess the impact of these changes on standards of living in retirement. The trends and policy changes whose effects we propose to consider are: the declining prevalence of some employer-provided pensions, increases in the state pension age, the introduction of the new state pension, changes in annuity prices, and the financial incentives to save encompassed in 'auto-enrolment'.

Such analysis is of considerable importance for policy makers. Understanding the long-run impact of recent, extremely large policy reforms on households' behaviour and living standards is vital for any assessment of a policy's effectiveness at meeting its objectives. Furthermore, greater understanding of the impact of some long-running changes in the pensions and saving environment is needed to better understand which (if any) future policy reforms may be desirable.

Understanding the impact of recent pension policy reforms and longer-run trends on household behaviour and their preparedness for retirement is of major interest to a variety of audiences, including policy makers, academics, private sector organisations, and charities. As such, we expect our work to have important impacts in a number of ways. Those engaged in policy-making (particularly in the UK, but also internationally) will benefit considerably. This will arise both from improvements to the evidence base on household preparedness for retirement and how this differs within and between cohorts, and enhanced understanding of household responses to pension policy. Understanding which households are at risk of poverty or large falls in their living standards on retirement and why is important for policy makers concerned with these individuals' circumstances, since it has implications for what policy action (if any) might be warranted. Policy makers at the Department for Work and Pensions (DWP) and HM Treasury (HMT) are actively interested in this area and we have good contacts with both. We believe that our analysis, which will contribute to a greater understanding of likely long-term trends in savings behaviour will also be of interest to the Bank of England, the Office of Manpower Economics (OME), the European Commission and the OECD.

We will present our results to policy makers at an early stage, and through the course of the work, through meetings and seminars. Such seminars will include two to each of the relevant teams at HMT and to the DWP seminar series (both of whom have committed to this in their capacity as Project Partners). We will submit the research to at least one conference with substantial policymaker involvement (such as the Work, Pensions and Labour Economics Study Group conference, currently sponsored by DWP and OME).

This research will also be of benefit to private sector organisations who provide pension and saving products and charities with an interest in household finance and wellbeing. The research team currently have regular contact with a number of such organisations through the 'IFS Retirement Savings Consortium' - which currently consists of DWP, HMT, the Financial Conduct Authority, Institute and Faculty of Actuaries, the Investment Management Association, the Money Advice Service, Just Retirement and Age UK - that co-funds (with the ESRC) a programme of IFS research. The current consortium research programme finishes in Summer 2015 and we will make every effort to extend it for a further two years.

On completion of the research we will publish (at least) one IFS report which will summarise in a non-technical way the results of the research and its lessons for policy. This will be freely available on the IFS website and widely disseminated to the public, private and third sector audience described above. We will communicate the research findings through an IFS press release that has wide circulation amongst the media and other interested parties, and the work will be further disseminated at an 'impact workshop' where the project team, project partners as well as national and international experts will present and discuss this and related work.

The impact that we anticipate our work having on the project team and on the academic community is treated more fully in the 'Academic Beneficiaries'. Here we briefly note that the beneficiaries will be a) those in the academic community in the UK and internationally who work on the link between pension systems and household behaviour, b) users of Understanding Society who will be able to use our imputed measures of pension wealth and c) the project team, in particular the early career researcher, who will develop skills in the project methodology and be in a position to lead projects of this type in the future.