Prepared for Retirement?
The Adequacy and Distribution of
Retirement Resources in England
Prepared for Retirement?
Introduction
An ageing crisis?
• Projections for next 50 years suggest:
• population to continue ageing:
20–64 year olds: 35.7m in 2006 to 35.6m in
2056
65 & over: 9.7m in 2006 to 17.5m in 2056
An ageing crisis?
• Projections for next 50 years suggest:
• population to continue ageing
• but public finances financially sustainable:
6.2% of national income in 2004–05 to 6.6%
of
national income in 2054–55
An ageing crisis?
• Projections for next 50 years suggest:
• population to continue ageing
• but public finances financially sustainable
• Is further reform needed to facilitate appropriate
retirement and saving decisions?
Are individuals saving ‘enough’?
• Assessing optimality of current behaviour
would require detailed information on:
• expectations of future income and needs
• preferences (impatience and risk aversion)
Are individuals saving ‘enough’?
• Assessing optimality of current behaviour
would require detailed information on:
• expectations of future income and needs
• preferences (impatience and risk aversion)
• Current situation depends on events to date
compared to previous expectations
Are individuals saving ‘enough’?
• Different benchmarks of adequacy used
• Minimum absolute standard
• Relative to current income / earnings
• Retirement needs potentially financed from:
• current pension wealth
• current non-pension wealth
• future income
English Longitudinal Study of Ageing
• Large survey representative of individuals
aged 50+ in households in England
• 12,000 individuals interviewed in wave 1
(2002–03) of which 4,687 aged between 50
and SPA
• Individuals to be re-interviewed every 2 years
• Will enable analysis of retirement outcomes
of the same individuals
English Longitudinal Study of Ageing
• Wealth
• net financial wealth
• owner occupied housing wealth
• other physical assets
• pensions
• Expectations
• Including: longevity, employment,
inheritance
• Income, demographics, economic activity and
health
What about the under 50s?
• Difficult to learn much from those 50+
• Required adjustment larger
• increased longevity
• reduced state pension relative to average
earnings
• declining investment returns
• Use of owner-occupied housing wealth
• we assume half spent by those aged 50 to
SPA
• what inheritances do the next generation
expect?
Prepared for Retirement?
Distribution of retirement resources
and expectations
Outline
• Level, distribution and type of retirement
resources
• Expectations of future events
• Comparison of expected and predicted future
income from private pensions
Pension wealth
• State pension wealth
• Private pension wealth
Pension wealth
• State pension wealth
• Basic State Pension
• SERPS/S2P
• Private pension wealth
Pension wealth
• State pension wealth
• Basic State Pension
• SERPS/S2P
• Private pension wealth
• Current defined benefit (DB)
• Current defined contribution (DC)
• Past pensions in receipt
• Past pensions not in receipt (retained
rights)
Distribution of family pension wealth
400
Pension wealth/£000's
350
Mean
p25
Median
p75
300
250
200
150
100
50
0
State
Source: ELSA, All 50 to SPA
Private
Total
Sources of pension wealth
Mean pension wealth
1000
Wealth from
past pensions in
receipt
Pension wealth/£000's
900
800
Wealth from
past pensions
not in receipt
700
600
500
Current DC
wealth
400
300
200
Current DB
wealth
Pension wealth decile
Source: ELSA, All 50 to SPA
All
Richest
9
8
7
6
5
4
3
2
Poorest
100
State pension
wealth
Sources of pension wealth
Mean pension wealth
1000
Wealth from
past pensions in
receipt
Pension wealth/£000's
900
800
Wealth from
past pensions
not in receipt
700
600
500
Current DC
wealth
400
300
200
Current DB
wealth
Pension wealth decile
Source: ELSA, All 50 to SPA
All
Richest
9
8
7
6
5
4
3
2
Poorest
100
State pension
wealth
Other sources of wealth
• Individuals may have accumulated wealth in
other forms:
• Financial wealth
• Business wealth
• Property wealth
• Owner-occupied housing wealth
Correlation between pension wealth
and non-pension wealth
Total pension wealth
Pension wealth/£000's
700.0
Mean
p25
p75
Median
600.0
500.0
400.0
300.0
200.0
100.0
Source: ELSA, All 50 to SPA
All
Richest
Total non-pension wealth decile
9
8
7
6
5
4
3
2
Poorest
.0
Sources of total wealth
Mean wealth
1800
Housing wealth
Total wealth/£000's
1600
1400
Other wealth
1200
1000
800
Private
pension wealth
600
400
State pension
wealth
Total wealth decile
Source: ELSA, All 50 to SPA
All
Richest
9
8
7
6
5
4
3
2
Poorest
200
Sources of total wealth
Mean wealth
1800
Housing wealth
Total wealth/£000's
1600
1400
Other wealth
1200
1000
800
Private
pension wealth
600
400
State pension
wealth
Total wealth decile
Source: ELSA, All 50 to SPA
All
Richest
9
8
7
6
5
4
3
2
Poorest
200
Characteristics associated with high
wealth
•
•
•
•
•
•
Older
High current income
High education
High numeracy
No reported health problems
Self-reported retired
Those with house
and private
pension
Source: ELSA, All 50 to SPA
Those with house
or private pension
Neither house nor
private pension
All
Inactive
Retired
In paid work
Inactive
(Retired)
In paid work
Inactive
Retired
In paid work
Inactive
Retired
900
800
700
600
500
400
300
200
100
0
In paid work
Total wealth/£000's
Characteristics associated with high
wealth – employment status
Those with house
and private
pension
Source: ELSA, All 50 to SPA
Those with house
or private pension
Neither house nor
private pension
All
Inactive
Retired
In paid work
Inactive
(Retired)
In paid work
Inactive
Retired
In paid work
Inactive
Retired
900
800
700
600
500
400
300
200
100
0
In paid work
Total wealth/£000's
Characteristics associated with high
wealth – employment status
Expectations of future events
• Are there any future events that mean
individuals do not currently need high levels
of wealth?
• Receiving an inheritance in the future
• Working longer
• Dying younger
Measuring expectations
“Now I have some questions about how likely you think
various events might be. When I ask a question I'd like
you to give me a number from 0 to 100, where 0 means
that you think there is absolutely no chance an event will
happen, and 100 means that you think the event is
absolutely certain to happen.”
… What are the chances that you will live to age 75?
Expectations of receiving an
inheritance
Mean self-reported chance
>£100,000
Total wealth decile
Source: ELSA, All 50 to SPA
All
Richest
9
8
7
6
5
4
3
2
40
35
30
25
20
15
10
5
0
Poorest
Percentage of group
Any inheritance
Expectations of future work
Mean self-reported chance
Men 50-59 (age 60)
Total wealth decile
Source: ELSA, All men 50-59, all women 50-54
All
Richest
9
8
7
6
5
4
3
2
80
70
60
50
40
30
20
10
0
Poorest
Percentage of group
Women 50-54 (age 55)
Expectations of living to age 75 - Men
High chance (61-100%)
70
60
50
40
Total wealth decile
Source: ELSA, All men 50 to SPA
All
Richest
9
8
7
6
5
4
3
2
30
20
10
0
Poorest
Percentage of group
Low chance (0-39%)
Expected vs predicted income
• Currently only have information on
expectations of private pension income
• Compare to our predictions of future
pension income
Private pension income/£ p.a.
Predicted and expected private
pension income
12000
10000
8000
6000
4000
2000
0
Retire in 2002
Baseline
Predicted income
Source: ELSA, All 50 to SPA with at least one private pension
Expected
income
100
90
80
70
60
50
40
30
20
10
0
Over-estimators
(>30%)
-30% to 30%
All
Richest
4
3
2
Under-estimators
(-100% to -30%)
Poorest
Percentage of group
Proportion under-/over-estimating
Non-pension wealth quintile
Source: ELSA, All 50 to SPA with at least one private pension
Summary
• Wealth is unevenly distributed
• Low wealth individuals have low expectations
of…
• Receiving an inheritance
• Working at older ages
• Surviving to age 75
• Some evidence that, on average, individuals
over-estimate future private pension income
Prepared for Retirement?
Identifying those at risk of having
inadequate resources
How to define “adequacy”?
• Adequacy versus optimality
• Adequate for what?
• To maintain a minimum living standard?
• To maintain pre-retirement living
standards?
A “poverty line” interpretation of
adequacy
• Sufficient income to avoid poverty
• Many different benchmarks of poverty
could be chosen
• One possibility is to take the Pension Credit
Guarantee level of income as a benchmark
• £109.45 for singles/£167.05 for couples in
2005/6
An absolute income
interpretation of adequacy
Wealth measure
Assumes probabilistic likelihood of working to SPA
% inadequate
An absolute income
interpretation of adequacy
Wealth measure
Pension wealth only
Assumes probabilistic likelihood of working to SPA
% inadequate
17.7
An absolute income
interpretation of adequacy
Wealth measure
% inadequate
Pension wealth only
17.7
Non-housing wealth only
12.9
Assumes probabilistic likelihood of working to SPA
An absolute income
interpretation of adequacy
Wealth measure
% inadequate
Pension wealth only
17.7
Non-housing wealth only
12.9
Total wealth
8.2
Assumes probabilistic likelihood of working to SPA
An absolute income
interpretation of adequacy
Wealth measure
% inadequate
Pension wealth only
17.7
Non-housing wealth only
12.9
Total wealth
8.2
+ Expected inheritance
Assumes probabilistic likelihood of working to SPA
7.7
An absolute income
interpretation of adequacy
Wealth measure
% inadequate
Pension wealth only
17.7
Non-housing wealth only
12.9
Total wealth
8.2
+ Expected inheritance
+ Pension Credit
Assumes probabilistic likelihood of working to SPA
7.7
0
% of the population
Distribution of predicted
retirement income
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Total wealth (including expected inheritance)
0
10000
20000
30000
40000
Gross equivalised retirement income (£ p.a.)
50000
% of the population
Distribution of predicted
retirement income
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Total wealth (including expected inheritance)
0
10000
20000
30000
40000
Gross equivalised retirement income (£ p.a.)
50000
% of the population
Distribution of predicted
retirement income
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Total wealth (including expected inheritance)
Non-housing wealth
0
10000
20000
30000
40000
Gross equivalised retirement income (£ p.a.)
50000
A relative income interpretation of
adequacy
• The standard of living implied by the PCG will
be unacceptably low for some individuals
• An alternative is to measure adequacy
relative to current income
• 67% net replacement rate
• 80% net replacement rate
• Pensions Commission benchmark
A relative income definition of
adequacy
Wealth measure
67%
Pension wealth only
37.3
Non-housing wealth only
26.9
Total wealth
18.3
+ Expected inheritance
17.0
+ Pension Credit
11.3
Assumes probabilistic likelihood of working to SPA
80%
A relative income definition of
adequacy
Wealth measure
67%
80%
Pension wealth only
37.3
51.6
Non-housing wealth only
26.9
40.9
Total wealth
18.3
30.4
+ Expected inheritance
17.0
29.1
+ Pension Credit
11.3
23.1
Assumes probabilistic likelihood of working to SPA
The Pensions Commission
benchmark
Gross income
Less than £9,500
Assumed gross
replacement rate
80%
£9,500 to £17,499
70%
£17,500 to £24,999
67%
£25,000 to £39,999
60%
£40,000 and over
50%
Pensions commission definition
of adequacy
Wealth measure
% of earners
Pension wealth only
38.8
Non-housing wealth only
29.1
Total wealth
18.3
+ Expected inheritance
16.2
+ Pension Credit
12.6
Assumes probabilistic likelihood of working to SPA
……………
……..
Pensions commission definition
of adequacy
Wealth measure
Pension wealth only
38.8
% of all
individuals
30.2
Non-housing wealth only
29.1
22.7
Total wealth
18.3
14.2
+ Expected inheritance
16.2
12.6
+ Pension Credit
12.6
9.8
Assumes probabilistic likelihood of working to SPA
% of earners
Comparison with Pensions
Commission (2004)
• Our calculations: 730,000 individuals in
England aged between 50 and SPA
• 9.8% of individuals in this age group
• Pensions Commission Interim Report,
October (2004) :4.9-5.6 million individuals in
the UK aged between 46 and SPA
• Between 38% and 43% of individuals in
this age group
Why different from Pensions
Commission?
• Pensions Commission only looked at pension
wealth in assessing adequacy
• Pensions Commission considers all individuals
separately, not as family units
Why different from Pensions
Commission?
• Pensions Commission only looked at pension
wealth in assessing adequacy
• Pensions Commission considers all individuals
separately, not as family units
Earnings
Man
£12,500
Women
£12,500
Joint
£25,000
Assumed rr Required
income
Why different from Pensions
Commission?
• Pensions Commission only looked at pension
wealth in assessing adequacy
• Pensions Commission considers all individuals
separately, not as family units
Earnings
Assumed rr Required
income
Man
£12,500
70%
Women
£12,500
70%
Joint
£25,000
£17,500
Why different from Pensions
Commission?
• Pensions Commission only looked at pension
wealth in assessing adequacy
• Pensions Commission considers all individuals
separately, not as family units
Earnings
Assumed rr Required
income
Man
£12,500
70%
Woman
£12,500
70%
Joint
£25,000
60%
£17,500
£15,000
% at risk: Summary
Adequacy measure
Exc PC
Inc PC
Pension Credit
Guarantee
7.7
0
67% replacement rate
17.0
11.3
80% replacement rate
29.1
23.1
Pensions Commission
Benchmark
12.6
9.8
Assumes probabilistic likelihood of working to SPA
Size of the average shortfall for
those at risk
Adequacy measure
% at risk
Median shortfall
(% of current
income)
Assumes probabilistic likelihood of working to SPA, average figures refer to medians
£
Size of the average shortfall for
those at risk
Adequacy measure
67% replacement rate
% at risk
11.3
Median shortfall
(% of current
income)
£
11.6
3,582
Assumes probabilistic likelihood of working to SPA, average figures refer to medians
Size of the average shortfall for
those at risk
Adequacy measure
% at risk
Median shortfall
(% of current
income)
£
67% replacement rate
11.3
11.6
3,582
80% replacement rate
23.1
12.7
3,420
Assumes probabilistic likelihood of working to SPA, average figures refer to medians
Size of the average shortfall for
those at risk
Adequacy measure
% at risk
Median shortfall
(% of current
income)
£
67% replacement rate
11.3
11.6
3,582
80% replacement rate
23.1
12.7
3,420
Pensions Commission
Benchmark
9.8
8.4
2,345
Assumes probabilistic likelihood of working to SPA, average figures refer to medians
Size of the average shortfall for
those at risk
Adequacy measure
% at risk
Annual saving required in
addition to current pension
saving
(% of current
income)
67% replacement rate
11.3
80% replacement rate
23.1
Pensions Commission
Benchmark
9.8
Assumes probabilistic likelihood of working to SPA, average figures refer to medians
£
Size of the average shortfall for
those at risk
Adequacy measure
% at risk
Annual saving required in
addition to current pension
saving
(% of current
income)
£
67% replacement rate
11.3
20.2
6,466
80% replacement rate
23.1
23.3
5,877
Pensions Commission
Benchmark
9.8
14.2
4,264
Assumes probabilistic likelihood of working to SPA, average figures refer to medians
Who is more likely to be at risk?
• Little overlap between groups at risk under
PCG benchmark and replacement rate
benchmark
• Lifetime poor more likely to be at risk
under PCG benchmark
• High current income individuals more
likely to be at risk under replacement
rate benchmark
Who is at risk under the Pensions
Commission benchmark?
• Pensions Commission benchmark only
applies to those in work
• Lower educated, divorced/separated women,
single men are more likely to be at risk
• Women in couples less likely to be at risk
Correlation between “at risk”
measures
• Only 2.5% are at risk under both the PCG
benchmark and the Pensions Commission
Benchmark
• Important to specify policy aims precisely
Conclusions
• Small, but not insignificant group who appear
to have “inadequate” resources
• Those at risk would have to save 14% to 20%
of their income on top of their current pension
contributions to lift themselves above the
benchmarks
• Individuals at risk are hard to identify
Prepared for Retirement?
The Adequacy and Distribution of
Retirement Resources in England