UK pension reform: much under way
with more to come?
Carl Emmerson
Presentation at “Pensions in HE – annual schemes update”, London,
7th March 2012
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Outline
• Public service pensions
• Moving to a flat rate state pension
• Increasing state pension age
• Workplace pension reforms
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Spending on public service pensions forecast to
fall as a share of national income
2.0
1.5
1.0
Historical
HM Treasury, December 2004
0.5
HM Treasury, March 2008
Year
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Notes and sources: see Figure 5.1 of The IFS Green Budget: February 2012.
2060
2055
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
2000
1995
1985
1980
1975
1970
0.0
1990
Lord Hutton, interim report October 2010
1965
Per cent of national income
2.5
Latest reforms do much to improve structure of
pensions
• Defined benefit schemes retained
– state particularly well placed to offer these schemes
• Career average rather than a final salary basis
– more logical measure of earnings to use
• Normal Pension Age aligned with State Pension Age (except for
uniformed services)
– a coherent response to rising longevity at older ages
• Changes apply to future accrual (apart from those less than 10
years from current NPA)
– reduces extent to which individuals doing the same job for the same
pay accrue different pensions
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Valuing public-service pensions
• Difficult to do
– doesn‟t just depend on scheme rules
– also depends on longevity of individual and their partner, discount
rate, earnings trajectories and pension tenure
• Clear that the latest reforms do reduce the generosity for some
– those protected from Labour‟s reform could see their NPA increase
from 60 to 68 for new accrual
– civil service scheme made less generous
• But for others not clear there is an overall reduction in generosity
– high flyers with long tenures did very well under final salary
schemes and lose from the shift to career average
– but those with lower earnings growth, on average, gain
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Year
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Source: Author‟s calculations using data from
the Annual Survey of Hours and Earnings.
2011
2010
2009
2008
2007
2006
2005
Private – defined benefit
Private – any
2004
2003
2002
2001
2000
1999
1998
Public – defined benefit
Public – any
100
90
80
70
60
50
40
30
20
10
0
1997
Per cent of employees
Public service pensions remain much more
generous than those provided in the private sector
Moving to a simple flat rate state pension
• Option 1: move to flat rate accrual of S2P sooner
• Option 2: move to flat rate state pension in payment sooner
• Implications for individuals:
– going forwards higher earners accrue lower state pension, lower
(lifetime) earners and self-employed accrue greater state pension
– reduced reliance on means-tested benefits; those who would not
otherwise take up their entitlements would be big winners
– a simpler state pension system would arrive sooner
• Intention to leave public spending on pensions unchanged, so gains
have to be offset by losses under both reforms
– option 1: easily done
– option 2: Pension Credit Savings Credit to be abolished and no State
Pension paid to those with fewer than 7 years contributions
• Contracting out of DB schemes to end
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“A state pension for the 21st century”?
• Should individuals plan on the basis of expecting £140 a week,
triple-locked?
• Recent history suggests maybe not:
– indexation to greater of prices or earnings previously broken
– “This is our New Insurance Contract for pensions. This Contract will
deliver the security we all want, now and for the future.” (DSS, Green
Paper, 1998)
– “Pensions policy has to be for the long term. If we want people to plan
for the future, stability in the framework of pensions policy is a key
component.” (DWP, Green Paper, 2002)
– “These reforms set the direction for the long-term future of pensions
and retirement savings. They will create a system that is coherent,
comprehensive and which will stand the test of time” (DWP, White
Paper, 2006)
• But perhaps a simpler system will prove more durable?
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Increasing state pension age & individual
behaviour
• State income reduced while aged between old and new SPA
– those moving onto health-related or means-tested benefits will see at
least some of this loss recouped
• Many will have to choose between
– increasing earnings (including later retirement)
– reducing spending during working-life (i.e. increased saving)
– reducing spending during retirement
• Retirement ages could also rise if SPA provides a signal of the
„appropriate‟ age to retire
– SPA is the most common retirement age
• Retirement ages likely to increase (but by less than SPA increase)
– partners of those directly affected might also respond
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Employment rates, by sex and age
100
Men
Women
Percentage
80
60
40
20
0
50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69
Age
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Source: Labour Force Survey, data for 2007, 2008 and 2009
pooled. Weighted.
Employment rates, by sex and partner‟s age
100
Men
Women
Percentage
80
60
40
20
0
50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69
Partner‟s age
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Source: Labour Force Survey, data for 2007, 2008 and 2009
pooled. Weighted.
Increasing state pension age & individual
behaviour
• State income reduced while aged between old and new SPA
– those moving onto health-related or means-tested benefits will see at
least some of this loss recouped
• Many will have to choose between
– increasing earnings (including later retirement)
– reducing spending during working-life (i.e. increased saving)
– reducing spending during retirement
• Retirement ages could also rise if SPA provides a signal of the
„appropriate‟ age to retire
– SPA is the most common retirement age
• Retirement ages likely to increase (but by less than SPA increase)
– partners of those directly affected might also respond
• Biggest losers might be those who would like to work more but are
unable to do so
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Role of workplace pension reforms
• Employers to enrol employees automatically into a private pension
which complies with certain minimum standards
– all those aged 22 to State Pension Age earning more than £7,475
– those opting out to be re-enrolled every three years
• Reform implemented gradually from October 2012
– large employers first, those with fewer than 250 employees unaffected
until March 2014 (or later)
• Minimum contributions
– eventually 8% of (banded) pay with at least 3% coming from employer
– minimum employer contribution 1% until October 2016
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More to contribute to a private pension, but
some might contribute less?
Per cent
Pensions saving behaviour 3–15 months after hire, single firm
Groups hired just before and just after move to opt-in default
100
90
80
70
60
50
40
30
20
10
0
Opt-out default
Participation
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3% (default)
contribution
Source: Madrian and Shea (2001).
Opt-in default
6%+ contribution Default fund only
Pension status and earnings
Average (median)
gross annual earnings (2005)
£25,000
£21,617
£20,000
£13,988
£15,000
£10,000
£5,000
£0
Has current private pension
No current private pension
(66%)
(34%)
Pension status
Source: Emmerson and Wakefield (2009).
Average (median)
net liquid financial assets (2005)
Pension status and net liquid financial assets
£3,500
£3,000
£3,000
£2,500
£2,000
£1,500
£1,000
£500
£0
£0
Has current private pension
No current private pension
(66%)
(34%)
Pension status
Source: Emmerson and Wakefield (2009).
Conclusions
• Public service pensions
• Moving to a flat rate state pension
• Increasing state pension age
• Workplace pension reforms
© Institute for Fiscal Studies
Conclusions
• Public service pensions
– current schemes are not „unaffordable‟ as significant cuts to public
service pensions already announced
– latest public service pension reforms do much to improve structure
of pensions
– in some schemes reductions in the long-run generosity for high
flyers offset by gains, on average, for those with lower earnings
growth
– public service pensions remain much more generous than those
provided in the private sector
• Moving to a flat rate state pension
• Increasing state pension age
• Workplace pension reforms
© Institute for Fiscal Studies
Conclusions
• Public service pensions
• Moving to a flat rate state pension
– simplicity welcome but losses need to offset gains to keep within
stated cost envelope
– will a simpler system prove more durable?
• Increasing state pension age
• Workplace pension reforms
© Institute for Fiscal Studies
Conclusions
• Public service pensions
• Moving to a flat rate state pension
• Increasing state pension age
– will help to boost retirement ages
– biggest losers might be those who would like to work more but are
unable to do so
• Workplace pension reforms
© Institute for Fiscal Studies
Conclusions
• Public service pensions
• Moving to a flat rate state pension
• Increasing state pension age
• Workplace pension reforms
– auto-enrolment into workplace pensions significant
– likely to boost pension coverage
– but some might reduce their pension contributions, and should those
brought into a pension be saving in that form?
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Radical pension reforms?
Carl Emmerson
Presentation at “The Future Outlook for UK Pensions: Sustainable and
Equitable Pensions for All”, Inside Government conference, London,
13 July 2011
© Institute for Fiscal Studies