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

Lead Research Organisation: Institute for Fiscal Studies
Department Name: IFS Research Team

Abstract

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.

Planned Impact

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.

Publications

10 25 50
 
Description Member of the Pension and Lifetime Saving Association (formerly the National Association of Pension Funds) steering group on the adequacy of household pension saving
Geographic Reach National 
Policy Influence Type Participation in a advisory committee
Impact An important aim in our work is to engage with the policy-making and corporate sectors on issues around the adequacy of pension saving and appropriate policy-responses. The PI on the grant was asked to be a member of a steering group for a review into the adequacy of pension saving carried out by the Pension and Lifetime Savings Association (PLSA - formerly National Association of Pension Funds). His contribution to this group was informed by early work from this project. The PLSA's review was published in November 2016 and will form an input into the PLSA's submission to the government's review of auto-enrolment (a key pension policy) in 2017. The report is published here: http://www.plsa.co.uk/PolicyandResearch/DocumentLibrary/0605-Retirement-income-adequacy-Generation-by-Generation.aspx http://www.plsa.co.uk/PolicyandResearch/DocumentLibrary/0605a-Retirement-income-adequacy-Generation-by-Generation-Appendix-Methodology.aspx
URL http://www.plsa.co.uk/PolicyandResearch/DC/Retirement-Income-Adequacy/O-Dea-Cormac.aspx
 
Description Cormac O'Dea was on the advisory board for the PLSA Report Advisory Board 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact Cormac O'Dea was on the advisory board for the PLSA Report Advisory Board

Retirement Income Adequacy: Generation by Generation
Year(s) Of Engagement Activity 2016
URL https://www.plsa.co.uk/Policy-and-Research/Defined-Contribution/Retirement-Income-Adequacy
 
Description Household Portfolio and financial preparedness for retirement 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Policymakers/politicians
Results and Impact This presentation was given to the Economic and Social Research Instiute of Ireland in Dublin to academics and policy makers.
Year(s) Of Engagement Activity 2016
 
Description Individual mortality expectations and financial planning for retirement 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Other audiences
Results and Impact Presented at Oxford University to academics.
Year(s) Of Engagement Activity 2016
 
Description Inequality, Efficiency and the Design of Public Pensions 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Other audiences
Results and Impact This presentation wad held for academics at:

Stanford University, Palo Alto

University of Tennessee, Knoxville

University of Wisconsin, Madison
Year(s) Of Engagement Activity 2017,2018
 
Description Pensions and Lifetime Savings Association 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact Meeting with the Advisory Council of the Pensions and Lifetime Savings Association.
Year(s) Of Engagement Activity 2016
 
Description Presentation at Department of Economics, Maynooth University 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Other audiences
Results and Impact Presentation of work in progress at an internal seminar at the Department of Economics, Maynooth University
Year(s) Of Engagement Activity 2016
 
Description Private Pensions and Public Pension Design 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Policymakers/politicians
Results and Impact This presentation was held at for academics and policymakers at:

Invited Seminars

University of Bristol Economics Department

University of Cambridge Economics Department

DiW Berlin

University of Essex Economics Department

IFS Seminar

University of Michigan

University of Minnesota

Oxford University

University of Surrey

University of California, San Diego

Warwick University

Washington University, St Louis

Yale University



Conference Presentations

Barcelona Graduate School of Economics Summer Forum

Centre for Economic and Policy Research Household Finance Workshop

ZEW Structural Micoeconomic Workshop
Year(s) Of Engagement Activity 2016,2017