1. The Only Way is Up? Britain’s
challenge to raise pension
contribution rates
Wednesday June 12th, 2013!
Twitter:
#onlywayisup!

2. ! Professor David Blake, Cass Business School!
! Richard Wilson, Senior Advisor, NAPF!
! James Lloyd, Director, Strategic Society Centre!
! Dr. Yvonne Braun, Head of Savings and
Retirement, Association of British Insurers!
! Adrian Richards, Deputy Director – Pensions and
Ageing, Department for Work and Pensions!
! Chair: Norma Cohen, Demography
Correspondent, Financial Times. !
!

3. 1
The Only Way is Up?
Britain’s challenge to raise pension
contribution rates
Professor David Blake
Director
Pensions Institute
Cass Business School
d.blake@city.ac.uk
12 June 2013

4. 2
What is the problem that needs
addressing?
 Ratio of time in retirement to time in work is
increasing
 This is due to:
 Increased life expectancy and longevity risk
 Shorter and more discontinuous working lives
 Later starts due to higher education
 Work breaks either voluntary or involuntary:
• Unemployment
• Child or elderly parent care

5. 3
What is longevity risk?
 We systematically underestimate how long
people are going to live:
 Longevity is a slowly-developing trend risk
 Danger of individuals outliving their savings
 A related issue is possible long-term care needs

6. 4
Official agencies underestimate increasing LEs
Actual and projected period life expectancy at birth,
UK males, 1966-2031
Shaw (2007, page 16)

7. 5
Individual underestimates of life expectancy by age
Source: O’Brian, Fenn, and Diacon, 2005, self-estimated life expectancy compared with GAD
forecast life expectancy
Number of years by which consumers underestimate life expectancy
Women
Men60-69
50-59
40-49
30-39
20-29
0 2 64 8 10
Age

8. 6
Source: 100% PNMA00 medium cohort 2007
Age
25%
25%
Life
expectancy =
86.6
Most likely
age
at death =
90
%deathsateachage
Random Variation
Risk
Random Variation Risk
0
1
2
3
4
5
65 70 75 80 85 90 95 100 105 110
Expected distribution of deaths: male 65!
Idiosyncratic risk
%deathsateachage
Expected distribution of deaths: male 85
Life
expectancy =
91.6
Most likely age
at death = 86
0
1
2
3
4
5
6
7
8
9
10
85 90 95 100 105
Age
1 in 3 will reach
93 and 5% will
reach 100
Poor understanding of variability in life
expectancy
Idiosyncratic risk

9. 7
Life expectancy in England and Wales
at age 65:
By social class and gender, 2002-5
Class description males females
Non-manual
I Professional 18.3 22.0
II Managerial and
technical/Intermediate
18.0 21.0
IIIN Skilled non-manual 17.4 19.9
Manual
IIIM Skilled manual 16.3 18.7
IV Partly skilled 15.7 18.9
V Unskilled 14.1 17.7
All 16.6 19.4

10. 8
What awaits future generations:
Longevity fan chart for 65-year old males
(CBD model)

11. 9
What are the potential consequences?
 There might be an undesirable fall in standard of
living in retirement for individuals:
 Leading an increase in means-tested benefits
 If this happens for a large number of people,
then there will be a large increase in the tax bill
for the next generation of employees

12. 10
What needs to be recognised?
 People need to:
 Determine their desired standard of living in
retirement
 Estimate their life expectancy once retired
 These factors determine the size of the pension
pot needed to support this standard of living over
the estimated retirement period

13. 11
How can the problem be solved?
 Suppose that this analysis leads to the result
that the pension pot will not be large enough
 Only two real solutions:
 Save more while in work
 Work longer
 A third solution is to take more investment risk,
but the outcome is unreliable
 So the real trade-off is between contributing
more and working longer

14. 12
What else needs to be taken into
account?
 But DC plans favour those whose lifetime career
earnings peak earliest:
 Manual workers
 Women
 Rather than
 Professional
 Managerial workers
 Because of compounding, the relative size of
their pension pots will be higher

15. 13
What else needs to be taken into
account?
 DC plans will lead to lower pensions for those
with higher life expectancies
 Due to post-code annuity pricing
 The exception is women
 Under gender equality legislation
 Those with shortened life expectancies can buy
enhanced annuities
 As a result of health impairments or lifestyle
choices
 Future generations will be worse off due to their
greater life expectancy

16. Contribution rate required for a male aged 25 to
achieve a 50% replacement ratio by the following ages
14
Age
60 65 70
Conservative1investment1strategy1(25%1equities)
Ignoring1longevity1risk 26% 16% 8%
Allowing1for1longevity1risk 33% 20% 11%
Aggressive1investment1strategy1(75%1equities)
Ignoring1longevity1risk 23% 13% 6%
Allowing1for1longevity1risk 28% 16% 9%

17. 15
 There is an unavoidable trade-off between the
contribution rate into a pension plan and age of
retirement
 Anyone who does not accept that is expecting
the next generation to bail them out
 If everyone behaves in this way, it is a recipe for
intergenerational conflict
 It’s the demographics stupid!
Conclusion

18. 16
Thank you!
Longevity 9:
Ninth International Longevity Risk and
Capital Markets Solutions Conference
6-7 September 2013
Beijing
http://www.cass.city.ac.uk/longevity-9

20. PQM$contribu-on$levels$
Employer)
contribu0on)
Total)
contribu0on)
Pensionable)pay)
AE)minimum) 3%) 8%)
Band)earnings)
(£6k)@)£41k))
PQM) 6%) 10%) Basic)pay)
PQM)PLUS) 10%) 15%) Basic)pay)

21. Annual$amounts$for$average$earner$
Employer)
contribu0on)
Total)
contribu0on)
Pot)aKer)40)
years)saving)
AE)minimum) £600) £1,600) £103,000)
PQM) £1,600) £2,600) £167,000)
PQM)PLUS) £2,600) £3,900) £251,000)

22. James Lloyd, Director, Strategic
Society Centre!

23. The Only Way is Up? Britain’s challenge to
raise contribution rates
! Achieving adequate pension income across retired
cohort has two components:!
! Adequate participation rates!
! Adequate contribution rates!
! Current reforms focused on adequate participation
rates!
! “AE is the easy bit”!
! Builds on those employers with good schemes!
! But, 8% of qualified earnings benchmark contribution
rate was never expected to be enough!
! And looks increasingly inadequate.!

24. What are the potential approaches
for lifting contribution rates such as
regulation, education, incentives
and behavioural interventions?

25. Whose contribution rates?
! Employees!
! Employers!
! Policy choices around whose contribution
rates to push up, and when!

26. Whose contribution rates?
! Employees!
! Universal or targeted approach to raising
employee contributions? !
! If targeted, then:!
! Who is the priority for intervention?!
! Whose contribution rates will be easiest to lift?!
! What are the trade-offs of a universal vs.
targeted approach?!

27. Whose contribution rates?
! Employees!
! Target employees by:!
! Age, life-stage!
! Tenure!
! Region!
! Gender!
! Sector/employer-type!
! Earnings!
! Different policy levers appropriate to different
groups!
! And different contribution rates appropriate.!

28. What are the policy levers
available?
! AE regulation!
! Education and information!
! Incentives!
! Other nudges!
!

29. AE regulation
! Raise the 8% of qualifying earnings
benchmark total contribution rate in
legislation through higher employee
contributions!
! From current ‘floor’ to higher level!
! E.g. median adequate rate!
! But what is median adequate rate for workforce?!
! And, lifting employee benchmark contributions will
inevitably increase opt-out rates!
! Where is the ‘top of the curve’?!
!

30. Education and information
! Tell people what they should be contributing!
! Again – trade-off between universal vs. nuanced,
targeted information!
! Questions over effectiveness!
! Everyone knows they should be saving more!
! Not everyone knows what percentage of income
they are contributing!
! How effective is education at getting people to
take action?!
!

31. Incentives
! Link incentives to save to proportion of earnings put in
pension!
! Two key levers: employer contribution, tax-relief!
! Review interaction with different levels of employee
contribution!
! But penalty for those under greater financial pressure, e.g.
parents?!
! Alternatively, look at rules/treatment of different share
of savings: !
! First x% of employee contribution treated differently to
second x%?!
! E.g. only the second x% of employee contribution can be
taken as 25% lump-sum?!
!

32. Other nudges
! Apply other behavioural economics
techniques besides AE (default) !
! ‘Commitment’: “Save more tomorrow”!
! Pre-agreed commitment to increase proportion of
income saved at time of next pay-rise.!
! ‘Norms’: use influence of what others are
doing!
! “The average contribution rate by employees in
your organisation/sector/age-group is x%”!
!

33. 1
The only way is up?
• Adequacy varies by individual
• Govt as an enabler
• Contributions play a critical role in retirement income
• Impact of reform will take time to work through
• Auto-escalation looks promising
• Wider points

34. ! What exactly is an adequate pension contribution rate? How
does it vary by earnings, life stage, preferences, cohort and
trends in economic growth?!
! Should policymakers aim for a universal, benchmark
contribution rate or opt for a more individualized approach?!
! What are the potential approaches for lifting contribution rates
such as regulation, education, incentives and behavioural
interventions?!
! What should be the balance between boosting employer and
employee contribution rates?!
! What do long-term economic and mortality trends mean for
defining an adequate contribution rate for the workforce?
Could this eventually be beyond what workers will voluntarily
accept?!
! Is the UK economy and Exchequer ready for high levels of
participation and contribution rates across the workforce? If
not now, when?!

35. !
!
!
!
Strategic Society Centre
32-36 Loman Street
London
SE1 0EH
info@strategicsociety.org.uk!
www.strategicsociety.org.uk
Twitter: @sscthinktank !
!
The Strategic Society Centre is a registered charity (No. 1144565)
incorporated with limited liability in England and Wales (Company No.
7273418).!