About the PPI’s Models
The Pensions Policy Institute (PPI) has constructed a suite of models to analyse long-term outcomes from the current UK pensions system and possible reforms. The development of the models was funded by the Nuffield Foundation and the PPI is very grateful for their support.
The models have been designed to allow different types of analysis under different pensions systems:
- The Individual Model projects future state and private pension income for hypothetical individuals with different characteristics.
- The Aggregate Model projects long-term government expenditure on pensions and contracted-out rebates, income from the private pensions system and the fiscal cost of tax relief.
- The Distributional Model projects forward the distribution of pensioner incomes consistently with the Aggregate Model.
- The Dynamic Model uses longitudinal data on people aged over 50 in England (taken from the English Longitudinal Survey of Ageing) to make deterministic projections about future retirement outcomes using a dynamic micro-simulation model.
The models have been developed over the last two years: our individual modelling capability has been expanded with a stochastic investment model and the aggregate model can now model public sector and the private sector pension schemes separately. Future developments will include improved modelling of retirement decisions and transitions into retirement, including the holding of investments beyond State Pension Age. These recent developments have also been funded by the Nuffield Foundation.
The Individual Model is the PPI’s tool for modelling illustrative individual’s income during retirement. It can model income for different individuals under current policy, or look at how an individual’s income would be affected by policy changes. This income includes benefits from the state pension system and private pension arrangements, and can also include income from earnings and equity release. It is useful to see how changes in policy can affect individuals’ incomes in the future.
The DWP commissioned the Pensions Policy Institute (PPI) to validate Ipen against the PPI’s Individual Model (IM). The PPI’s IM is a model developed by the PPI to project incomes in retirement for hypothetical individuals and couples. Please click here for further details.
The Aggregate Model projects long-term government expenditure on pensions and contracted-out rebates, the private pension system and the fiscal cost of tax relief:
- At the heart of the Aggregate Model is a projection of the labour market.
- Future expenditure on the State Earnings-Related Pension Scheme (SERPS) and State Second Pension (S2P) is estimated based on the projection of the labour market.
- Future expenditure on contracted-out rebate rates is estimated based on the projection of the labour market.
- Private pensions and cost of tax relief are projected.
- Basic State Pension is projected by making an assumption as to how entitlements improve over time, based on current government policy.
The Distributional Model projects the future distribution of pensioner incomes. Based on this projection, it calculates Pension Credit entitlements and income tax liabilities.
The Distributional Model is based closely on the dataset used by the Department for Work and Pensions for their Pensioners’ Incomes Series (PIS) publication. This in turn is based on the Family Resources Survey (FRS) dataset and the Households Below Average Income (HBAI) dataset. The PIS is a dataset of around 8,000 households in Great Britain over state pension age.
The Distributional Model is a static microsimulation model. This means that it contains a representative set of households from the pensioner population. In the projection, the income received by the individuals is adjusted over time, to take account of future changes in benefit rates and rules around qualification for benefits (for example the increase in state pension age and the reduction in the number of required qualifying years for full basic state pension).
The pensioner income distribution could change in future as a result of:
- Changes in the average amount of income received by pensioners.
- Changes in how income is distributed between pensioners.