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About the PPI’s Models

The PPI has constructed a suite of micro-simulation models to analyse long-term outcomes from the current UK pensions system and possible reforms. These represent the current pensions system and allow for particular scenarios to be modelled. The models can:

• Illustrate projections of the impact on both an individual’s post-retirement income and on future pensions systems revenue and expenditure cashflows to the Exchequer; and
• Project outcomes for younger cohorts.

The original development of the models was funded by The Nuffield Foundation. Each year the PPI considers the currency of the models and Council’s annual report Objectives and activities updates them to incorporate the latest data and assumptions used. In the past year, this has involved updates including:

• The Aggregate Model and the Distributional Model have been updated for more recent experience based on Office for National Statistics
(ONS) data on population projections and employment information as well as Department for Work and Pensions (DWP) data on benefit caseload and levels;
• The population projected within the Dynamic Model has been updated to reflect the most recent wave of the English Longitudinal Study of Ageing (ELSA) dataset bringing the population more up to date;
• The decumulation modelling within the Dynamic Model and the Individual Model has been updated to better reflect the range of behaviours exhibited since the introduction of Freedom and Choice.

Models:

The Individual Model (IM) 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 PPI to validate Ipen against the PPI’s 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.

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Virginia Woolf Building
1st Floor, 22 Kingsway
London, WC2B 6LE

Tel. 020 7848 3744

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