IFS calls for consideration of drivers behind pension trends in policy discussions

The Institute for Fiscal Studies (IFS) has emphasised the need to explore the drivers behind big-picture trends when considering potential new pension policies, highlighting concerns around the pensions gender gap and impact of auto-enrolment (AE) in particular.

A report from the group, Life-cycle patterns in pension saving, found that whilst there is an age profile in defined contribution (DC) savings, with average total contributions increasing through working life, the magnitude of these is "relatively small".

In particular, the IFS estimated that, across all private-sector employees, including those not saving in a DC pension at a particular time, mean contributions into DC pensions increase by around 2 percentage points of gross pay between the early 20s and mid-50s.

It explained that much of this increase was driven by net movements into saving in a workplace DC pension, particularly amongst those in their 20s and early 30s.

Indeed, it estimated an increase in the membership rate of DC pensions of 10 percentage points during people’s 20s, although it clarified that this is followed by smaller increases in membership rates for the age groups after this.

It also found that average pension contributions amongst those saving into a DC pension increased “steadily but slowly” throughout the whole of working life, increasing by around 5 percentage points of gross pay between the early 20s and late-50s, due to increases from both the employer and employee.

However, the report warned that AE has further flattened age profiles, as it has increased pension membership among younger individuals.

"This is not to suggest that automatic enrolment is not a good policy that will improve lifetime living standards," it clarified, noting that AE may overcome behavioural biases that prevent people saving as they might like.

Furthermore, it suggested that the relatively flat saving profile encouraged by AE may result in better lifetime living standards than a saving profile that increases with age but results in a lower level of retirement resources.

Despite this, it emphasised that as AE is developed further going forward, the issue that it might benefit individuals if default contributions vary over working life or in line with individual circumstances should be "carefully considered" in light of emerging evidence.

In addition to this, the IFS has argued that AE has "fundamentally changed" the nature of the gender pension gap in pension savings rates, highlighting the gender gap more broadly as a "particular area of concern" in the current public debate.

In particular, the IFS found that, comparing the age profile of pension saving as a share of earnings between male and female private-sector employees before automatic enrolment, average pension saving was “broadly similar” until the mid-30s.

At this point, saving rates “diverged sharply”, as average pension contributions for men continued to increase whilst women's plateaued, which IFS warned will have driven a gender pension gap "over and above" that arising from differences in labour market attachment or average earnings.

It also found, however, that the age profiles for average contributions as a percentage of gross pay conditional on being a member of a workplace pension are much more similar, and, in fact, are higher for women than men.

“Automatic enrolment will have changed the nature of the gender pension gap going forwards, by substantially increasing pension membership, and resulting in a difference in pension membership between male and female employees that is more uniform with age,” it explained.

“Understanding the drivers of the previous gender pension gap is therefore important for fully assessing the impacts of automatic enrolment, and the channels through which it affects individuals.”

Considering this, the IFS has confirmed that the remainder of its research programme will explore the drivers behind the empirical trends revealed in its recent reports, with a particular focus on what drove the divergence in the behaviour of male and female employees in their 30s, and further consideration of the self-employed.

“These questions are important," the report stated. "While this evidence is based on behaviour before the introduction of automatic enrolment, this is likely to still be informative of how those more ‘active’ savers (who would have been saving in the absence of the reform) continue to save.

“This is important in order to project the likely retirement resources of these individuals, and to understand better the impact of automatic enrolment and the likely effects of potential new policies to encourage greater retirement saving.”

Indeed, it highlighted the findings as evidence of the importance of examining gender differences in saving rates, rather than just accrued pension wealth or pension income.

"Focussing on the latter risks developing policies to fix a perceived problem that has already changed," IFS warned.

"It is important to understand more about the drivers of previous and current differences in pension saving rates between men and women, in order both to understand the wider consequences of automatic enrolment and to provide insight into what actions, if any, are warranted to address any continuing gender pension gap."

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