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.
 
Description 1. The main achievement of the research funded by this grant has been the contribution to knowledge generated. Examples include:
- In our work on "Patience, household portfolios and financial preparedness for retirement", (which has been resubmitted to the journal Quantitative Economics) we show that households differ greatly in their patience and, as a result, the extent to which they plan for retirement. We highlight the importance of this heterogeneity for understanding savings decisions. We also demonstrate the role played by tax incentives to retirement saving and show how we might expect household saving to change if these incentives were altered.
- In our work on subjective survival expectations (one piece of this research has been published as an IFS report and another is under review at a peer-reviewed journal) we document that individuals mis-perceive their own life expectancies, and show how this could affect their retirement savings behaviour. This creates a role for governments to inform individuals about life-expectancies - emphasising the likelihood that individuals will need to fund retirement out to very old ages.
- In our work seeking to understand whether different generations have saved appropriately (working title "Should generations differ in their wealth accumulation?") we demonstrate the inappropriateness of simply comparing wealth levels between generations. We show how different earnings paths, life expectancies, state pensions, and retirement ages would all lead to generations 'optimally' accumulating different levels of wealth by the same age. We give some practical guidance to policy makers, industry bodies and consumer groups interested in this area on the appropriate use of 'replacement rate' benchmarks.
- In our work on the design of public pension systems ("Inequality, Efficiency and the Design of Public Pensions"), we develop a method for evaluating the costs and benefits of means-testing in state pension systems. We implement that method using newly-linked survey and administrative data and show that, notwithstanding the fact that means-testing reduces the incentive for some households to save for retirement, the benefits (by targeting scarce resources on those who need them most) are substantial. We argue that governments, considering pension reforms in the face of increasing demographic pressures, consider extending the role of means-testing.
2. In addition to this knowledge-generation, we have had real impact on the way policy makers and industry think about assessing individuals' pension saving. This is discussed below.
3. Another key achievement is in our lasting contribution to the research community. There are three aspects of this. First, we used the Wealth and Assets Survey to impute pension wealth for individuals observed in Understanding Society. This data will be deposited with UKDS for the benefit of future researchers. Second, we have developed two early career researchers who now have significant modelling skills that can be used for future work. Finally, we have demonstrated the power of administrative data linked to survey responses. Our outputs may be particularly useful, as case studies of how such data can be successfully used, by future researchers seeking access to administrative data from data owners.
Exploitation Route We have engaged extensively with other academics, presenting different aspects of the work at numerous conferences in the US, Europe and UK. We expect two of our findings in particular to be taken forwards by the academic community: (i) the importance of heterogeneous individual preferences - where we have provided an empirical estimate of the distribution of patience which can be used by other researchers, and (ii) the importance of different types of assets in structural models of savings behaviour.
We have also undertaken considerable dissemination activities outside of the academic community, presenting our findings to industry and to policy makers, sitting on an advisory group for an industry study of retirement preparedness, and sharing our results through the media. Our findings relevant to 'how to best assess the adequacy of retirement saving' have already fed directly into discussions with others trying to answer this question - in think tanks (e.g. Resolution Foundation), in industry (e.g. Pensions and Lifetime Savings Association), and policy makers (DWP) - and we expect that to continue to be the case in future as we maintain our networks in this area.
Sectors Financial Services, and Management Consultancy,Government, Democracy and Justice

 
Description There is considerable ongoing debate surrounding individuals' retirement provision, particularly regarding the adequacy of pension saving, the likely effects of 'pension freedoms', and the intergenerational differences in wealth accumulation - to name just a few areas. The many findings of our research have been picked up by policy makers, consumer groups, think tanks and industry, and the evidence we have provided has improved the quality of discussions on these topics. Our findings on the biases in individuals subjective survival expectations have been of particular interest to private sector firms who operate in the annuity market, improving their understanding of their target market. This could help inform their pricing decisions and marketing strategies in future. The evidence we have provided in this area has also been absorbed with interest by policy makers (in particular at the Department for Work and Pensions and HM Treasury), regulators (the Financial Conduct Authority) and consumer groups (such as the Money Advice Service) who are all concerned with how individuals may respond to the introduction of pension freedoms. While not directly addressing this policy question, our findings are being used as an important piece of evidence in understanding individuals' expectations, and therefore how they might potentially respond to the greater choices now available to them about how they access their retirement resources. The public and policy debate around what constitutes an 'adequate' retirement income continues, and is of particular importance as the government contemplates its next moves on Automatic Enrolment - for example, whether it should change default contribution rates in future. Our research has received considerable traction in this debate, both in terms of the direct findings of the research and in terms of the way of thinking about the issue. Members of the research team have, as a direct result of this research, been involved in advisory groups to help the DWP, the FCA, and industry organisations (such as the Pensions and Lifetime Savings Association) to understand the issues at play in defining and measuring 'adequacy' and simulating how well prepared working-age individuals are. This has directly influenced thinking and improved the quality of debate and further evidence collection. The final findings of our research - that demonstrate the importance of understanding the circumstances facing different generations when comparing (either explicitly or implicitly) the wealth accumulation of different generations - are soon to be published and so have yet to achieve their full impact. However, the work has already been discussed extensively with DWP and the FCA. One impact of this has been a slow move in the direction of reducing the extent to which older generations are used as a 'benchmark' against which the retirement preparedness of more recent generations is assessed. We expect the results to receive considerable traction in the debate surrounding intergenerational fairness, and hope that our findings both caution against simple comparisons of achieved wealth levels between generations, and stimulate a focus on understanding more about the drivers of wealth differences. This is vital if any policy action - either on the part of government, regulators or industry -is to be appropriately designed.
First Year Of Impact 2018
Sector Financial Services, and Management Consultancy,Government, Democracy and Justice
Impact Types Economic,Policy & public services

 
Description David Sturrock was a member of a steering group for internal Department for Work and Pensions work on adequacy of retirement income.
Geographic Reach National 
Policy Influence Type Membership of a guideline committee
 
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 Other evidence to government: DWP minsterial roundtable on pension income adequacy
Geographic Reach Local/Municipal/Regional 
Policy Influence Type Gave evidence to a government review
 
Description Other evidence to government: Discussion at DWP on retirement income adequacy
Geographic Reach Local/Municipal/Regional 
Policy Influence Type Gave evidence to a government review
 
Description BBC London TV interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact BBC London TV live interview - home ownership briefing note
Year(s) Of Engagement Activity 2018
 
Description BBC News interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Public/other audiences
Results and Impact Jonathan Cribb interview on the IFS home ownership briefing note
Year(s) Of Engagement Activity 2018
 
Description BBC Radio 3 Counties interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact Andrew Hood interview on IFS home ownership briefing note
Year(s) Of Engagement Activity 2018
 
Description BBC Radio 4 Today Programme 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Public/other audiences
Results and Impact BBC Radio 4 Today Programme interview for home ownership report
Year(s) Of Engagement Activity 2018
 
Description BBC Radio Berkshire Interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact Jonathan Cribb interviewed on home ownership on BBC radio Berkshire.
Year(s) Of Engagement Activity 2018
 
Description BBC Radio Cornwall live interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact Andrew Hood interview on BBC Radio Cornwall live discussing the IFS home ownership briefing note.
Year(s) Of Engagement Activity 2018
 
Description BBC Radio London live interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact BBC Radio London Live interview on the IFS home ownership briefing note by Andrew Hood.
Year(s) Of Engagement Activity 2018
 
Description BBC Radio Scotland live 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact BBC Radio Scotland live interview - home ownership briefing note by Andrew Hood.
Year(s) Of Engagement Activity 2018
 
Description BBC Radio Shropshire live interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact BBC Radio Shropshire Live interview - home ownership briefing note by Andrew Hood
Year(s) Of Engagement Activity 2018
 
Description BBC Radio Somerset live interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact BBC Radio Somerset Live interview - home ownership briefing note by Andrew Hood
Year(s) Of Engagement Activity 2018
 
Description BBC Radio Wales live interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact 0645 BBC Radio Wales interview for home ownership briefing note by Andrew Hood
Year(s) Of Engagement Activity 2018
 
Description BBC Radio Wiltshire live interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact BBC Radio Wiltshire Live interview - home ownership briefing note by Andrew Hood
Year(s) Of Engagement Activity 2018
 
Description BBC Radio World Service 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Public/other audiences
Results and Impact BBC Radio World Service interview - home ownership briefing note
Year(s) Of Engagement Activity 2018
 
Description BCB Radio live interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Public/other audiences
Results and Impact Andrew Hood interviewed live on BCB Radio on the IFS home ownership briefing note
Year(s) Of Engagement Activity 2018
 
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 ITV News pre-recorded interview 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Public/other audiences
Results and Impact Jonathan Cribb interviewed on the IFS home ownership briefing note.
Year(s) Of Engagement Activity 2018
 
Description Multiple presentations - 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 (2016), the Association of British Insurers research day (26 Apr 2018), and at the English Longitudinal Study of Ageing Wave 8 launch (18 Oct 2018)
Year(s) Of Engagement Activity 2016,2018
 
Description Multiple presentations - 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

Society of Labor Economists, Toronto

International Institute for Public Finance, Helsinki

Stanford Institute for Theoretical Economics, Palo Alto
Year(s) Of Engagement Activity 2017,2018
 
Description Multiple presentations - 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

Stanford University, Palo Alto

University of Tennessee, Knoxville

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 2016,2017,2018
 
Description Netspar International Workshop presentation: "Survival pessimism and the demand for annuities" 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Industry/Business
Results and Impact Presentation given at the Netspar International Pension Workshop 2019 in Leiden, the Netherlands by David Sturrock.
Year(s) Of Engagement Activity 2019
URL https://www.netspar.nl/en/event/international-pension-workshop-19/
 
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 Press release: Just 1 in 4 middle-income young adults own their own home - down from 2 in 3 twenty years ago 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Public/other audiences
Results and Impact Press release regarding home ownership in middle-income young adults.
Year(s) Of Engagement Activity 2018
 
Description Press release: Just 1 in 4 middle-income young adults own their own home - down from 2 in 3 twenty years ago 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Public/other audiences
Results and Impact Press release regarding home ownership in middle-income young adults.
Year(s) Of Engagement Activity 2018
 
Description Radio broadcast 
Form Of Engagement Activity A broadcast e.g. TV/radio/film/podcast (other than news/press)
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Public/other audiences
Results and Impact Interview on Radio 4's You and Yours - David Sturrock.
Year(s) Of Engagement Activity 2019
 
Description Radio broadcast 
Form Of Engagement Activity A broadcast e.g. TV/radio/film/podcast (other than news/press)
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Public/other audiences
Results and Impact Interview for BBC Business Live by Jonathan Cribb.
Year(s) Of Engagement Activity 2018
 
Description Radio broadcast 
Form Of Engagement Activity A broadcast e.g. TV/radio/film/podcast (other than news/press)
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Public/other audiences
Results and Impact Interview on Talk Radio Live - Andrew Hood.
Year(s) Of Engagement Activity 2018
 
Description Radio broadcast 
Form Of Engagement Activity A broadcast e.g. TV/radio/film/podcast (other than news/press)
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Public/other audiences
Results and Impact Channel 5 pre-recorded interview with Jonathan Cribb.
Year(s) Of Engagement Activity 2018
 
Description WPEG conference presentation: "Should generations differ in their wealth accumulation?" 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact Presentation at Work Pensions and Labour Economics annual conference. Session attended by around 30 policy makers from DWP and academics and sparked interesting questions and discussion afterwards.
Year(s) Of Engagement Activity 2018
 
Description WPEG conference presentation: "Survival pessimism and the demand for annuities" 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact Presentation at Work, Pensions and Labour Economics Study Group annual conference. Attended by around 30 policy makers from DWP and other academics, who expressed a lot of interest and asked lots of follow up questions.
Year(s) Of Engagement Activity 2018