The market for Personal Accounts

The market for Personal AccountsMatthew Wakefield

© Institute for Fiscal Studies

Outline for part 2• How much current disposable income would those not

currently contributing to a private pension forego if they were to contribute 5% of their earnings in the band £5,035 to £33,540?

• How many not currently offered an employer pension might be brought into private pensions – perhaps often Personal Accounts – through the change in enrolment?

• How much might these individuals build up in pensions through minimum default contributions?


How much disposable income foregone?• Take the most recent available year of data on incomes,

pension contribution status and family circumstances– FRS, 2006/07

• Change pension contributions such that all those not in fact contributing to a pension make individual contributions of 5% on the on the band between £5,035 and £33,540 of earnings

• Model how this affects current disposable income, given the tax, benefit and credit system.

• Look at effect on average across the population, and also at how this varies across the income distribution


Income devoted to employee contribution• Contribute a proportion of a band of earnings

– A key determinant of income taken is level of earnings• Take an individual earning £33,540 with no other income

– Contributes 0.05*(33,540 – 5,035) = £1,425– 20% is tax relief, reduction in income: 0.8*£1,425 = £1,140– This is 3.4% of the £33,540 gross income– Disposable income – net of income tax and NI – would have

been £24,561 w/o the pension contribution– £1,140 is 4.6% of disposable income

• This is the biggest ‘loss’ somebody could have– No interaction with higher-rate income tax or benefit

withdrawal– Lowest income on which one could pay 5% of the whole

band © Institute for Fiscal Studies

Income devoted to employee contribution• Take an individual earning £7,885.50 (one-tenth of the

way from £5,035 to £33,540) with no other income– Contributes 0.05*(7,885.5-5,035) = £142.5– Contribution less tax relief is £114– This is 1.4% of gross income, 1.6% of disposable income

• Take an individual earning £60,000 with no other income– Contributes 0.05*(33,540 – 5,035) = £1,425– 40% tax relief, reduction in income: 0.6*£1,425 = £855– This is 1.4% of gross income, 2.1% of disposable income

• Level of earnings a major determinant of proportion of disposable income accounted for by contribution


Income devoted to employee contribution• Level of earnings a major determinant of proportion of

disposable income accounted for by contribution• Amount of non-earned income will also matter

– Contribution a proportion of earnings– No extra contribution for “other income”, but it is extra

disposable• Example of higher-rate taxpayer also showed tax-rate

matters– This is effective tax-rate, not just a distinction between

basic- and higher-rates– Similar effect for those on steep taper of new tax credits– For such an individual, at least some of pension

contribution “costs” only 41p of disposable, per pound of contribution, thus reducing the proportion of disposable that is foregone


Proportion of disposable accounted for by 5% employee contribution from those not currently contributing

All

Poo

rest 2 3 4 5 6 7 8 9

Ric

hest

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Income decile group

% o

f dis

posa

ble

inco

me

Among families containing an “affected” individual

Source: IFS Tax and Benefit model, TAXBEN, using data from 2006–07 Family Resources Survey.


All

Poo

rest 2 3 4 5 6 7 8 9

Ric

hest

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Income decile group

% o

f dis

posa

ble

inco

me

Across all families



All

Poo

rest 2 3 4 5 6 7 8 9

Ric

hest

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

Income decile group

% o

f dis

posa

ble

inco

me

Across all families


How many might be automatically enrolled into Personal Accounts?• Examine one group who might have been enrolled into

Personal Accounts in the past– Those not offered employer’s scheme

• Excludes any whose employer might choose Personal Accounts when previously offering a different scheme

• Also supposes employers that did not offer pension scheme in the past would now offer Personal Accounts

• Think of the group identified as a group:– Relatively likely to be brought in to Personal Accounts– Who would be new to being offered pension through the

workplace• Use BHPS data

– Baseline year 2005, but also look at evolution 2001-05


Personal Account defaultees?

2001 2002 2003 2004 2005 Any year-5%

0%

5%

10%

15%

20%

25%

30%

14.6%

% o

f tho

se a

ged

22 to

SPA



2001 2002 2003 2004 2005 Any year-5%

0%

5%

10%

15%

20%

25%

30%

14.6%

% o

f tho

se a

ged

22 to

SPA

4.7 million



2001 2002 2003 2004 2005 Any year

0%

5%

10%

15%

20%

25%

30%

12.3% 13.2% 12.7% 14.1% 14.6%

26.6%

% o

f tho

se a

ged

22 to

SPA



2001 2002 2003 2004 2005 Any year

0%

5%

10%

15%

20%

25%

30%

3.0% 3.4% 3.1% 2.9% 3.0%

13.0%9.3% 9.8% 9.7% 11.2% 11.6%

13.7%

With Personal Pension or Stakeholder P...

% o

f tho

se a

ged

22 to

SPA


Persistence of being in PA default group

All 5 years; 27.9%

2005 only; 21.0%

2 years; 17.8%

3 years; 16.1%

4 years; 17.2%


Amount of default minimum contributions• How much would the group identified in 2005, have

contributed over the period 2001 – 2005• Default minimum contributions are 8% of earnings

between £5,035 and £33,540 so can be computed straightforwardly– Assessing actual contributions would be much more

complex• The amounts will be a reflection of the earnings

distribution • … and of how this and group membership shifted over

the period 2001-2005, for those identified in 2005


Distribution of PA default minimum contributions


£0 £2,000 £4,000 £6,000 £8,000 £10,000 £12,0000

102030405060708090

100

2005...&2004...&2003

Default PA contributions among contributors in 2005

Cum

ulat

ive

perc

enta

ge

Averages of PA default contributions

…&2001

…&2002

…&2003

…&2004

2005

0 500 1000 1500 2000 2500 3000

£768 £900 Mean

Median


Averages of PA default contributions

…&2001

…&2002

…&2003

…&2004

2005

0 500 1000 1500 2000 2500 3000 £2,168

£1,846

£1,588

£1,247

£768

£2,823

£2,437

£1,982

£1,484

£900 MeanMedian


Conclusions (1)• Reforms to enrolment and default contributions to boost

private pension coverage• Most not currently contributing to a private pension have

lower earnings– Pounds increase in contributions will be small

• Majority not contributing to a private pension do not have positive liquid wealth– Reshuffling small but some to repay debts less quickly?– Is a pension the best savings vehicle for them?


Conclusions (2)• Default minimum employee contribution to reduce

disposable income by 0.5% • Number brought in to Personal Accounts likely to

increase quickly– Although also a persistent group of defaultees– Some would have saved in a private pension without the

reform• Among those not offered an employer’s pension scheme

in 2005:– Aggregate contributions £4.2 billion from 4.7 million

individuals– Median contributions of £770– Over 2001-05, median contributions of £2,170


Amounts and Accounts:Reforming Private Pension Enrolment Carl Emmerson and Matthew WakefieldInstitute for Fiscal Studies


Documents

The market for Personal Accounts