amounts and accounts: reforming private pension enrolment carl emmerson and matthew wakefield...
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Amounts and Accounts:Reforming Private Pension Enrolment Carl Emmerson and Matthew Wakefield
Institute for Fiscal Studies
© Institute for Fiscal Studies
IFS Retirement Saving Consortium
• Association of British Insurers
• Bank of England• Barclays• Chartered Institute of
Personnel and Development
• Department for Work and Pensions
• Financial Services Authority
• HM Revenue and Customs
• HM Treasury• Investment Management
Association• Pensions Regulator• Personal Accounts
Delivery Authority• Scottish Widows• The Actuarial Profession
© Institute for Fiscal Studies
The 2012 pension reforms andprivate pension holding in the UKCarl Emmerson
© Institute for Fiscal Studies
State pension reforms
• Pension Credit Guarantee to be indexed to earnings-growth
• Increased generosity of basic state pension• State Pension Age increased from 65 to 68 between 2024
and 2046• Reduced generosity of Pension Credit Savings Credit• Reduced accrual of State Second Pension for higher
earners
• Impacts:– increased income from state for many from State Pension
Age– state support less targeted on lower-income pensioners– simpler pension system
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2012 private pension reforms
• Employers to enrol employees automatically into a private pension which complies with certain minimum standards– all employees aged between 22 and State Pension Age
earning more than £5,035 (in 2006–07 earnings terms)
• Compliant schemes include:– contracted-out defined benefit arrangements– defined contribution schemes with certain minimum
contributions (includes new Personal Accounts)
• No increase in compulsion for employees– free to choose to leave the scheme– re-enrolled each time they move employer and might also be
re-enrolled periodically (but not more often than every 3 years)
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Personal Accounts
• A new pension option for employers– minimum default contributions of 5% of band earnings from
employee (1% being basic rate income tax-relief) and 3% from employer
– applies to earnings from £5,035 to £33,540 (2006–07 earnings terms)
• Employees can choose:– to contribute less than the default minimum, but would risk
losing the employer contribution; or to contribute more than the default amount
• Employers can choose:– to have a higher employer contribution; or to enrol
employees at higher default employee contribution rates
• Annual contribution cap of £3,600 (2005 earnings terms)• In most cases no transfers between Personal Accounts
and other private pensions (review in 2017)© Institute for Fiscal Studies
Reforms to boost private pension coverage
• Those currently not choosing to join an employer’s pension scheme:– standard economic model: slightly easier to contribute to a
private pension and slightly harder not to contribute to a private pension
– behavioural economics: some individuals might shy away from making seeming complex decisions
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Changing defaults can boost pension coverage…
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0 4 8 12 16 20 24 28 32 36 40 44 480%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Before automatic en-rolment
After automatic enrolment
Months since joining employer
Perc
enta
ge o
f em
plo
yees
Source: This graph has been used in presentations by David Laibson (e.g. Laibson, 2008);
it draws on and is sourced to Choi et al. (2004), which in turn built on Madrian and Shea (2001).
…but some might contribute less
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0% 1–2% 3% 4–5% 6% 7–9% 10% 11–14%
15%0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
63%
3% 4% 4%11%
3% 4% 1%6%
14%
1%
65%
2%7%
2% 3% 1%5%
Before automatic enrolment
After automatic enrolment
Contributions as a share of earnings
Perc
enta
ge o
f em
plo
yees
Source: Madrian and Shea (2001).
Reforms to boost private pension coverage
• Those currently not choosing to join an employer’s pension scheme:– standard economic model: slightly easier to contribute to a
private pension and slightly harder not to contribute to a private pension
– behavioural economics: some individuals might shy away from making seeming complex decisions
• Those currently not offered the chance to join an employer scheme will face an increased incentive to join a private pension– employer contribution of (at least) 3% of (band) earnings is
contingent on the employee not choosing to leave the scheme
– in addition to impact of change in defaults
© Institute for Fiscal Studies
Private pension coverage in the UK
© Institute for Fiscal Studies
1992–9
3
1993–9
4
1994–9
5
1995–9
6
1996–9
7
1997–9
8
1998–9
9
1999–0
0
2000–0
1
2001–0
2
2002–0
3
2003–0
4
2004–0
5
2005–0
6
2006–0
7
2007–0
8
0
10
20
30
40
50
60
70
80
90
100Family Resources Survey British Household Panel Survey
Financial year
Perc
enta
ge
Source: Authors’ calculations using data from the FRS and the BHPS.
Detailed pension status, 2005
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Not of-fered em-
ployer's pension,
no Personal Pension
Not of-fered em-
ployer's pension,
joined Personal Pension
Offered em-
ployer's pension & declined, no Personal Pension
Offered em-
ployer's pension & declined,
joined Personal Pension
Offered em-
ployer's pension &
joined
0 10 20 30 40 50 60 70
18
5
16
3
59
Per cent
Source: Authors’ calculations using data from the 2005 BHPS.
Pension coverage by earnings, 2005
• Median earnings among those not contributing to private pension was £14,000 compared to £21,600 among those who did– increase in private pension coverage to be associated with
only a small, at least in absolute terms, increase in contributions
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Pension coverage by earnings, 2005
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0
5,0
00
10,0
00
15,0
00
20,0
00
25,0
00
30,0
00
35,0
00
40,0
00
45,0
00
50,0
00
0102030405060708090
100
AllNo private pension
Gross annual earnings
Cum
ula
tive p
erc
enta
ge
Source: Authors’ calculations using data from the 2005 BHPS.
Pension coverage by liquid assets, 2005
• Those not contributing to a private pension are not more likely to have gross debts, or greater gross debts, than those who are
© Institute for Fiscal Studies
Pension coverage by non-mortgage debt, 2005
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0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
0102030405060708090
100
AllNo private pension
Current gross non-mortgage debt
Cum
ula
tive p
erc
enta
ge
Source: Authors’ calculations using data from the 2005 BHPS.
Pension coverage by liquid assets, 2005
• Those not contributing to a private pension are not more likely to have gross debts, or greater gross debts, than those who are
• But they are less likely to have savings/investments to offset debts
© Institute for Fiscal Studies
Pension coverage by liquid assets, 2005
© Institute for Fiscal Studies
-10,0
00
-5,0
00 0
5,0
00
10,0
00
15,0
00
20,0
00
25,0
00
30,0
00
35,0
00
40,0
00
0102030405060708090
100
AllNo private pension
Current net liquid financial wealth
Cum
ula
tive p
erc
enta
ge
Source: Authors’ calculations using data from the 2005 BHPS.
Average liquid assets, by detailed pension status
© Institute for Fiscal Studies
… & no PP
… & joined
PP
Not of-fered em-
ployer's pension
… re-fused & no PP
… re-fused & joined
PP
... & re-fused
… & joined
All of-fered em-
ployer's pension
All
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
0
3,800
0
0
4,000
0
2,800
1,500
1,000
Median net liquid fin-
ancial wealth
Source: Authors’ calculations using data from the 2005 BHPS.
Pension coverage by liquid assets, 2005
• Those not contributing to a private pension are not more likely to have gross debts, or greater gross debts, than those who are
• But they are less likely to have savings/investments to offset debts
• Suggests they should be saving more but not in a private pension?
• Limited scope for those brought into private pensions to use other savings or investments to finance contributions– more likely that new pension saving will be new overall
saving– individuals brought into private pensions might pay off
existing debts less quickly
© Institute for Fiscal Studies
Pension coverage by other characteristics
• Within couples pension status is positively correlated– but many not contributing to a private pension have a partner
who does
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Pension holding within couples
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Not offered, no PP
Not offered, PP
Offered, refused, no PP
Offered, refused, PP
Offered, accepted
0% 20% 40% 60% 80% 100%
Offered, accepted Offered, refused, PP Offered, refused, no PPNot offered, PP Not offered, no PP
Percentage
Ow
n p
ensi
on s
tatu
s
Partner’s pension status
Source: Authors’ calculations using data from the 2005 BHPS.
Pension coverage by other characteristics
• Within couples pension status is positively correlated– but many not contributing to a private pension have a partner
who does
• Pension coverage lower among those aged 22 to 29– 21ppt less likely to be currently contributing than those aged
40 to 49– less likely to accept offer to join an employer’s pension
scheme, and less likely to arrange an individual private pension– how might this change as they age?
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Pension status by age
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22 to 29
30 to 39
40 to 49
50 to SPA
Total
0% 20% 40% 60% 80% 100%
Offered, accepted Offered, refused, PP Offered, refused, no PPNot offered, PP Not offered, no PP
Percentage
Age g
roup
Source: Authors’ calculations using data from the 2005 BHPS.
Pension coverage by other characteristics
• Within couples pension status is positively correlated– but many not contributing to a private pension have a partner
who does
• Pension coverage lower among those aged 22 to 29– 21ppt less likely to be currently contributing than those aged
40 to 49– less likely to accept offer to join an employer’s pension
scheme, and less likely to arrange an individual private pension– how might this change as they age?
• Coverage higher among public sector workers– 26ppt more likely to be currently contributing than private
sector workers– more likely to be offered chance to join an employer’s scheme
and, if offered, more likely to accept an offer
© Institute for Fiscal Studies
Conclusions
• Reforms to enrolment and default contributions to boost private pension coverage
• Most not currently contributing to a private pension have lower earnings– pounds increase in contributions will be small
• Majority not contributing to a private pension do not have positive liquid wealth– reshuffling small but some to repay debts less quickly?– is a pension the best savings vehicle for them?
• Those aged 22 to 29 are less likely to be contributing than older individuals– a key issue is how their behaviour will change as they age
© Institute for Fiscal Studies
The market for Personal AccountsMatthew Wakefield
© Institute for Fiscal Studies
Outline for part 2
• How much current disposable income would those not currently contributing to a private pension forego if they were to contribute 5% of their earnings in the band £5,035 to £33,540?
• How many not currently offered an employer pension might be brought into private pensions – perhaps often Personal Accounts – through the change in enrolment?
• How much might these individuals build up in pensions through minimum default contributions?
© Institute for Fiscal Studies
How much disposable income foregone?
• Take the most recent available year of data on incomes, pension contribution status and family circumstances– FRS, 2006/07
• Change pension contributions such that all those not in fact contributing to a pension make individual contributions of 5% on the on the band between £5,035 and £33,540 of earnings
• Model how this affects current disposable income, given the tax, benefit and credit system.
• Look at effect on average across the population, and also at how this varies across the income distribution
© Institute for Fiscal Studies
Income devoted to employee contribution
• Contribute a proportion of a band of earnings– A key determinant of income taken is level of earnings
• Take an individual earning £33,540 with no other income– Contributes 0.05*(33,540 – 5,035) = £1,425– 20% is tax relief, reduction in income: 0.8*£1,425 = £1,140– This is 3.4% of the £33,540 gross income– Disposable income – net of income tax and NI – would have
been £24,561 w/o the pension contribution– £1,140 is 4.6% of disposable income
• This is the biggest ‘loss’ somebody could have– No interaction with higher-rate income tax or benefit
withdrawal– Lowest income on which one could pay 5% of the whole
band
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Income devoted to employee contribution
• Take an individual earning £7,885.50 (one-tenth of the way from £5,035 to £33,540) with no other income– Contributes 0.05*(7,885.5-5,035) = £142.5– Contribution less tax relief is £114– This is 1.4% of gross income, 1.6% of disposable income
• Take an individual earning £60,000 with no other income– Contributes 0.05*(33,540 – 5,035) = £1,425– 40% tax relief, reduction in income: 0.6*£1,425 = £855– This is 1.4% of gross income, 2.1% of disposable income
• Level of earnings a major determinant of proportion of disposable income accounted for by contribution
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Income devoted to employee contribution
• Level of earnings a major determinant of proportion of disposable income accounted for by contribution
• Amount of non-earned income will also matter– Contribution a proportion of earnings– No extra contribution for “other income”, but it is extra
disposable
• Example of higher-rate taxpayer also showed tax-rate matters– This is effective tax-rate, not just a distinction between
basic- and higher-rates– Similar effect for those on steep taper of new tax credits– For such an individual, at least some of pension
contribution “costs” only 41p of disposable, per pound of contribution, thus reducing the proportion of disposable that is foregone
© Institute for Fiscal Studies
Proportion of disposable accounted for by 5% employee contribution from those not currently contributing
All
Po
ore
st 2 3 4 5 6 7 8 9
Ric
he
st
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
Income decile group
% o
f d
isp
osa
ble
inco
me
Among families containing an “affected” individual
Source: IFS Tax and Benefit model, TAXBEN, using data from 2006–07 Family Resources Survey.
Proportion of disposable accounted for by 5% employee contribution from those not currently contributing
All
Po
ore
st 2 3 4 5 6 7 8 9
Ric
he
st
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
Income decile group
% o
f d
isp
osa
ble
inco
me
Across all families
Source: IFS Tax and Benefit model, TAXBEN, using data from 2006–07 Family Resources Survey.
Proportion of disposable accounted for by 5% employee contribution from those not currently contributing
All
Po
ore
st 2 3 4 5 6 7 8 9
Ric
he
st
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
Income decile group
% o
f d
isp
osa
ble
inco
me
Across all families
Source: IFS Tax and Benefit model, TAXBEN, using data from 2006–07 Family Resources Survey.
How many might be automatically enrolled into Personal Accounts?
• Examine one group who might have been enrolled into Personal Accounts in the past– Those not offered employer’s scheme
• Excludes any whose employer might choose Personal Accounts when previously offering a different scheme
• Also supposes employers that did not offer pension scheme in the past would now offer Personal Accounts
• Think of the group identified as a group:– Relatively likely to be brought in to Personal Accounts– Who would be new to being offered pension through the
workplace
• Use BHPS data– Baseline year 2005, but also look at evolution 2001-05
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Personal Account defaultees?
2001 2002 2003 2004 2005 Any year-5%
0%
5%
10%
15%
20%
25%
30%
14.6%
% o
f th
ose a
ged
22
to S
PA
© Institute for Fiscal Studies
Personal Account defaultees?
2001 2002 2003 2004 2005 Any year-5%
0%
5%
10%
15%
20%
25%
30%
14.6%
% o
f th
ose a
ged
22
to S
PA
4.7 million
© Institute for Fiscal Studies
Personal Account defaultees?
2001 2002 2003 2004 2005 Any year
0%
5%
10%
15%
20%
25%
30%
12.3% 13.2% 12.7% 14.1% 14.6%
26.6%
% o
f th
ose a
ged
22
to S
PA
© Institute for Fiscal Studies
Personal Account defaultees?
2001 2002 2003 2004 2005 Any year
0%
5%
10%
15%
20%
25%
30%
3.0% 3.4% 3.1% 2.9% 3.0%
13.0%9.3% 9.8% 9.7% 11.2% 11.6%
13.7%
With Personal Pension or Stakeholder ...
% o
f th
ose a
ged
22
to S
PA
© Institute for Fiscal Studies
Persistence of being in PA default group
All 5 years; 27.9%
2005 only; 21.0%
2 years; 17.8%
3 years; 16.1%
4 years; 17.2%
© Institute for Fiscal Studies
Amount of default minimum contributions
• How much would the group identified in 2005, have contributed over the period 2001 – 2005
• Default minimum contributions are 8% of earnings between £5,035 and £33,540 so can be computed straightforwardly– Assessing actual contributions would be much more
complex
• The amounts will be a reflection of the earnings distribution
• … and of how this and group membership shifted over the period 2001-2005, for those identified in 2005
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Distribution of PA default minimum contributions
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£0 £2,000 £4,000 £6,000 £8,000 £10,000 £12,0000
102030405060708090
100
2005
...&2004
...&2003
Default PA contributions among contributors in 2005
Cu
mu
lati
ve p
erc
en
tag
e
Averages of PA default contributions
…&2001
…&2002
…&2003
…&2004
2005
0 500 1000 1500 2000 2500 3000
£768 £900 Mean
Median
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Averages of PA default contributions
…&2001
…&2002
…&2003
…&2004
2005
0 500 1000 1500 2000 2500 3000
£2,168
£1,846
£1,588
£1,247
£768
£2,823
£2,437
£1,982
£1,484
£900 MeanMedian
© Institute for Fiscal Studies
Conclusions (1)
• Reforms to enrolment and default contributions to boost private pension coverage
• Most not currently contributing to a private pension have lower earnings– Pounds increase in contributions will be small
• Majority not contributing to a private pension do not have positive liquid wealth– Reshuffling small but some to repay debts less quickly?– Is a pension the best savings vehicle for them?
© Institute for Fiscal Studies
Conclusions (2)
• Default minimum employee contribution to reduce disposable income by 0.5%
• Number brought in to Personal Accounts likely to increase quickly– Although also a persistent group of defaultees– Some would have saved in a private pension without the
reform
• Among those not offered an employer’s pension scheme in 2005:– Aggregate contributions £4.2 billion from 4.7 million
individuals– Median contributions of £770– Over 2001-05, median contributions of £2,170
© Institute for Fiscal Studies
Amounts and Accounts:Reforming Private Pension Enrolment Carl Emmerson and Matthew Wakefield
Institute for Fiscal Studies
© Institute for Fiscal Studies