I’m not a great fan of the Institute of Fiscal Studies who have found it hard to understand pension as “wealth” . But this report has taken a step in the right direction
In this IFS report, pensions hold a bigger value in our wealth. If we moved from pot to pension, the importance of pensions over our whole life would be higher still.
Younger adults hold ‘significantly more’ pension wealth than official data suggests
This is a press release from IFS of the report you can access on the link above, I finish with some thoughts for the future (assuming we move from DC to CDC)
Younger adults held a significantly larger share of total household wealth during the 2010s than official statistics suggest, according to analysis from the Institute for Fiscal Studies (IFS), which highlighted longstanding issues in measuring private pension wealth.
The report argued that methodological changes and inconsistencies in Office for National Statistics (ONS) data have made it difficult to accurately assess how wealth is distributed across British households over time, leaving policymakers without a clear and reliable picture.
Private pensions, the largest component of household wealth, have been particularly affected, with the IFS developing a revised methodology that aligns pension valuation more closely with the way other assets are measured.
Using this approach, pensions accounted for 54 per cent of total household wealth in 2020-22, compared to just 38 per cent under official estimates, reflecting a more accurate treatment of future pension income, particularly during a period of ultra-low interest rates.
The revised figures suggested that younger individuals were considerably better off than previously thought, as the share of total wealth held by those aged 20-39 increased from 10 per cent in 2010-12 to 18 per cent in 2020-22 under the IFS methodology.
This compares with official statistics, which showed a much smaller rise, from 8 per cent to 11 per cent, meaning that the gap in wealth between younger and older generations has likely been overstated in recent years.
In addition, the report found that disparities in wealth by education level were wider than suggested by official data, as individuals with degrees were more likely to hold pension wealth that had previously been undervalued.
As a result, median wealth for graduates was around 50 per cent higher under the revised methodology, compared to an uplift of less than 25 per cent for those without formal qualifications.
The IFS also pointed out that differences between methodologies were particularly pronounced during periods of very low interest rates, although the gap between the two approaches may narrow in future data releases following the rise in market interest rates since 2022.
Will pensions become a larger part of our “wealth”.
The IFS method is to think of money in pension pots as future pension and this leads to an immediate improvement of their perception of the value of what is in the pension system
Why the IFS see pensions as more valuable than the ONS is because they are calculating the value of future pensions earned over the whole of our life on a more realistic basis (their core methodology).
The methodology developed in this report seeks to begin the process of remedying that situation by developing a core methodology, based on sound economic principles, for the valuation of pension assets. Most importantly, it moves away from the use of the SCAPE rate, which is not appropriate for measuring the market value of pension promises, and towards the use of real UK government bond yields, which provide a reasonable measure of the risk-free interest rate.
I am not going to argue for Scape or Gilt Discounting, I’m going to thank IFS for thinking of pensions as income paid in retirement. Right now, most people working in the private sector, don’t get a pension. When we move from pot to pension then pensions will become even more valuable.
