Building up pension rights
A hard copy of this report summary can be obtained by contacting Paul Noakes [E-Mail: Paul.Noakes@dwp.gsi.gov.uk] or by writing to him at the 'Social Research Division, Department for Work and Pensions, 4th Floor, Adelphi, 1-11 John Adam Street, London WC2N 6HT'.
Research Report No. 114
By Robert Walker, Claire Heaver and Stephen McKay
This report examines how people build up pension rights over their lifetimes and the circumstances of those with limited pension provision. It is based on an analysis of the 1994/5 Survey of Family and Working Lives, a representative survey of over 9,000 individuals in Great Britain aged 16-69 years, which examined peoples' economic and family circumstances throughout their working lives. The research, which will contribute to the evaluation of the pension reforms, was carried out by the Centre for Research in Social Policy (CRSP), Loughborough University.
The main findings were:
- There were differences between men and women in the accumulation of rights to the basic state pension. Home Responsibilities Protection (HRP), while improving women's basic state pension entitlements, did not guarantee that women approaching retirement over the next few years would gain a full basic state pension based on their own National Insurance contributions. Women were also less likely than men to have accrued rights to the State Earnings Related Pension Scheme (SERPS).
- About three-quarters of men (73 per cent) had made non-state pension arrangements (occupational or personal pensions) compared with only half of women (51 per cent). People were most likely to join occupational pensions either in their 20s or their 40s. A similar pattern was observed for personal pensions.
- With each successive generation, more workers have acquired occupational and, latterly, personal pensions and have done so earlier in life. The acquisition of pensions slowed down among people starting work within the last decade or so, perhaps because of increasing unemployment and people staying longer in education. Fewer of the people who were in their mid 20s in 1995 had secured pension rights than in any generation since the late 1960s.
- Factors associated with a greater probability of belonging to an occupational pension scheme were: educational qualifications, gender (male) and ethnicity (white), being in a job in the public sector and the former nationalised industries of energy and transport, working in a large firm, being a professional or a manager. Part-time and/or seasonal jobs were very unlikely to provide occupational pensions.
- People without non-state provision were disproportionately younger, women, ethnic minorities, people with limited educational qualifications, in low-status jobs, and in particular industries, notably distribution, construction and 'miscellaneous' industries. Men living in Scotland and the North of England were among those most likely to be dependent on state pensions.
Introduction
This report examines how people build up pension rights over a lifetime and the circumstances of those with limited pension provision. It is based on an analysis of the 1994/5 Survey of Family and Working Lives, which collected information about respondents' economic activity and family circumstances throughout their working lives, and about their decisions to join and leave pension schemes. The research, carried out by CRSP explores the process by which people build up rights to state and non-state pensions, and reports on the circumstances of those with limited pension provision.
Background
Pension arrangements are closely related to individuals' lifetime patterns of economic activity, which in turn reflect changing economic and social conditions. Those respondents aged 60 to 69, who had largely reached the end of their working lives, had held an average of six different jobs in three or more industries1. Younger generations tended to have held more jobs by any given age and to stay in each job for less time. At the time of interview respondents in their 50s had had an average of seven jobs; those in their 40s, six; those in their 30s, five; and those in their 20s, four.
Interruptions in employment serve to reduce the length of a person's working life and the years that count towards a pension. Sizeable numbers of people had experienced such breaks but gender differences were marked and never more so than when people were in their 40s. Ninety per cent of women and 45 per cent of men aged between 40 and 54, had spent at least one month since leaving school when they were not in paid work. Women, of course, had spent more time out of the labour market than men caring for children and others. Men, though, had been more prone to unemployment; by their 50s, 71 per cent of men had experienced a spell when they were not in paid work.
Social changes evident from the survey included the decline in the prevalence of marriage, and an increased risk of divorce among younger age cohorts.
At the time of interview in 1995:
- 12 per cent of all respondents had both joined an occupational pension and taken out a personal pension;
- 40 per cent had joined occupational pensions only;
- nine per cent had taken out a personal pension, but never joined an occupational scheme;
- 38 per cent had not so far started a non-state pension.
State pension schemes
Entitlement to state pension is based on a person's National Insurance contributions. When interviewed, 85 per cent of respondents had made at least one year's worth of Class 1 (employed) contributions, 11 per cent had made Class 2 (self-employed) contributions and 23 per cent had been credited with contributions. Twenty seven per cent seemed likely to qualify for Home Responsibilities Protection (including almost half - 47 per cent - of women but just seven per cent of men).
Whereas only eight per cent of the men who had reached pension age had fewer than 40 years' contributions towards the basic pension, at age 60 a majority of women (55 per cent) had contributed to a pension scheme for less than 20 years. Whilst Home Responsibilities Protection improved the state pension entitlements of women, it did not guarantee that all (or almost all) women would gain full state pensions for some time. As many as 22 per cent of women aged 55 to 59, and 12 per cent of those aged 50 to 54, had already spent more than 25 years outside of the labour market and hence generally would not reach a full pension even with full Home Responsibilities Protection and an otherwise complete working record.
Almost half the sample (45 per cent) had been members of State Earnings Related Pension Scheme (SERPS) at some point, rising to more than two-thirds of those aged 25 to 34. Comparatively few people had belonged to SERPS for ten or more years, although nine per cent of males aged 55 to 64 had been in SERPS for 15 years or over. While there is a disparity between men and women both in the number who had ever joined SERPS and the length of their contribution records, this was smaller than that found for non-state pension arrangements.
Joining non-state pensions
More than half (52 per cent) of people aged 16 to 69 had been in an occupational pension at some time during their life, and one-fifth (21 per cent) had started a personal pension. Almost four in ten (38 per cent) had, so far, made neither type of arrangement.
Occupational Pensions
Employees tended to join occupational schemes in the largest numbers either during their 20s or in their 40s. Only about five per cent of people had joined an occupational pension scheme by the age of 20, whereas more than one-third had done so by the time they were 30. Membership at age 50 was close to two-thirds and increased only marginally thereafter.
The propensity to join an occupational pension scheme was associated with gender, ethnic origin, educational qualification, and the type of occupation and industry in which people worked.
Almost everyone with at least 'A' level qualifications eventually joined an occupational pension, but this was true of only about half of those with qualifications no higher than GCSE grade 'C' standard. Until the age of about 20 men and women shared the same propensity to join an occupational pension scheme but thereafter the number of women newly acquiring an occupational pension fell behind that of men. Whereas 72 per cent of 45 year old men had ever joined an occupational pension scheme, only 45 per cent of women had done so.
Some kinds of jobs were significantly less likely to provide occupational pensions: namely those which were part-time, temporary or seasonal, located in small firms, based in the manufacturing, distribution and construction sectors, and occupied by women. The chance that a job would carry a pension was more closely linked to industry than occupation, being particularly high in public administration, and the formerly publicly owned energy and transport sectors. Even so, professionals and managers were (on average) about four times as likely to have occupational pensions as those in manual occupations, even after controlling for other characteristics of the jobs.
Personal Pensions
People who had taken out a personal pension were most likely to have either been aged in their 20s or their 40s. Precisely when they took out a personal pension depended on whether or not they had ever had an occupational pension. Those who had an occupational pension were mostly likely to acquire a personal pension in their 40s, even their late 40s. Those who had not were more likely to take out a personal pension in their 20s, with a second peak among people aged between 40 and 50.
How long do people stay in pension schemes?
Non-state pensions
At the time of interview those men who had ever joined an occupational pension scheme had, been members for an average of 15 years. Women had generally belonged to on occupational scheme for less time, for ten years on average. Men who were aged over 60 had typically contributed for 24 years, and women for 16 years. Single women had spent more time as members of occupational pensions than either married or divorced women but marital status made no difference to the time that men had belonged to occupational pension schemes.
Men aged 60-69, many of whom would have completed the accumulation of their pension, divided into three equal-sized groups. Thirty seven per cent of this age group had not joined an occupational pension scheme or spent less than ten years in one; 32 per cent had spent a substantial amount of their working lives belonging to an occupational scheme (30 or more years), while 29 per cent had spent between ten and 30 years in occupational pensions. At the same age, 63 per cent of women had never joined an occupational scheme and 12 per cent had belonged to one for less than ten years. Twenty per cent had been belonged to a scheme for between ten and 30 years, and only six per cent for 30 or more years.
Those with the most significant occupational pension rights had often started early - two-thirds (64 per cent) of those over 50 with at least 16 years of occupational rights had made at least some contributions whilst in their 20s.
The average time that respondents had spent in any particular occupational pension scheme was 14.4 years, although half had left within a little over ten years. Men, on average, tended to remain in schemes for longer than women: half of men stayed as long as 12 years, whilst half the women had left in eight years. Statistical analysis suggested this gender difference was true only of older birth cohorts; among younger birth cohorts there was no difference in the rate at which men and women left occupational pensions.
The length of time for which respondents remained in an occupational pension scheme was also related to the type of scheme. For example, the average membership was twice as long in defined benefit occupational pension schemes (a median of 13.9 years) than defined contribution schemes (median 7.3 years). People tended to remain much longer in their first occupational scheme than in subsequent ones.
First indications suggest that the average amount of time spent in a personal pension - that is the period during which contributions were being made by the respondent or on their behalf - is likely to be the same as that spent in an occupational pension scheme. People appear to leave appropriate personal pensions more rapidly than other types of personal pensions.
Life-time Perspectives
Adopting a lifetime perspective it was possible to identify eight different patterns of economic activity and membership of occupational pensions. About one in five respondents had been members of occupational pensions virtually throughout their working lives. Three-quarters of this group were men. A similar number of respondents, although they had generally worked, and more or less continuously did not belong to an occupational pension scheme; they typically worked in lower status occupations or for smaller companies. Almost one-third (32 per cent) of this latter group had taken out a personal pension, whereas only 17 per cent had joined an occupational pension. Those most likely to have taken out personal pensions were respondents following a self-employed career path: 61 per cent of this group had had a personal pension at some stage.
Other groups were characterised by relatively late entry into occupational pensions followed by considerable employment stability, or by periods of time out of the labour market on account of caring responsibilities or, more rarely, long-term unemployment. Economic inactivity did not necessarily stop people putting resources into non-state pensions, but the sizeable gaps in employment reduced the likelihood of having a non-state pension.
People without non-state pensions
Even allowing for the growth of occupational pension schemes and, more recently, in personal pensions, significant numbers of people aged 16-69 in 1995, 27 per cent of men and 49 per cent of women, have neither. Many of these are young and still have time to build up pension rights, but others seem likely to enter retirement with no more than a state pension.
With each successive generation, more workers have been acquiring occupational and, latterly, personal pensions and doing so earlier in life. However, it is possible that this trend halted recently. The acquisition of pensions slowed down among people starting work within the last decade or so perhaps because of increasing unemployment and people staying longer in education. Fewer of the people who, in 1995, were in their mid 20s had secured pension rights than in any generation since the late 1960s.
A large number of characteristics predispose people to be reliant entirely on state provision. As already noted - people seem to acquire non-state pensions later in life with the result that young people tended to rely on state provision. People without occupational or personal pensions are comprised disproportionately of women, ethnic minorities, and people who have limited educational qualifications, work in low status jobs and in particular industries, notably distribution, construction and miscellaneous other industries. Similarly people who began work before the late 1970s or after 1985, have experienced spells of unemployment and who do not own their own homes are all the more likely than average to be reliant exclusively on state pensions. There was evidence that gender differences had declined over time, especially within the youngest cohorts, although the presence of children in a couple seemed to help perpetuate differences.
Educational qualifications enhance the likelihood that both men and women will not be solely dependent on state pension provision although qualifications were a less sharp discriminator among men than women. Employment status at the time of interview was also a good predictor of whether or not a person had a non-state pension.
People aged over 40 are less likely than younger people to acquire a non-state pension before they retire. Only 34 per cent of the men and 13 per cent of women without non-state pensions were in full-time work when interviewed in 1995 while respectively 44 per cent and 60 per cent were economically inactive. Twenty two per cent of the women without pensions were working part-time.
It is likely that jobs in the distributive trades will generate a quarter of the male pensioners retiring without a non-state pension in the next 20 to 25 years, and manufacturing and construction a further fifth each. Although occupational pensions are particularly associated with jobs in public administration, this industrial sector probably accounts for almost a third of the women retiring without an occupational or personal pension. Fifty six per cent of men retiring without a pension will previously have worked as plant operators, craftsmen or labourers, although this may partly be a reflection of the characteristics of the employees or of the employers.
Multivariate analysis confirmed that the above-mentioned associations remained statistically significant even when account was taken of all the variables together. Other variables that proved to be significant included: trade union membership (which increased the chances of somebody having an occupational pension) and, in the case of men, region: those living in Scotland and the North of England were among those most likely to be entirely dependent on state pension.
Links between pensions of partners
In 41 per cent of couples both partners had a non-state pension, in 43 per cent there was just one non-state pension, and for 16 per cent there was none. More than eight in ten (83 per cent) of men without non-state pensions, had (female) partners without occupational pensions. Eleven per cent had female partners who had been in occupational pensions for less than ten years, and a further seven per cent had female partners who had been in such pensions for ten years or more. Women were more likely then men to have partners with pensions. Almost half (47 per cent) of the women with no non-state pension had partners with an occupational pension; about four in ten (39 per cent) women with no non-state pension had partners who had been in such schemes for more than five years.
The survey provided some insight into people's pension situation on divorce. Over half (53 per cent) of men who had experienced divorce, had been in an occupational pension scheme when they divorced, compared to only one-quarter of women (27 per cent). Not only were divorcing men more likely to have belonged to an occupational pension scheme, they were also more likely to have larger pension rights than women. Divorcing men belonging to occupational schemes had on average 11 years of accumulated rights compared to only eight years for their female counterparts. Fifty eight per cent of men who had no occupational pension rights when they divorced were in full-time paid work at the time of interview, compared with just 31 per cent of women who had divorced under similar circumstances. Sixty two per cent of these men had subsequently re-married as had 44 per cent of women.
The wider effect of pension schemes
It was possible to use the survey to investigate whether belonging to an occupational pension affects the time that people stay in jobs and the timing of their retirement.
Eight out of ten people said that being a member of an occupational pension scheme made no difference to the length of time that they would stay (or had stayed) with an employer. On the other hand, one in ten said that it had or would increase the time that they stayed and the same number was unsure if there had been any effect. But twice as many men as women (12 per cent of men compared to six per cent of women) said the pension meant they stayed longer with a firm.
Respondents who had been members of salary related occupational pension schemes were more likely than those in money purchase schemes to say that they stayed longer with a firm because of the pension scheme (13 per cent compared to five per cent). Similarly, more members of non-contributory schemes said that they had stayed with an employer for longer because of their pension than was so for people in contributory schemes, but the difference was small (12 per cent compared to nine per cent).
Respondents aged in their 30s anticipated retiring at around the age of 60: 59 for those in work, and 61 for those who were not working when interviewed. Those born a decade earlier and in their late 40s when interviewed expected to retire slightly later, at the age of about 62.
People with occupational pensions seemed to retire, or at least to become economically inactive, earlier and over a narrower age band than people without occupational pensions. They also expected to retire earlier - though it is impossible to say which phenomenon caused the other.
Almost one-fifth (18 per cent) of people without a non-state pension were uncertain about when they would retire, compared with eight per cent for those with non-state pensions. Just over half (51 per cent) of men who had ever contributed to a non-state pension expected to retire by the age of 62, or earlier, compared with around only one-third of men (34 per cent) who had joined neither type of scheme. Almost three-quarters (73 per cent) of women with a non-state pension expected to retire by the age of 62 compared with 60 per cent of those without non-state pensions.
Publication details
Walker, R, Heaver, C and McKay, S (2000) “Building Up Pension Rights” (DSS Research Report No. 114) Leeds: CDS (£33.50)
Other relevant publications on individuals' pension provision
Hedges, A. (1998) “Pensions and Retirement Planning” (DSS Research Report No. 83) Leeds : CDS (£28.00)
Disney, R., Grundy, E. and Johnson, P. (1997) “The Dynamics of Retirement” (DSS Research Report No. 72) London: TSO (£36.00)
Field J. and Prior G. (1996) “Women and Pensions” (DSS Research Report No. 49) London: HMSO (£35.00)
Hawkes, C. and Garman A. (1995) “Perceptions of Non State Pensions ”(DSS In-house report No.8)
Bone, M., Gregory, J., Gill, B. and Lader D. (1992) “Retirement and retirement plans” (Social Survey Division, Office of Population Censuses and Surveys) London:HMSO