IFS

© Institute for Fiscal Studies, 2008

Tax reform and retirement saving incentives: take-up of Stakeholder Pensions in the UK

Matthew Wakefield

with Richard Disney and Carl Emmerson

matt_w (at) ifs.org.uk

April 2008

2

Background• How to encourage saving for retirement?• Important issue in UK

– Large private retirement saving & possible ‘savings gap’– Occupational pension sector coverage not increasing– Further reforms: A-day (2006); Personal Accounts

• Tax incentives – May be costly if not targeted at marginal saver

• Stakeholder pens. package: target less covered groups– First econometric attempt to look at effects

• Investigate in context of private pension coverage• Use diff-in-diffs: did changes to incentives have effect?• Conclusion: yes, but not where rhetoric had suggested

3

Structure of presentation

• Describe the reform package

• Describe strategy to evaluate impact

• Describe how / why FRS data useful

• Describe results

• Conclusions

4

The stakeholder pension package• Voluntary private pension saving important in UK

– Occupational (DB/DC) and Personal (DC) Pensions existed before Stakeholders

– BOTH tax relieved (deferred)

• 2001: Stakeholders, ‘No frills’ personal pension (DC)– Aimed at those earning £10,000-£20,000

“People on middle incomes want to save more for retirement but current pension arrangements are often unsuitable or expensive. Our new secure, flexible and value-for-money stakeholder pension schemes will help many middle earners to save for a comfortable retirement.”

DSS Green paper, cm 4179, 1998.

5

The stakeholder pension package• Voluntary private pension saving important in UK

– Occupational (DB/DC) and Personal (DC) Pensions existed before Stakeholders

– BOTH tax relieved (deferred)

• 2001: Stakeholders, ‘No frills’ personal pension (DC)– Aimed at those earning £10,000-£20,000– Assumed higher earners already covered– Low/zero earners better in state earnings related scheme

• Features– Same tax relief as existing personal pensions– Charge as % of fund up to max of 1½% each year– Basic information & advice– Employer nomination

• Scope for increased coverage in target group?– Around two-thirds already had a private pension

6

The stakeholder pension package• Voluntary private pension saving important in UK

– Occupational (DB/DC) and Personal (DC) Pensions existed before Stakeholders

– BOTH tax relieved (deferred)

• 2001: Stakeholders, ‘No frills’ personal pension (DC)– Aimed at those earning £10,000-£20,000– Assumed higher earners already covered– Low/zero earners better in state earnings related scheme

• Features– Same tax relief as existing personal pensions– Charge as % of fund up to max of 1½% each year– Basic information & advice– Employer nomination

• Scope for increased coverage in target group?– Around two-thirds already had a private pension

7

The stakeholder pension package• Voluntary private pension saving important in UK

– Occupational (DB/DC) and Personal (DC) Pensions existed before Stakeholders

– BOTH tax relieved (deferred)

• 2001: Stakeholders, ‘No frills’ personal pension (DC)– Aimed at those earning £10,000-£20,000– Assumed higher earners already covered– Low/zero earners better in state earnings related scheme

• Features– Same tax relief as existing personal pensions– Charge as % of fund up to max of 1½% each year– Basic information & advice– Employer nomination

• Scope for increased coverage in target group?– Around three-fifths already had a private pension

22

8

The Stakeholder Pension Package

• Reform of tax relieved contribution limits for low- and non-earners

• Were individuals expected to respond?

“The changes will also make it easier for partners to contribute to each other’s pensions, again within the overall contribution limits, should they choose to do so.”

DSS Green paper, cm 4179, 1998.

9

Maximum contributions (pre April 2001)

£0

£2,000

£4,000

£6,000

£8,000

£10,000

£12,000

£14,000

£16,000

£18,000£0

£5,0

00

£10,

000

£15,

000

£20,

000

£25,

000

£30,

000

£35,

000

£40,

000

Gross relevant earnings

Max

imu

m g

ross

co

ntr

ibu

tio

n

61-74

56-60

51-55

46-50

36-45

35 or under

10

Maximum contributions (post April 2001)

£0

£2,000

£4,000

£6,000

£8,000

£10,000

£12,000

£14,000

£16,000

£18,000£0

£5,0

00

£10,

000

£15,

000

£20,

000

£25,

000

£30,

000

£35,

000

£40,

000

Gross relevant earnings

Max

imu

m g

ross

co

ntr

ibu

tio

n

61-74

56-60

51-55

46-50

36-45

35 or under

23

14

11

Difference-in-differences

Before After

Limit increase Yb Ya

Limit fixed Zb Za

• Comparisons across time & groups informative– Difference-in differences (DiD)

12

Difference-in-differences

Before After

Limit increase Yb Ya

Limit fixed Zb Za

• Comparisons across time & groups informative– Difference-in differences (DiD)

• Time difference (Ya-Yb) not policy effect if trend

• Common Trend across groups: find as Za-Zb

• DiD (Ya-Yb) – (Za-Zb) as policy effect

• Average effect on those affected (treated)• Condition on other household characteristics

– Regression framework: slightly non-standard

13

Data to implement this strategy

• Data on individuals before and after reform– Consistent; not necessarily the same people

• Need good info on private pension ownership • Need good info on income• Detailed background characteristics• FRS meets requirements – Improvements?

– Improved data on amounts saved in pensions– Better data on income & pension type: admin data– Improved info on saving / assets

14

Family Resources Survey data

• Repeated cross section, use four years:– Before: 1999/00; 2000/01 – After: 2001/02; 2002/03

• Information on:– Demographics; income & economic circumstances – Whether and type of private pension they (or

employer) contribute to– Amt of individual contributions to PPs & SHPs

• Use ages 22-SPA (not self-emp / missing)– Approx. 110,000, of which– 30% zero, 35% affected earner, 35% high 10

15

FRS Priv pens coverage, by limit status

Group 1999 2000 2001 2002 99-02

Zero 3.8 4.0 3.9 3.9 + 0.1

Lim Inc 46.8 46.1 46.9 46.5 – 0.2

No Inc 81.3 80.9 80.3 79.2 – 2.1

Agg 47.2 46.8 47.4 46.9 – 0.2

16

Results (1): Across all individuals

• All with limit increase:

28.5%, + 2.1 ppt• Zero earners: 3.9%, + 0.4 ppt• +ve earners: 46.7%, + 3.3 ppt

• Is an effect on those who have limit increase• Driven by earners

– consistent w target group test

• Effects not insubstantial

17

Results (2): +ve earners, decomposed

• Single men 39.2%, + 3.1 ppt• Single women 40.7%, + 5.4 ppt• Men in couple: 47.4%, + 0.3 ppt• Women in couple: 50.3%, + 4.3 ppt

• Effects substantial• Stronger for women, and singles• Unusual: couples by partner’s earns/education

– Strongest low earns, middle education (a-level)

18

Really an effect of reform package?

Problems inferring common trend frm higher earners:• Other factors specific to high earners

– Changes in value of housing (and stock) wealth– Unlikely to explain patterns across groups (e.g. for women)

• Other factors specific to low earners– Policy changes (Pension Credit, S2P) tend to underestimate

Change in composition of groups• Could it be due to reform?

• Little measurable evidence of characteristics (age, educ, own or partner’s earnings) changing differentially

• Results robust for 36-45 subsample

19

Conclusions

• FRS data to evaluate stakeholder package• FRS data best choice due to sample size and

details on pensions; income; characteristics– More data on contribution amounts would have been

helpful

• Similar strategy for assessing future reforms?– Possibly for personal accounts, depending on how

they are rolled out

• In general FRS is a useful resource for studying wealth holding & pensions

20

Conclusions

• FRS data to evaluate stakeholder package• Stakeholder reform package increased private

pension coverage for lower earners– Effects substantial for some groups, notably women– Most likely due to change in tax relief

• Offsetting a downward trend• Results on amounts of pension saving suggest

w/o reform this would have declined 30% more– Tentative, given data

• Saving behaviour does respond to incentives• Too hasty to conclude tax relief not working?

IFS

© Institute for Fiscal Studies, 2008

Tax reform and retirement saving incentives: take-up of Stakeholder Pensions in the UK

Matthew Wakefield

with Richard Disney and Carl Emmerson

matt_w (at) ifs.org.uk

April 2008

22

FRS Priv pens coverage: earnings group

Earnings 1999 2000 2001 2002 99-02

Low 33.7 34.0 35.4 34.2 + 0.5

Target 61.9 60.8 61.2 60.6 – 1.3

High 84.5 84.5 83.3 82.2 – 2.3

Agg 47.2 46.8 47.4 46.9 – 0.2

7

23

Maximum contributions (post April 2006)

£0

£2,000

£4,000

£6,000

£8,000

£10,000

£12,000

£14,000

£16,000

£18,000£0

£5,0

00

£10,

000

£15,

000

£20,

000

£25,

000

£30,

000

£35,

000

£40,

000

Gross relevant earnings

Max

imu

m g

ross

co

ntr

ibu

tio

n

April, 2006

10

24

Diff in diff & discrete dependent variable

• Non-linearity means diff-in-diff cannot simply be read off from marginal effects

• Common trend on index (Ф1) not probability• Following Blundell, Costa-Dias, Meghir, Van

Reenen (JEEA, 2004)• Implementation discussed there or in our

paper

• All further results use this method• Average effect of treatment on the treated

25

Allowing for discrete dependent variable

• E(Yit |Xit, Z=i, A) is Prob(Yit=1), [Ф(Yit)], Y*it=linear

index of Xit

• Common trend on index (inv. prob fn) not probability– Following Blundell, Costa-Dias, Meghir, Van Reenen (2004)

• In absence of treatment:Ф1 [E(Yit |Xit, Z=i, A)] – Ф1 [E(Yit |Xit, Z=i, B)] =

Ф1 [E(Yit |Xit, high, A)] – Ф1 [E(Yit|Xit, high, B)]

• Estimate effect as:I(X) = E(Yit |Xit, Z=i, A) – Ф{ Ф1 [E(Yit |Xit, Z=i, B)] +

Ф1 [E(Yit |Xit, high, A)] – Ф1 [E(Yit |Xit, high, B)]}

= PTA – Ф{YTB + (YCA – YCB)}

26

Estimating I(X)

• PTA– Probit for treatment after– Predict probability for each

treatment after

• YTB– Probit for treatment before– Predict index for each

treatment after

• YCA– Probit for ‘highs’ after– Predict index for each

treatment after

• YCB– Probit for ‘highs’ before– Predict index for each

treatment after

27

Estimating I(X)

• PTA– Probit for treatment after– Predict probability for each

treatment after

• YTB– Probit for treatment before– Predict index for each

treatment after

• YCA– Probit for ‘highs’ after– Predict index for each

treatment after

• YCB– Probit for ‘highs’ before– Predict index for each

treatment after

• Use predictions to calculate I(X) each treatment after • Average within each treatment after group• Result interpreted as average effect of treatment on

treated