Pension reforms: are some in danger of being left behind?sticerd.lse.ac.uk/dps/seminarpapers/wpa24022016.pdf · 2016-02-24 · Analysis seminar series - London School of Economics

Centre for Analysis of Social Exclusion: Welfare Policy and

Analysis seminar series - London School of Economics

Wednesday, 24th February, 2016

Pension reforms: are some in danger of being left behind?Tim Pike, Daniela Silcock - Pensions Policy Institute

Timeline of reforms

State pension reforms: Pensions Commission

State pension reforms: New State Pension

State Pension

Private Pension

Private pension reforms: automatic enrolment

Private pension reforms: public sector pensions

Private pension reforms: Freedom and Choice

2010

2013 2015

20162012

State pension reforms: raising State Pension Age

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•State pension reforms: Pensions Commission

•State pension reforms: raising State Pension Age

•Private pension reforms: automatic enrolment

•Private pension reforms: public sector pensions

•Private pension reforms: Freedom and Choice

•State Pension reforms: New State Pension

Pension reforms: who is in danger of being left behind?

3

State pension reforms: Pensions CommissionFrom 2010:• Reduced the number of qualifying years required

for a full Basic State Pension (BSP) from 39 years forwomen and 44 years for men to 30 years for both.

• Replaced Home Responsibilities Protection withweekly credits towards BSP and S2P.

• Indexed state pension to the greater of earnings,prices or 2.5% - the triple-lock.

• Scheduled for S2P to become flat-rate by around2030, so that a person’s level of entitlement to S2Pwould no longer depend on their level of earnings.

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Levels of entitlement will increaseProportion of people reaching State Pension Age and not qualifying for a full pension

60%

25%

5%10%

5% 5%

0%

10%

20%

30%

40%

50%

60%

70%

2008 2010 2025

WomenMen

5

Eligibility for means-tested benefits will reduceProjected proportion of pensioner benefit units eligible for means-tested benefits

Pension Credit

Housing Benefit

Council Tax

benefit

Any means-tested

benefit

2012 45% 20% 50% 55%

2020 45% 15% 45% 55%

2050 40% 15% 40% 50%6

The 2010 reforms will lead to fewer pensioners living in poverty

2011 2017 2025

Current policy – BSP triple-locked, S2P flat-rate mid-2030s, Guarantee Credit indexed to earnings. Assumes current levels of take-up of means-tested benefits

Percentage of pensioners living in households with household income below 60% of median income, after housing costs (UK)

15% 14% 11%

Government spending on state pensions and other benefits (% of GDP) 5.1% 5.3% 5.7%

7

Impact of state and private pension reforms

Stat

e pe

nsio

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Private pension

Better outcomes

Better outcomes

Pooreroutcomes

Pooreroutcomes

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State Pension reforms: raising State Pension Age• SPA was 60 for women, 65 for men until 2010• The SPA for women has been increasing from April 2010 in

a series of steps to reach age 65 by November 2018 when it will be equal for both men and women.

• Both men and women will then see their SPA increase to 66 by 2020. Legislation to increase the SPA to age 67 in the mid 2030s and 68 by the mid 2040s for both sexes was enacted in 2007.

• The Government has since included in the Pensions Bill a proposal to bring forward the increase of SPA to reach age 67 by the mid 2020s.

• Aims to keep state pension sustainable and maintain even proportion of adult life spent in receipt of the state pension10

Period measures of life expectancy and healthy life expectancy provide an estimate of the proportion of life after age 65 spent in good health

Life expectancy and healthy life expectancy (years) at age 65, 2008-10Life expectancy Healthy life

expectancyProportion of life over 65 spent in good health

Male Female Male Female Male FemaleUnited Kingdom

17.8 20.4 10.1 11.6 57% 57%

England 18.0 20.6 10.3 11.8 57% 57%

Scotland 16.6 19.2 8.6 10.8 52% 56%

Wales 17.5 20.2 10.3 10.0 59% 50%

NorthernIreland

17.3 20.1 9.5 10.8 55% 54%

Source: PPI analysis of ONS, Health expectancies in the United Kingdom 11

Year in which SPA would increase if the ‘spend up to a third of adult life in retirement’ principle were applied

First year in which 33% of adult life* would be spent in retirement

New SPA UnitedKingdom

England Scotland Wales Northern Ireland

66 2010 2009 2020 2012 2012

67 2021 2019 2033 2023 2024

68 2033 2032 2045 2036 2037

69 2046 2045 2057 2049 2050

* Adult life starts at age 20Source: PPI analysis of ONS population projections

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Private pension reforms: Automatic enrolment• Implemented from October 2012.• Harnessing inertia by introducing default

saving.• Workers earning £10,000+ (2016/17) and not

participating in a qualifying scheme to beautomatically enrolled

• Workers are able to opt out (others can optin)

• Contributions payable on band earnings,£5,824, - £43,000 (2016/17).

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In 2012, around ¾ of workplace pension savers were saving in Occupational Pension schemesPrivate and public sector membership of workplace pension schemes by type, 2012

60%15%

14%

8%3%

DB Occupational (public &private sector)

DC Occupational

Group Personal Pension

Group Stakeholder Pension

Pension type unknown17

0

2

4

6

8

10

12

14

16

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

Peop

le sa

ving

in w

orkp

lace

pe

nsio

n sc

hem

es (m

illio

ns)

A 15% opt out rate would result in 14m people actively saving in private sector DC workplace pension schemes by 2030Number of active scheme members in private sector workplace pension schemes by year assuming 15% opt out

Existing DC

Multi-employer schemes

Other automatic enrolment DC

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Just under a quarter of all employed people do not meet automatic enrolment qualifying criteriaProportion of total employed population (total: 26.3m) who meet automatic enrolment qualifying criteria, (irrespective of pre-existing pension scheme membership) UK, 2015

Eligible20.1m77%

Ineligible6.2m, 23%

Under age 221.8m29%

Over SPA843,000

14%Income below

£10,0003.5m, 57%

Total Employed Population

Ineligible Employed Population

Reason for not meeting qualifying criteria

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Gender

Eligible Ineligible

84%

68% 32%

16%

Women are less likely than men to meet the qualifying criteria for automatic enrolmentProportion of employees meeting auto-enrolment qualifying criteria (irrespective of pre-existing pension scheme membership) by gender UK, 2015

Men13.3m

Women 13m


20

Pakistani, Bangladeshi and Black/African/Caribbean workers are less likely to meet automatic enrolment qualifying criteria

Proportion of employees from different ethnic groups meeting auto-enrolment qualifying criteria, UK, 2015

Percentageof

employed population

Percent who meet eligibility

criteria

Percent who do not

meet eligibility

criteria

Percent ineligible earning under

£10,000

Percent of employed

men who do not meet criteria

Percent of employed

women who do not meet

criteria

White 89.9% 77% 23% 56% 15% 31%Mixed/multiple ethnic group

1.2% 74% 26% 34% 23% 28%

Indian 2.2% 81% 19% 78% 11% 28%Pakistani 0.9% 68% 32% 62% 22% 51%Bangladeshi 0.4% 67% 33% 91% 33% 33%Chinese 0.3% 80% 20% 80% n/a 31%Any other Asian background

1.1% 72% 28% 82% 22% 35%

Black/African/Caribbean 2.4% 71% 29% 63% 26% 32%Other ethnic group 1.5% 69% 31% 66% 28% 34%21

30% of disabled workers do not meet the qualifying criteria for auto enrolmentProportion of employees with disabilities (as defined by Equalities Act) meeting auto-enrolment qualifying criteria (irrespective of pre-existing pension scheme membership) UK, 2015

17,984,11977%

5,237,04923%

EligibleIneligible

2,140,33570%

913,24530%

Eligible

IneligibleEmployed people with a disability

Employed people without a disability

Disabled3m

12%

Not disabled23.2m88%


22

81% of employed carers do not meet the qualifying criteria for automatic enrolment Proportion of employees in receipt of caring benefits meeting auto-enrolment qualifying criteria (irrespective of pre-existing pension scheme membership) UK, 2015

20,115,93877%

6,113,98223%

EligibleIneligible

8,51619%

36,31281%

Eligible

Ineligible Employed carers

Employed people not receiving caring benefits

In receipt of caring benefits45,000, 0.2%

Not in receipt of caring benefits, 26.2m


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Private pension reforms: Public sector pensionsPrevious reforms: 2007-2008• Civil Service scheme moved to Career Average Revalued

Earnings scheme (CARE) for new entrants.• Normal Pension Age for NHS, Teachers and Civil Service

schemes was increased from 60 to 65 for new entrants, andrates of accrual in the final salary schemes were amended.

• Higher rates of member contributions for all four of the mainschemes for all scheme members and for some schemes (e.g.the NHS and LGPS) the introduction of tiered membercontributions saw higher earners pay higher rates ofcontribution than lower earners for the first time.

Previous reforms: 2011• Indexation of deferred pensions and pensions in payment

switched from RPI to CPI 27

The Coalition’s reforms to public sector schemes, 2013•Switch from Final Salary to Career Average

Revalued Earnings (CARE);•Linking of Normal Pension Age to State

Pension Age (except uniformed services);•Higher rates of contributions from scheme

members (+3.2% on average except LGPS) and tiered contributions;

•Reforms apply to all members for future accrual but protections for members within 10 years from their Normal Pension Age on 1 April 2012.

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• Effective Employee Benefit Rate; • Factors in CARE accrual & revaluation rate,

pensions indexation to project the value of the future pension benefit payment after taking account of the member’s own contributions;

•Discounts the value of the future pension benefit back to a present value; (DR = CPI + 3%)

• The EEBR is the value of the pension benefit accrued by the member in one-year expressed as a % of the member’s salary.

•How much extra pay that member would need to be given by their employer to compensate for the employer closing the scheme.

PPI’s EEBR methodology

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Public sector pension reform• The reforms to the NHS, Teachers, Local

Government and Civil Service pension schemes willreduce the average value of the benefit offeredacross all scheme members by more than a third,compared to the value of the schemes before theCoalition Government’s proposed reforms.

• Across the four largest public service pensionschemes the value of the schemes reduces, onaverage, from 23% of a scheme member’s salarybefore the reforms to 15% of a scheme member’ssalary after the Coalition Government’s proposedreforms

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23% 23% 22%27%

23%

7%

23%

14% 14% 14%17%

15%

0%

5%

10%

15%

20%

25%

30%

35%

NHS PensionScheme

Teachers'PensionScheme

LocalGovernment

PensionScheme

PrincipalCivil Service

PensionScheme

Average FourMain Public

ServiceSchemes

AveragePrivate Sector

DefinedContribution

AveragePrivate Sector

CPI-linkedDefinedBenefit

Value before Coalition reforms Value after Coalition reforms

The Coalition Government’s reforms reduce the average value of the public service pension schemes by more than a thirdAverage value of the four main public service pension schemes as a percentage of the scheme member’s salary before and after the Coalition Government’s proposed reforms for all scheme members (CPI linked)

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29%

15%11%

15%

0%

5%

10%

15%

20%

25%

30%

35%

NHS Pension Scheme under Final Salary withCPI increases

NHS Pension Scheme under CoalitionGovernment proposed reforms

High-flyer Low-flyer

High-flyers and low-flyers have a pension benefit worth the same percentage of their salary under the Coalition Government’s reformsValue of the NHS Pension Scheme to members joining before 1 April 2008 who are: a high flying 40 year old man compared with low flying 40 year old man who both start at the median earning level at age 40

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Government expenditure on the unfunded public service pension schemes will increase in the short term and decrease in the long termNet government expenditure on unfunded public service pension schemes, as % of GDP

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%1.6%1.8%2.0%

2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065

Pre-reform CPI, pre-reform member contributions

Pre-reform CPI, post-reform member contributions

Post-reform, post-reform member contributions

1.1%

1.0%

0.8%

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•The Coalition Government’s reforms to the public service schemes reduce the value of the four largest schemes by more than a third

• Some public sector members will be affected to a greater extent, others to a lesser extent

•Public service schemes remain more valuable than most private sector DC schemes

•The reforms reduce government expenditure in the unfunded schemes and reduce the pressure on investment returns and employer contributions in the LGPS. However, this will depend on employee opt-out rates

Public sector pension reforms

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• Prior to April 2015 people over minimum pension age with DC savings above and below a certain level must purchase a product which will provide a secure retirement income in order to access DC savings

• After April 2015, all people over minimum pension age with DC savings can:

• Purchase – a lifetime annuity, flexible annuity, flexible drawdown, new products...

• Withdraw one or more lump sums from uncrystallised pension funds

Decisions for those with DC pension savings changed after April 2015

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Annuity sales were 56% less in the third quarter of 2014 than they were in the third quarter of 2013

92,345 89,896 90,414

80,53774,270

46,36840,085

0

25,000

50,000

75,000

100,000

2013 q1 2013 q2 2013 q3 2013 q4 2014 q1 2014 q2 2014 q3

Annuity sales by quarter 2013 - 2014 Q1-3

-56% (from same quarter in 2013)

-49% (from same quarter in 2013)

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Skills and knowledge necessary to make an informed decision about accessing DC savings• What options are available • Longevity risk • Potential future needs incl health/social care• Economic factors: Inflation Market risks and returns Understanding of compound interest (and

charges)

Decision making about DC pension has become more complex

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Hard

Easy

Difficulty of making informed financial decisions

Accessing DC savings Decisions

regarding work and retirement

Accessing DB entitlement

Buying life insurance

Buying a house

Education vs. work

Accessing state pension

Buying a car

Accessing non-pension

income, savings and

assets in retirement

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• Transitions can be involuntary, particularly among people of lower socio-economic class (profession based)

• “Decisions” can be influenced by internal and external factors: Cognitive factors Affective (emotional/feeling) factors Behavioural factors Attitudes towards external stakeholders Structural factors

Internal and external factors influence work and retirement transitions

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• Numeracy levels are low in the UK. Among UK adults:

• Around 4 in 5 adults have a low level of numeracy (below GCSE grade C level)

• Nearly one in five people cannot correctly identify the balance in a bank statement

• A third of adults do not understand the impact of inflation on purchasing power

Numeracy is correlated with the ability to make “good” decisions about accessing pension savings

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People with DC savings and low or no DB entitlement are most “at-risk” of making poor decisions

DB

DC

Yearly entitlement to £5,400

Yearly entitlement below £5,400

Yearly entitlement above £5,400

Savings of £19,400

Savings of below £19,400

Savings of above £19,400

Low DC/No DB 12%

Low DC/0-50th

percentile DB 19%

Low DC/50th – 100th

percentileDB22%

Some DC/50th – 100th

percentileDB1%

Moderate DC/

50th – 100th

percentileDB 1%

High DC/0-50th

percentile DB 2%

High DC/50th –100th

percentileDB 1%

= high risk = medium risk = low risk

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State pension reforms: New State Pension• For those reaching SPA from April 2016• Set just above Guarantee Credit level (£155.65 per

week in 2016/17 prices)• 35 qualifying years for full entitlement and 10

minimum qualifying years• Uprated by the triple-lock • Removal of Savings Credit for people retiring

after April 2016• Abolition of Contracting Out from April 2016

48

Comparison of the state pension entitlements of two low earning individuals, each spending around half of their working life out of work, one reaching SPA in 2016 and one in 2036 (£ per week, 2013 earnings terms)Entitlement (£ per week)

Individual A: reaches SPA in 2016, most career breaks taking place before 2002

Individuals spending time out of the work force, but who would have qualified for S2P credits after 2002, may receive less from the single-tier pension

49

Level of entitlement for proportion of individuals reaching SPA in each year (2016-2040)

Source: DWP estimates of level of entitlement to single-tier (based on the modelling and economic assumptions in the October 2013 Pensions Bill Impact Assessment)

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Documents

Pension reforms: are some in danger of being left behind?sticerd.lse.ac.uk/dps/seminarpapers/wpa24022016.pdf · 2016-02-24 · Analysis seminar series - London School of Economics