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Why are pensions important?

What’s on offer?

Each year early career economists at IFS deliver a day of public economics talks, aimed at A-level and undergraduate students who have an interest in economics or might want to pursue a career in public policy research. As part of this year’s Festival of Social Science, we will be live streaming a selection of lectures from the series to anyone who is interested in finding out more about economics. There will be time allowed for Q&A on each topic.

What’s it about?

Why should people save for retirement and why do governments intervene in people's pension saving decisions? How has the UK pension system changed over time? This lecture will discuss key themes around pension saving, specifically discussing the UK policy context.

Who’s leading the event?

Heidi Karjalainen, Research Economist at IFS

Open to

These webinars are primarily aimed at final year undergraduates studying economics, but should be useful to anyone interested in the subject.

Why are pensions important?

Video transcript

good afternoon everyone and welcome to the event why are pensions important my name is george stoy i'm an associate director at the ifs and i'm going to be chairing today's session this is the first in a series of public economics lectures which look at a range of topics in public economics and they're going to be on every monday at the same slot so if you're interested please join us next week we'll be talking about income inequality so what's going to happen today is that my colleague haley carolinan is going to talk to you about pensions why we as economists think that it's important that people save and how you can motivate them to save more she's going to talk for about 40 minutes and then this can be time for a question and answer session those aren't those questions you're gonna be based on uh questions from the audience so if you could get typing away on slido as the talk goes on we'll return to those questions and see what haiti has to say about them at the end of the event so without further ado i'm going to pass on to haiti thank you very much george um so yes as george mentioned i'm a haircut caroline i'm a research economist at the iff and i'm going to be talking about why are pensions important and to answer this question um i'll start by talking about why people say for retirement and why why they should save for retirement i'll also talk about why uh what is it about pension saving in particular that means that governments tend to intervene in pension saving uh and i'll finish off with talking about uh the uk pension system in particular so how does the uk government intervene in the in people's pension saving and how and why has that changed over time so to start off i'm going to just generally talk about pension savings as i mentioned why do people say for retirement why should they and i'm going to start by talking about a standard life cycle model so this is a model of saving and consumption that we use in economics where we have periods where people work and they receive income and each in each period people can choose to either save or they can choose to consume so if they they basically face this trade-off if they consume today they get the benefit of that today but if they save they can consume later um so and the most that people can consume or save is the total of the income in that period and any kind of accumulated savings from previous period and i'm going to start by introducing the most standard version of this model where we assume perfect certainty so people can make these decisions with perfect knowledge of the number of periods that they will live and work and so on and they also know what their income is going to be in each of those periods and i'm going to discuss why that might not be a reasonable assumption in a bit but i will start with the very standard version of this model we could also add things like returns on savings or borrowing against future earnings and things like that in this model but that's we're not going to be showing that here so um so here we're going to be looking at an individual and this individual is working from age 22 and they're going to be working until age 68 and they're they're earning 25 000 pounds a year and they know that they're they're going to live until the age 100. so they know that they will have this 32 years period of no income now why might people want to save for retirement according to this very simple model well they might want to smooth consumption so in order to maintain a level of income and consumption in retirement people will have to save during the years when they work so for example if we assume that this person wants to maintain a constant level of consumption and expenditure shown here by this red line at about 15 000 pounds a year which is the total uh lifetime income earned by that person divided by the numbers number of years that they they live um they would have to accumulate wealth during the years when they're working and then decumulate uh with this while they're in retirement so here uh people will be saving this amount between um their income and consumption and then in the early or during the years that they're in work and then in the later years uh they're decumulating so dissaving or just withdrawing that those uh assets and savings that they've accumulated by that point so this is essentially the consumption smoothing rationale for retirement savings so people retirement saving is a way for people to move resources from the years in which they work to the periods when they're retired a particular and a particular part of pension saving that makes it so challenging uh is that even with uh if if we're looking at people who have no cognitive limitations they have kind of perfect financial literacy they understand pensions completely they don't face any market distortions or behavioral biases even for those people what's uh what's true about their uh what about their their lifetime is that they don't know when they will die and this is something that in the context of pension saving we call longevity risk so people face a risk of living less or more time than what they had expected to so for example in our uh in this example that i showed you um if the person got to a hundred years old and then realized that they had another 10 years of life left they would have already accumulated all their wealth by that point and they wouldn't be able to maintain the level of consumption that they previously had so how could we solve for this um so the way that people kind of traditionally can protect themselves from longevity risk is uh by having what's called an annuity and people can buy a financial product called an annuity so this is essentially a product that guarantees to pay a fixed income to until until death and like with any insurance product here the insurance provider takes on the kind of longevity risk and you essentially have to pay an insurance premium for this which in this case means that the payouts that you can expect to receive will be smaller than the amount that you spend to buy this product in the first place just to give you a sense of this for example if you were 60 and wanted to buy an annuity this week with a 50 000 pound pension pot you could buy an annuity that would pay uh pay you just under two thousand pounds a year until until death now that might not sound like a lot uh especially if you expect that you might only live say ten years after sixty but actually life expectancy for women for example women who turn 60 now is about 30 years so they can expect to live up to age 90. so the insurance company in that case would have to pay such a woman about 60 000 pounds over those 30 years so with this kind of product people can maintain that stable level of consumption until the end of their uh life so if essentially if people value stable consumption they can insure away the risk of running out of income by purchasing an annuity so essentially this is why pension saving is important it's a it's a way for um to move resources from working life to retirement and in case of an annuity or an annuitized saving product also can also guarantee an income in retirement protecting against longevity risk now if we think of the standard lifecycle model in this model people face this tradeoff between saving and consumption and if they are as the standard model assumes fully informed that they can calculate their returns on savings there are no market distortions and so on people according to the model will make the right choices for themselves when they're deciding how much to save for retirement and how much to consume today and if they're worried about longevity risk they could annuitize their savings however in reality what we see is that is quite a lot of government intervention when it comes to pension saving so we i'll now kind of explain why that is so why can't the government trust people with these decisions about their pension saving well there are many reasons why people may not behave as the traditional model predicts so we have both behavioral biases which mean that governments think that they need to interfere and also some things that might lead to market failure so firstly many of you might have heard of these behavioral biases also in the context of pension savings so some of these include present bias so this means that people save too little because they so value consumption more today and they over discount consumption in the future so people might for example think that you know they will they prefer consumption today they will start uh saving tomorrow but then when tomorrow comes around they will again uh prefer consumption in that current period uh and and and will not uh save uh another very uh thing that we talk about a lot in the pensions uh space and his pensions policy is inertia so this is basically relates uh the fact that people stick to a default option um when it comes to their pension savings and in general there's more cognitively difficult decisions so there's this kind of lack of engagement uh with with pension-saving decisions and people tend to not uh react to to changes in their circumstances and so on so that's what we mean by inertia another bias uh that we see in uh is is in people's thinking is the bias in assessing probabilities of future events so people often inaccurately assess the risks and uncertainty that um that are related to many of the components of pension savings and they can be overly optimistic or pessimistic about these really important aspects so there are a lot of things that are that can be uncertain like what are their lifetime time earnings growth going to be or what are the kind of level uh returns that people might expect to see on their retirement and we also know from some earlier ifs research that when people are asked about how likely they are they think that they are to survive to a certain age they're generally too pessimistic about surviving past age 75 or 80 or 85 and of course this is huge importance in the context of pension savings because it means that um that people might think that they're gonna live uh or die earlier than they actually will and that that means that they might not save enough or might run out of money so these are the kind of behavioral biases that we see which mean that uh governments uh will will want to uh intervene and fix correct for uh in addition to this there are other reasons um so the pension saving is kind of inherently a very difficult uh uh difficult um thing to do understanding all the different aspects of risk and return being able to calculate expected returns accurately making decisions between different products and so on all of this is hugely difficult so a lot of people don't necessarily have the required level of financial literacy or or knowledge of of pensions um so these are all the kind of all sort of different biases that push people away from uh the decision from uh for to save for a pension so a government might want to intervene if they think that the right decision for people would be to save but the government could also decide to intervene because of market failure in the pension market so in particular in the annuities market that i talked about so this is the insurance product that gives people um an income stream for for until death um there's a lot of asymmetric information in insurance markets which leads can lead to adverse election and potential market failure so essentially again annuities and insurance against longevity risk so of course this kind of guaranteed income until the end of life is more valuable for someone in very good health who is more likely to live longer or it's not necessarily worth purchasing for someone who knows or thinks that they only have a few years of life left so we might end up in a situation in the annuities market where the insurance companies offer annuities based on assumptions around kind of the average health and longevity of the population but only those with very good health buy these annuities so then these juris companies end up losing money on annuities because they end up paying out for longer than they'd expected and this can lead to a situation where the whole market uh collapses or at least becomes very unattractive for uh most people so this is what we call adverse selection and this is the reason why these kind of pension products or longevity insurance as well as well as other types of insurance like health insurance and social care insurance more generally are so difficult for private markets to provide there is also another reason why governments might want to intervene in pensions and that's for redistributional purposes um so pensions can redistribute income between different people and pensions can do this in a way that where redistribution is done based on uh lifetime earnings rather than a single year of earnings and this you know is of course important but this is not what we're going to be focusing on today but so this is why the government needs to intervene in pension savings so the governments uh generally understand that pension saving is important because it helps people smooth their consumption uh over their lifetime and they see that because of these biases and distortions people wouldn't be doing it if it wasn't for uh the government uh intervention so how is it then that governments uh intervene so i'm now going to be talking about first just public pension systems more generally uh before moving on to the uk uh context specifically so many countries have uh these public pension systems where essentially the way that um governments push people into saving into for their retirement is by having them pay taxes and mandatory contributions into pensions during their lifetime and then they will receive a pension benefit from the state in retirement we can all also call this sort of social insurance the government has this structure to ensure people from poverty and retirement as well as longevity risk um so when we're looking at these uh public pension systems in general i think it's really important to first make the point of the kind of context in which most developed countries find themselves when it comes to demographic change so as you know populations are aging so people are living longer than ever this graph shows that for the uk um when we're looking at in the 1980s uh men and women who turned 60 in 1980 how many years were they expected to to to live at that point so in 1980 women were expected to live until 83 and men to 79. now what this graph shows is that that number uh that life expectancy has increased for both uh men and women over uh since the 1980s but quite dramatically so women can now expect to live uh seven years longer and men a whole nine years longer and and also what we see here is that if we look at these projections for 2060 this trend is expected to uh continue so on this slide i'm going to be talking about how this affects a public pension system uh this system where people pay taxes and mandatory contributions during their lifetime and receive a pension benefit from the states in retirement um in particular what's important to understand here is i'm going to be talking about specifically a pay-as-you-go public pension system so that's what this payg refers to here so this means that under this kind of system which we have in the uk for example um this means that the current pensioners pension benefits are paid out of current taxation so it's not paid from the pension contributions that they paid for themselves so for example my pension my tax payments today are funding the the pensions of of retirees today and then when i'm in retirement that will be funded by the taxpayers at that point um so i'm going to be listing kind of different demographic trends and show their impact on these the taxes and benefits as well as uh the pay-as-you-go pension system uh in particular so as i already mentioned people now tend to live longer and what this means is that uh the total pension payments for governments are higher because uh people because there are all these additional years in which people uh will have to or the government will have to pay their pension benefit pension benefits so that means that there's more money going out uh over uh over time the other side of this is that you know of course if people just uh stayed in work the same number of years longer than as their life expectancy has increased we wouldn't necessarily have this issue of governments having to pay tax pay these pension payments for more years but what we see is that actually people spend more time in retirement uh in the last couple of decades or in the last decade or so we have seen an increase in the employment rates among older workers but for example if we're looking at older workers uh or men aged 60 to 64 today their employment rate so is about 60 so but about six in ten men in that age group are in work whereas in the 1970s it was closer to 80 percent so essentially people are not uh retiring kind of sufficiently later to make up for the increase in life expectancy so they spend more time in retirement people also enter the labor force later so this is mostly because of university degrees becoming so much more popular but in together this means that people spend a smaller proportion of life of their life paying taxes the other thing that we see in most developed countries is that fertility rates are falling so that means that also in the future there are less taxpayers in total so both of these things then together means that there's less money going into the pay-as-you-go pension system so essentially we have this imbalance where we have less money going in more money going out and this is a challenge the sustainability of public pension systems so what can a government to do to adjust it for this uh well they could try and fix this by balancing the size of these two arrows so firstly a government could increase people's mandatory contributions or taxes to help pay for the bigger pension payments so this is what uh governments in many european countries have done in particular uh so those countries uh trade pension as a social insurance like i mentioned uh social insurance is a way in which the state collects contributions and tax and then protects us against risks such as sickness unemployment or or longevity or poverty in old age so in the context of pensions this means that people pay this pension contributions there during their working life and then earn usually an earnings related pension from the state in retirement um so when the contributions are increased in this social insurance system you make it more sustainable because there's more money going in it also means that there's more redistribution both for the kind of less well of pensioners and also from the younger generations to older generations but this choice just come with potential trade-offs so increasing taxes can lead to can lead to labor supply distortions and what i mean by that is that it can decrease the incentive to work so when people have to pay more tax they are receiving a lower wage for the given amount of work that they've done and they might respond by working less and this can increase debt weight loss and this is what we often call the equity efficiency trade-off another issue is moral hazard so if people know that they have a generous say pension or public pension they're less likely to save privately and this is another trade-off that governments face when they're increasing these taxes and promising a more generous state pension so what else could the government do well it could actually reduce the generosity of the public pensions so reduce the amount that is paid out this should also incentivize private saving so essentially pushing uh the responsibility of the pension saving to the individual okay so at this stage i'm going to be i'm going to explain the uk pension system so we can look at the ways in which the pension system works specifically in the uk and also we can look at the ways in which it has changed in response to the changing demographics of the population and then how the uk government has uh responded with with more policy uh to to encourage more private saving or employer pensions which is a very important part of the pension picture in the uk so um so the uk pension system is made up of a few different components and i think kind of a quick summary of what what this system is is that it's state provided pension what which is what i call state pension uh complemented with some private saving so we have the state pension uh so this is or what can also be called public pension um so this is a um the government pays this flat rate um to anyone with over 35 qualifying years so years in which people have been either in work or taking care of young children mostly and since 2016 this has been a flat rate pension so everyone with the full quali number of qualifying years get the same amount and there's no earnings related uh part previously this was actually earnings related so it functioned more like a social insurance but this is now a flat rate pension where the flat rate is calculated sort of as a rate that protects older people from absolute poverty um and the system is uh pay as you go as i mentioned before and anyone over uh the state pension age uh which today is 66 can uh can receive this state pension but the state pension is just over 9 300 pounds per year which is about a third of median earnings in the uk so while it protects people from kind of absolute poverty it's not enough for most people so traditionally employers will also offer some sort of employer pension for employees so because this is not arranged by the states these are a type of private pension saving but we call it employer pension here because employers usually arrange them and they will also make some contributions into them on behalf of their employees and there are two types of employer schemes so the first one is defined benefit so in a defined benefit scheme as the name suggests it sets out to formula for calculating the amount of money that an employee will receive in retirement so it could be for example that for each year of service you get 160th of your final salary as a pension so if you work for the same company for 40 years you'd be guaranteed a pension that's two-thirds of your final salary so as this example illustrates most of the risk with this kind of pension lies with the employer so even if your pension contributions and the returns to those contributions don't actually cover two-thirds of your final salary until the end of your life this is what you've been promised so this is what the employer will have to pay you the so that's the issue with this scheme from the employers employees perspective on the other hand is that they they're not usually very uh portable so if you leave your job you would then stop accruing additional years and you might might lose out um but essentially what both the defined benefit scheme uh and also the state pension give you is an annuitized income stream in the sense that you get an income uh until the end of life which is which is guaranteed um now another form of pension saving is defined contribution pensions so as the name suggests here the employee employee and employer agree a rate at which they contribute to a pension pot so the individual can usually choose how much of their salary they want to put in and they can also make some choices in terms of which kind of financial products or what kind of risk level their fund is is invested in then as the person reaches retirement their pension income will be determined by how much of their uh of their own their own pot pension pot so their the amount of uh money that they've said into your pension how much they've paid in and how much that has accumulated returns and essentially after the age of 55 people people can decide how to draw that wealth down so in this in this case of the defined contribution pensions the market risk so how the stock market performs for example and how the other assets prices perform and also the longevity risk so at the risk of not knowing uh when you what age you live until both of these type of risks in this kind of with this kind of pension lie with the employee rather than the employer or the state um finally people might save for pension in other ways such as having a house owning a business having stocks and shares or arranging their own pension fund but the key difference with most of those kinds of savings is that there's no kind of commitment device so people could withdraw those uh savings at any point whereas with a pension there's usually uh some sort of age until uh that you have to wait until before you can start receiving your uh pension so so we're not going to be focusing on those other forms of savings today so this is the pension system in the uk in a nutshell and i'm not going to talk about the changes to this uk pension system in recent decades um and i'll start by talking about what's changed in the state pension system then talk about employer pensions and then talk about some of the policy responses to these changes now as i already mentioned some countries have responded to the kind of demographic challenges to their public pension system by increasing the amount of contributions that people are required to make and that way ensuring the sustainability of the system um and making the system more contributory and providing more social insurance now the uk has taken a slightly different approach uh when it comes to improving the sustainability of the pension system by reducing this generosity of the state pension so how have they done that well firstly the government phased out or is facing out the earnings related part of the pension so we now have this flat rate across everyone so as i've mentioned this means that the state pension is now more about protecting older people from poverty uh rather than have being this kind of a pure social insurance where higher contributions would lead to higher benefits on average it means that state pension is less generous for people in addition to that another important way for in which the government has reduced the state pension uh generosity is by increasing the state pension age so this is the age at which people can start receiving their state pension and i'll just show an example of this uh showing how women's stay pension age in particular has uh changed uh over over time so here on the horizontal axis we see the year of birth of of women and on the vertical axis we see the age at which they can start receiving uh state pension income so since the 1940s um the state pension age was 60 for women um it was 65 for men so in 1995 this pensions act was put in place that basically said that the state pension age of women would start increasing in 2010 and it wouldn't be equal to men's by 2020. there have been future further changes since then kind of bringing forward the uh the increases and also adding more increases for uh for people born later but this what this picture shows is just how dramatic the change was and just what a big difference it made to the generosity of uh state pension so if we compare a woman who was born in uh 1949 uh who started receiving the state pension uh in 2009 when they turned 60. if we now compare them to someone uh born in 1961 so they would have also turned 60 this year but actually they would only start receiving the state pension income at the age of 67. um so essentially they they are getting paid the same pension income which is over nine thousand pounds a year for seven years less than the women who were born just 12 years earlier so this kind of shows uh just how this change in state pension age affects people and affects helps helps make the system more sustainable um these increases from to 66 and 67 also apply to men and for someone for example in my generation the current legislative state pension is 68 but it's also likely that it's going to continue to increase as life expectancy uh increases so that's basically this the state pension side of the picture so we've seen a reduction in generosity there just as a as kind of a side note here in other countries the conversation often revolves around what happens in terms of the state pension but in the uk concepts it's also really important to think about the employer pension uh as i mentioned so and that's that's played a really important part in the uk pension saving picture for a very long time so in the uk pension system the state pension has been this less less significant source of income uh than in a lot of other countries so here we see the net replacement rates for average earners across the oecd so what these bars basically show is um the how much um what percentage of the um the net income an average earner will earn from state pension compared to the average earnings so as i mentioned this is about 30 percent in the uk whereas in some countries it's sort of close to 100 percent and even the average is as well above 50 so this is why in the uk when we're talking about pensions uh it's really important to also talk about the employer side of the picture because the state pension only makes up one uh part of pensions but the state pension is not the only part of the system that's become less generous so i talked about the definition between defined benefit and defined contribution schemes and as you might know a lot of the defined benefit schemes have actually come to an end and have been pha are being phased out for very similar reasons that the state pension has become less generous they're not sustainable because especially as people's life expectancies keep on increasing so companies are have been tied to paying out these pensions for much longer than what they had expected so partially as a result of this a much more prevalent form of employer pensions is now defined contribution pensions so the employers still have to pay pension contributions on behalf of their workers but the difference is that they're not liable for any future payments as they would have been under the uh defined benefit schemes so essentially what we've seen uh in the uk is this transfer of risk so where previously the market risk and the longevity risk of pensions lied sort of almost solely on the states and the employer the risk has now been transferred to the individual and it's their responsibility to ensure adequate income in retirement but as i discussed in the first section there are there are many biases which mean that people don't save optimally and individuals aren't actually necessarily best placed to make these really complex decisions about retirement saving so because the because the government has now transferred the risk to individuals they again have to then intervene to try and overcome the biases in pension saving and encouraging people to save more privately so how did the uk government do this so i will now talk about a couple of the policy responses uh to the transfer of risk so the first very well-known policy response is known as automatic enrollment so this was introduced in 2012 um so since then every employee age 22 to 64 earning above 10 000 pounds a year must be automatically enrolled to a pension scheme so this policy tackles both inertia because it doesn't require engagement from people and it also tackles press and buyers by nudging people into saving today and this policy has been hugely successful in encouraging people to save uh for a pension uh especially uh when considering that really the only thing that's changed here is the is the default uh option so uh what i'm gonna show here so this chart shows um the impact of automatic enrollment on employees but first i'm gonna show what is what percentage of working individuals who are self-employed are saving into a private pension so what we see here is that in the late 1990s about half of self-employed people were saving into a pension and this has been this has been declining over time all the way to where we are today which is below 20 percent and what you need to know uh know here is that self-employed people are not subject to uh to uh automatic enrollment because they don't have an um employee employer essentially um so so what does the picture look like for this uh employees instead so we can see that in the late 90s the rates of pension saving were pretty similar for self-employed people and employees and what we've seen uh what we saw from the late 90s to 2012 was this uh decline uh also among employees not quite as steep as one self-employed but still a decline in pension saving of the self-employed people but since 2012 we really see this huge impact of automatic enrollment on pension savings uh of uh of employees so very uh very quickly um the the rates of pension savings started increasing and that's also considered the rate has continued to increase uh since this data set as well so this policy essentially pushes people into saving into a private pension but there's also another side to this another policy response that the government came up with so in order to make sure that pensions are an appealing way of saving for most people so that they don't have uh they don't they have less of a reason to opt out uh the government also responded by introducing what we call pension freedoms so previously most people who had a pension a pot and had saved privately into a pension had to buy an annuity with their pension pot so even though this was money that people had kind of saved themselves the rules of how people could access this money were very restrictive since 2015 however uh people can uh people can now uh still withdraw 25 of their pension pot tax-free and they can also draw down the rest of it flexibly after the age of 55. so people can decide what they want to do with the with the money that they have saved into their pension so um just to summarize this uh this section uh the uk has moved from kind of providing this public pension as a form of social insurance uh to reducing the generosity of the state pension which makes the system more sustainable but leads to a need for individuals to save privately so is ensuring sufficient income and retirement is increasingly the responsibility of individuals rather than the states or the employers so in order to encourage people to save privately what the government has done is [Music] try to nudge people into saving [Music] by introducing automatic enrollment which then overcomes things uh biases such as inertia and present bias and also um and also then they've introduced pension freedoms which give people more freedom when it uh when it comes to choosing how to draw down their pension wealth this is maybe was a surprise to many people given that many of the same biases and distortions that we see when it comes to the accumulation phase so the saving phase also apply at the saving phase so people still might be biased by things like present bias and so on but this does make pension saving perhaps a more appealing way of saving for many people so i will now just conclude um so pension saving is is important because it helps people smooth consumption throughout their lifetime but as with most saving people might not behave optimally because of these many behavioral biases and also other distortions which are also things like longevity risk uh not knowing um or being overly optimistic or pessimistic about uh life expectancy and so on uh all of these things are particularly challenging for uh pension saving so this means that in most countries or in most developed countries that these governments have decided to intervene uh when it comes to pension saving and in the uk the changes in the uk pension system means that there's been this risk transfers from uh from employer and state to individuals so and then uh but that means that then the government has had to respond by nudging people into private saving um and then giving them more freedom in terms of uh how they want to withdraw their savings and i think uh just a thought to finish on i think especially in the uk context where there's so much of the responsibility of pension saving lies with the individual it's really increasingly important for people to have an understanding of of pensions and the pension system so i hope this uh talk has kind of helped you get started on that path um thanks very much and i think we we're now ready for some q a thank you haley that was great so we do have uh several questions on slider so the most popular one seems to be what did uh covert 19 do to impact on sorry how did kobit 19 impact pension saving in the uk right so covet 19 um is is obviously a very um was well did a lot to to the um in terms of things like uh the effect that it had on people's incomes the effects that it had on uh people's uh uh or stock markets and so on so there are a lot of things that we kind of would think or might think that would have affected pension savings so but actually what we see from the data or the early data at least is that actually the pension participation rates remained very similar to what they have been before people didn't seem to be opting out of of pensions either uh they didn't seem to be reducing their contributions and so on so this is actually quite uh quite surprising in in or you might think that it's quite surprising especially as something like a quarter of the uk workforce was furloughed so it was facing a you know 20 uh at least a 20 cut in their uh in their incomes so so so basically the i guess what we could uh take away from that is that uh even in the context of uh kobit 19 we still saw this kind of really uh strong evidence for uh for inertia um of course you know it might be that people didn't need to save or stop saving because they were consuming less for example um but actually uh what we also see in the data is that a lot of people were saving more um but again we don't really see evidence of of people increasing their pension contributions so whereas that might have been kind of very beneficial for the people who were who ended up saving saving more so again this seems to be this evidence of inertia both in terms of not responding to negative shocks uh to incomes or uh negative events but also uh we didn't really seem to have any uh any movement in the other direction either so uh yeah that's that's that's that's uh it looks like there wasn't a lot of engagement with pension saving despite this kind of very uh very salient and very uh large um uh events that was was happening but obviously it affected the value of the stock market quite a lot so it was a big drop and then subsequently it's gone up so is that do we think that's likely to affect people behavior going forward yeah so that's a really uh that's a really interesting point um i think so there was because people now have this freedom to decide what they want to do uh with their pension savings i think there was this fear that people might you know get scared by what's happening in the stock market and might withdraw uh withdraw a lot of their uh funds but actually we didn't see that happening so actually there were less um less withdrawals from from this private or defined contribution pensions during kovid again might be because people were consuming less and so on but we don't really see evidence evidence of that i think also um many of the the way that these many of these pension funds are structured is that if you're close to retirement so you're kind of getting close to thinking about withdrawing the pension funds the risk profile will usually be a little bit different where actually more of your uh more of your pot will be invested in things like bonds that don't respond in the same way to market fluctuations so for example you know stock markets fell by um you know 20 30 percent in march 2020 whereas we didn't really see a similar effect in um in a lot of these uh bond markets so so essentially for the people who were already kind of thinking about withdrawing their assets were probably already invested in um in a way that means that they weren't as um as affected and obviously for for uh younger people whose pensions are invested in um in the stock market that they did recover very quickly so hopefully it kind of does give people uh some comfort in that even if you see uh temporary dips in the in the stock market uh overall that's that's a good place to uh put your pension money because then over time uh they will uh they are most likely to recover that's interesting so you talked a little bit about pensions freedoms there there was one question asking relating this a little bit back to the theory that you were talking about earlier which was so when these pension freedoms were introduced did people stop buying annuities did did things change in the market you talked about adverse selection before but is that is that something that you know we actually saw in practice yes uh yes uh it is so basically as i said the um the rules used to be that for a certain size of pension pot you had to buy an annuity so the market was there once the pension freedoms were introduced actually these days we we see a very small minority of people buying annuities so the market is is still there it didn't completely collapse but the it's it's quite unattractive for for most people in terms of the uh products that can be uh can be offered so we did see kind of adverse selection happening in practice there and and a lot people um a lot less people nowadays have uh a lot fewer people nowadays have these annuities do we think it's likely that they would reverse that would we think that a future government might think about the reintroducing compulsory neutralization um well i mean i think it's a well i think it's i'm not sure i have a uh immediate view on uh well at least how quickly that would happen i think pension freedoms for a lot of people is quite a popular uh popular thing uh you know the fact that you can uh withdraw this money that you know you have saved yourself uh if if you need to you know say uh well what we find again in research is that a lot of people might use it to help their children by you know get on the property ladder or uh use it for a big holiday or so on which you know isn't necessarily what we want them to do with their pension money but it means that it's a very kind of popular thing uh so it would be kind of politically really quite difficult to go back to go back to that especially now that people are so used to the fact that uh their pension money they can kind of use as as they wish so yeah it would be difficult and especially when it comes to you know pensions um so you know if if i um if we make decisions on or changes into how people uh how people can access their pension funds for example uh if that applies to everyone then that would mean that you know some of those people saved that money uh kind of decades before um and so so it's quite difficult to make these um changes because it kind of has an impact a very long lasting impact and and can um change how people might have viewed their pensions uh uh yeah when they were saving earlier on in life so okay so what another question is again about annuities but someone asked why can't the insurers invest the money that pensioners pay in when buying annuities and maybe they do so if they do they take the money that people use to buy the annuity in the first place and then invest that themselves the example here is if they got a four percent return from those investments then they could just provide those four percent annuities forever um yeah so people um the pension funds um can can do that and i think they do do that as well uh where they will want to um yeah invest in assets where uh where the uh the payments uh uh that can kind of help create this profile that they kind of stable profile of um payments in the future um but i think you know the kind of issues of adverse election and so on still remain in that for some people the price uh the kind of insurance premium um will be difficult to set in a way that that means that it's kind of a um a uh attractive um product for for certain people to buy uh and then that could you know leads to those those same same kind of issues indeed so another question asked are the increases in the state pension age unique to the uk or they happening in other countries too is this a is this a global problem or is this just something that the uk is is dealing with no i think it is definitely happening in other countries in other countries as well uh because obviously every or most countries are are facing this same same issue so and and most countries are also facing this kind of combination of uh issues that i mentioned so you know people working for longer uh you know since the kind of 70s uh having reduced um or retiring earlier uh starting joining work the workforce later and also fertility rates falling so um so most countries are facing those same issues and and and most countries have recognized that even with um increases in the mandatory contributions it's not enough to kind of make up for for those so then the other thing that they've had to do is also increase uh increase their pension um save pension age of course we also then have examples from countries like france where you know there are there's a push for for that to happen but actually again politically it's it's been a lot more difficult than it has perhaps been in the uk so um so so yeah that's that's kind of uh somewhat a difference although interestingly you know the for example the increase in the women's state pension age for five years was introduced in 1995 and only implemented from 2010 onward so the issue there was that a lot of people didn't actually know about know about it and didn't know that it was happening so maybe that was uh made it politically a little bit easier to implement but um but yeah that's well of course some people still be very upset exactly exactly yes yeah so i mean i guess thinking about all those those pressures there's a couple of questions here that are quite related which is what do we think the the future of of pensions looks like so someone asked you know given all of these trends do you think that there will be a public pension system in future or by the time you retire and someone else has also asked you know you refer to the uk state pension as a pay as you go but it's actually a state benefit what are the chances the government may decide to save funds by making it means tested so do you think that means testing or just getting rid of the public pension system entirely are possible reforms the future well i think that getting rid of it can um completely is uh is sort of yeah uh unlikely to happen i think what the government wants to do is um is is protect people from uh kind of as i said absolute poverty or being uh living in poverty in retirement uh and also especially when you have this kind of the private saving is very flexible um government wants that there is or there is this kind of minimum amount or a relatively small amount that people will receive um no matter what happens to kind of their in their private pension savings so i think that is um that is likely to remain in in place that well that's my my view at least um of course the means testing is something that you know could happen especially in the uk so the state pension is only um only tied to your state pension age so you know there are people who might be working in uh still past their state pension age who are receiving the state pension uh so maybe you know something like that could change uh or uh or you know people who have very large uh private benef private pension pots um uh would not receive that but i think at the moment the um we don't want to create um kind of a disincentive for private saving by saying oh if you have more private saving you're not going to receive the um the public pension or you know if you if you continue working you're not gonna receive the public pension so um so yeah it's it's i don't think it's gonna happen anytime soon but of course uh we'll see we'll have to see how these things um um develop um in the in the future yeah as you say most most most of the policy seems to be kind of pushing towards increasing incentives for private savings so you talked about automatic enrollment and there were a couple of questions there as well i mean do we given it seems to be very successful do you think it should be applied to everyone rather than you know just doing just to employees certain places yeah so um so there are a couple of um the automatic enrollment has been very successful but there are some issues with it it is a completely sort of blanket policy right so so what some ifs research has found for example is that there are some um some very financially vulnerable people who for example say that they can't keep up with their bills they don't have any kind of liquid savings and so on and you know before automatic enrollment a very small proportion of those people were saving into um into a private pension probably you know because it made sense for them to be spending it on things like bills um today um after automatic enrollment you don't really see a difference um in the rates of um of private pension saving between that group and the groups that aren't um financially vulnerable so so there is already an kind of argument that you know should we really be pushing those people into into pension saving who are struggling um struggling today and for whom you know if their incomes are um quite quite low the the uh kind of income that the state pension provides relative to their uh incomes in or in their life earlier in their life is actually you know kind of more palatable so so i think that's kind of one of those things why for example currently automatic enrollment only applies to people who are earning more than 10 000 pounds a year um and you know there's there's a bit of a question mark of whether that should be uh lowered and and and probably makes sense that it's it's not at least immediately there's not an argument for changing the amount that people should put in maybe you could differentiate that by how much people earn in the first place yeah so but that's definitely something that could be done um the uh the the thing with that is also that you know earnings is kind of only one part of uh of of your financial situation in a way um so you know they probably should take into account other things like you know whether you have a mortgage or whether you have still paying your student loan or whether you have children uh whether your children live with you uh all those things of course we could try and um incorporate all of those things into defining the default rate but that's not okay so it gets very pretty complicated pretty quickly so uh but again yeah we've done some research on um on those kind of um looking at uh how should people save and and find that you know all of these things play into um how much people should be saving so yeah it's a bit more complicated in that sense and just finally i mean we touched this has all been for employees what about the self-employed it seemed to be quite a worrying trend that was that was falling quite so fast yeah so the self-employed is definitely something that the government is quite um a group that the camera are quite uh worried about uh the difficulty there of course is that they don't uh have this kind of stable uh or they don't have an employer who will enroll them into this and also they um so they don't have a paycheck where you kind of deduct the pension payments from so kind of just technically it's difficult but also a lot of the um for a lot of the self-employed people uh for example they face um large fluctuations in their incomes again they were grouped that were very severely affected in the early stages of covet 19 so so for those for that group it might actually make you know for a lot of them it makes more sense to keep their savings in a more liquid form that they can access if they uh have issues with their business uh for example so so yeah they there's there are also arguments for uh trying to increase uh some some sort of saving among that group but um um but the government's kind of running some pretty interesting trials into trying to find what it is that um the kind of product that actually would benefit those uh people the most great well we'll have to look forward to future research into that uh yes so learn the answers anyway thank you very much haley that was that was really interesting uh for those of you who've enjoyed it next week we'll be back to talk about income inequality uh how it's changed over time and why we might care about it so until then have a good week