Distributional Model

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 per pensioner.
• Changes in how income is distributed between pensioners.

The Distributional Model allows for most distributional effects.  In principle, there are four possible reasons why the distribution of pensioner incomes could change in future:

• Changes in the relative balance of different types of income
• Pensions policy affecting the distribution of individual types of income
• Demographic changes
• Changes in the labour market

Distributional Modelling cannot reflect everything that will impact on the pensioner income distribution over time.  Its aim is to allow comparison of the impact on the shape of the income distribution between different reform options. 

Additional data and assumptions for the Distributional Model:

• The current distribution of pensioner incomes is from the dataset underlying the 2005/6 Pensioners’ Incomes Series publication by the Department for Work and Pensions.
• The average amount received in BSP, SERPS/S2P and private pensions by each cohort is uprated from year to year in line with Aggregate Model projections of the aggregate amount received.  The average amount received from earnings and other sources is uprated from year to year in line with average earnings growth.