Defined Contribution (DC) pensions: The relative importance of DC wealth and the issue of small pots

Transcription

1 Defined Contribution (DC) pensions: The relative importance of DC wealth and the issue of small pots Rowena Crawford WAS User Group meeting, 8 July 2013 Institute for Fiscal Studies

2 Outline Interesting trends and key questions Wealth and Asset Survey data General interesting descriptives from WAS Investigating a specific policy question: the issue of small pots Institute for Fiscal Studies

3 Interesting trends and key questions Private pensions are becoming increasingly important State pension gradually moving away from earnings replacement In the long run pension income in retirement will depend on years of contributory activity but not on earnings Provides a relatively low level of income compared to what most mid/high level earners will have enjoyed in working life Private pension saving therefore increasingly important if individuals want to maintain standards of living in retirement Key questions: Do individuals understand what the state will provide and when? Are individuals saving enough to provide themselves an adequate total income in retirement? Do individuals understand the benefits of saving in pensions specifically? Institute for Fiscal Studies

4 Interesting trends and key questions DC pensions are becoming increasingly prevalent Decline of defined benefit (DB) pensions in private sector Auto enrolment expected to increase membership of pensions Why does this matter? DC pensions are a relatively complex product and require individuals to make important decisions: When and how much to contribute Where to invest the fund (trade off between expected return and risk) When to annuitise, what type of annuity and from whom Key questions: Do individuals understand these complex decisions? Are individuals making appropriate choices? Institute for Fiscal Studies

5 Data in the Wealth and Asset Survey The Wealth and Assets Survey Lots of pensions specific data: Attitudes towards saving for retirement Expectations of retirement Membership of, and wealth held, in pensions Lots of other data: Detailed information on other assets and liabilities Basic demographic and socio economic information Attitudes and expectations more generally Advantage of WAS is being able to combine all this information Who has DC pension wealth Relative importance of DC pension wealth How do expectations and attitudes translate into pension outcomes And being able to track how these change over time Institute for Fiscal Studies

6 Interesting descriptives How many people have a DC pension fund? Proportion of individuals 100% 80% 60% 40% 20% 0% No DC fund One DC fund Two or more DC funds All Age Institute for Fiscal Studies

7 Interesting descriptives How much wealth do they hold in DC funds? Cumulative percentage of individuals All Aged Aged Aged Aged Aged % 90% 80% 70% 60% 50% 40% 30% 50% have less than 20% 10,000 in DC funds 10% Median ~ 3,000 0% 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 Median ~ 8,000 Median ~ 12,000 Median ~ 18,000 Total wealth held in DC funds ( ) Institute for Fiscal Studies

8 Interesting descriptives For whom are DC pensions relatively important? Relative importance of DC wealth for DC pension-holding households, by total wealth quintile: Quintile of total wealth Median total wealth Median DC pension wealth 1 1,905 3, ,111 7, ,997 12, ,218 18, ,100 35,000 Median percentage of total wealth from: Net Net DC pension DB pension property wealth financial wealth wealth wealth All 230,692 13,245 Institute for Fiscal Studies

9 Interesting descriptives For whom are DC pensions relatively important? Relative importance of DC wealth for DC pension-holding households, by total wealth quintile: Quintile of Median Median Median percentage of total wealth from: total wealth total DC pension Net Net DC pension DB pension wealth wealth property financial wealth wealth wealth wealth 1 1,905 3, % 31.0% 19.2% 0.0% 2 72,111 7, % 1.5% 12.9% 0.0% 3 184,997 12, % 4.5% 8.5% 0.0% 4 362,218 18, % 8.6% 5.7% 0.2% 5 807,100 35, % 10.4% 4.2% 2.9% All 230,692 13, % 7.1% 7.1% 0.0% DC pensions relatively more important if: Older, male, couple, report excellent numerical ability, lower nonpension wealth, in employment Institute for Fiscal Studies

10 Interesting descriptives How realistic are individuals life expectancies? Expected age of death Men - individual expectations Men - cohort expectation Women - individual expectations Women - cohort expectation Current age Source: Crawford and Tetlow (2012b) Institute for Fiscal Studies

11 The issue of small pots The issue of small pots The small pots problem Small DC funds are relatively expensive for providers to administer Individuals may find it hard to achieve as good a net return as they would on a larger fund DWP consulted last year on how transfers of small pots between schemes could be better facilitated Consultation explicitly asked for evidence on the scale of the current problem of small pots We used WAS (2008/09) to look at the incidence of small pots and the scope for consolidation Funded by the National Association of Pension Funds and ESRC Published briefing note:

12 How common are small pots? The distribution of DC fund values The issue of small pots Cumulative percentage of DC funds 80% 70% 60% 50% 40% 30% 20% 10% 0% 50% of DC funds contain less than 8,500 35% of DC funds contain less than 5,000 16% of DC funds contain less than 2, ,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 Size of DC fund ( )

13 How common are small pots? Types of small pots The issue of small pots 3.9 million DC pots contain < 5,000

14 How common are small pots? Types of small pots The issue of small pots 3.9 million DC pots contain < 5,000 Current pots 72% (2.8m) Current: Individual (or employer) is making contributions Retained: Individual (and employer) is no longer making contributions

15 How common are small pots? Types of small pots The issue of small pots 3.9 million DC pots contain < 5,000 Retained pots 28% (1.1m) Collectively these funds are worth ~ 2.3 billion Current pots 72% (2.8m) Current: Individual (or employer) is making contributions Retained: Individual (and employer) is no longer making contributions

16 How much scope is there for consolidation? Do the holders of small retained pots hold other DC funds? The issue of small pots 1.1 million retained DC pots contain < 5,000

17 How much scope is there for consolidation? Do the holders of small retained pots hold other DC funds? The issue of small pots 1.1 million retained DC pots contain < 5,000 Held by an individual with no other DC funds 49%

18 How much scope is there for consolidation? Do the holders of small retained pots hold other DC funds? The issue of small pots 1.1 million retained DC pots contain < 5,000 Held by an individual with no other DC funds 49% Held by an individual with 1+ other retained DC fund 21%

19 How much scope is there for consolidation? Do the holders of small retained pots hold other DC funds? The issue of small pots 1.1 million retained DC pots contain < 5,000 Held by an individual with 1+ other current DC fund 17% Held by an individual with no other DC funds 49% Held by an individual with 1+ other retained DC fund 21%

20 How much scope is there for consolidation? Do the holders of small retained pots hold other DC funds? The issue of small pots 1.1 million retained DC pots contain < 5,000 Held by an individual with 1+ other retained and 1+ other current DC fund 12% Held by an individual with 1+ other current DC fund 17% Held by an individual with no other DC funds 49% Held by an individual with 1+ other retained DC fund 21%

21 How much scope is there for consolidation? Do the holders of small retained pots hold other DC funds? The issue of small pots 1.1 million retained DC pots contain < 5,000 51% of small retained DC pots held by an individual with at least 1 other DC pot

22 How much scope is there for consolidation? Do the holders of small retained pots hold other DC funds? The issue of small pots 1.1 million retained pots contain < 5,000 51% of small retained DC pots held by an individual with at least 1 other DC pot 76% of these (or 39% of all small retained funds) are held by an individual whose total DC wealth exceeds 5,000

23 The issue of small pots How much scope is there for consolidation? Potential gains if all DC pots were consolidated: % reduction # before # after # reduction Small retained pots m 0.7m 0.4m People with small retained pots m 0.6m 0.3m This may understate the gains from consolidation in future % (73%) of DC funds held by an individual with only 1 DC fund are held by an individual aged under 40 (50) plenty of time before retirement to save additional DC funds 2. Decline of DB pensions and introduction of auto enrolment DC pensions are more prevalent and individuals are more likely to accumulate >1 DC fund than in the past

24 Conclusions Lots of interesting and topical questions surrounding pensions and saving for retirement WAS is well placed to provide data to help try and answer many of these Key advantage is the ability to combine data on lots of different areas for the same individuals and to track these over time Will become ever more valuable with additional waves References: Crawford and Tetlow (2012) Crawford and Tetlow (2012b) Institute for Fiscal Studies

25 Defined Contribution (DC) pensions: The relative importance of DC wealth and the issue of small pots Rowena Crawford WAS User Group meeting, 8 July 2013 Institute for Fiscal Studies