Persistency of pension contributions in the UK: Evidence from aggregate and micro-data

This paper presents evidence on the persistency of contributions to individual pensions, including an analysis of micro-data from the British Household Panel Survey. It finds variation in persistency rates by gender, earnings and household income. Changes in income and consumption needs (for example, becoming unemployed or the arrival of a new baby) increase the probability of lapse, but household income also matters, suggesting that pensions may be less affordable for those on low incomes, even in the absence of shocks. The introduction in 2001 of stakeholder pensions, with a charge cap of 1% of fund value, transfers the financial penalty associated with lapsing from consumers to providers. Arguably this will makes it less likely that pensions are sold to those for whom they are less suitable. The only risk is if providers walk away from low income groups altogether.