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IFS © Institute for Fiscal Studies, 2008 Tax reform and retirement saving incentives: take-up of Stakeholder Pensions in the UK Matthew Wakefield with.

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Presentation on theme: "IFS © Institute for Fiscal Studies, 2008 Tax reform and retirement saving incentives: take-up of Stakeholder Pensions in the UK Matthew Wakefield with."— Presentation transcript:

1 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 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 3 Structure of presentation Describe the reform package Describe strategy to evaluate impact Describe how / why FRS data useful Describe results Conclusions

4 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 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 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 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 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 others pensions, again within the overall contribution limits, should they choose to do so. DSS Green paper, cm 4179, 1998.

9 9 Maximum contributions (pre April 2001)

10 10 Maximum contributions (post April 2001) 23 14

11 11 Difference-in-differences BeforeAfter Limit increaseYbYb YaYa Limit fixedZbZb ZaZa Comparisons across time & groups informative –Difference-in differences (DiD)

12 12 Difference-in-differences BeforeAfter Limit increaseYbYb YaYa Limit fixedZbZb ZaZa Comparisons across time & groups informative –Difference-in differences (DiD) Time difference (Y a -Y b ) not policy effect if trend Common Trend across groups: find as Z a -Z b DiD (Y a -Y b ) – (Z a -Z b ) as policy effect Average effect on those affected (treated) Condition on other household characteristics –Regression framework: slightly non-standard

13 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 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 15 FRS Priv pens coverage, by limit status Group Zero Lim Inc – 0.2 No Inc – 2.1 Agg – 0.2

16 16 Results (1): Across all individuals All with limit increase: 28.5%, ppt Zero earners:3.9%, ppt +ve earners:46.7%, ppt Is an effect on those who have limit increase Driven by earners –consistent w target group test Effects not insubstantial

17 17 Results (2): +ve earners, decomposed Single men39.2%, ppt Single women40.7%, ppt Men in couple:47.4%, ppt Women in couple:50.3%, ppt Effects substantial Stronger for women, and singles Unusual: couples by partners earns/education –Strongest low earns, middle education (a-level)

18 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 partners earnings) changing differentially Results robust for subsample

19 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 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?

21 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 22 FRS Priv pens coverage: earnings group Earnings Low Target – 1.3 High – 2.3 Agg – 0.2 7

23 23 Maximum contributions (post April 2006) 10

24 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 ( Ф 1 ) 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 25 Allowing for discrete dependent variable E(Y it |X it, Z=i, A) is Prob(Y it =1), [ Ф( Y it )], Y* it = linear index of X it Common trend on index (inv. prob fn) not probability –Following Blundell, Costa-Dias, Meghir, Van Reenen (2004) In absence of treatment: Ф 1 [E(Y it |X it, Z=i, A)] – Ф 1 [E(Y it |X it, Z=i, B)] = Ф 1 [E(Y it |X it, high, A)] – Ф 1 [E(Y it |X it, high, B)] Estimate effect as : I(X) = E(Y it |X it, Z=i, A) – Ф{ Ф 1 [E(Y it |X it, Z=i, B)] + Ф 1 [E(Y it |X it, high, A)] – Ф 1 [E(Y it |X it, high, B)]} = PTA – Ф{YTB + (YCA – YCB)}

26 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 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


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