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Wednesday, October 24, 2012

New data about the effect of the recession on older people - in the UK

I think the Institute for Fiscal Studies is an excellent organisation. The quality of the research and the way it presents its findings is first class.

Yesterday I attended the launch of some new research it has completed (and that still continues ) into the effect of the financial crisis on older households in England.

This is a very complex subject and I think that the IFS has made a great job to ‘start the ball rolling’, however, they would be the first to agree that there is a lot more work to be done.

You will probably read a lot about this research in the press and no doubt the findings will be dumbed down and probably misrepresented. The main thing that the press has focused on is the loss of wealth (£160,000+ for the most prosperous older people). This is interesting, both in the abstract and personally, I don't think it is the most important point.

Having had the chance to ask the authors about the research I think it worth noting the following points:

The research doesn’t really reflect the huge reduction in the value of annuities that has taken place – the authors know this and want to take it into account in the next iteration.

One set of calculations that attempts to account for the value of housing and other financial assets assumes that these are depleted by 50% over the life of the person. This is a nice idea but easier to say than to do. Again, the authors realize the problem - it is easy to do this on an Excel spreadsheet, harder to do in practice.

The biggest issue, for me, to come out of this research is that it does not integrate with the work done by Andrew Dilnot who has recommended how care should be funded. This means we have is one set of calculations that assume that the individuals wealth will be depleted by 50% or more until the point they require care and another set of calculations that assumes there will be no wealth depletion and  that people reach the point of needing care with their financial assets intact. Mr Dilnot should be speaking to the IFS to make sure their assumptions are the same. This should not be difficult since he was a director of the organisation.


The other omission is that the research really should have been done to show the differences between people receiving public and private sector pensions. The figures represent a mishmash of both groups.

The bottom line is that this research provides some good data and some interesting models for calculating the income of people during retirement. But, the models need to better reflect reality and to take into account the massive drop in the value of annuities. 

Today the ONS has released research that compares the impact of this recession with the previous two. The above graph shows how after the 1990 recession, real household income soon recovered. The 2008 recession is now 17 months old and real incomes have barely recovered.

There is yet more research just released by the Pensions Policy Institute that looks at the fall in the value of pensions. I will soon comment upon this data.

So what should you make from this monsoon of data? What it means is that the impact of the recession is still with us (and will be for the foreseeable future). All sections of society have been hit - older people are not immune. But, some groups of older people, whilst having lost money, are still doing OKish. They are the people you should be interested in understanding and capturing as customers. Dick Stroud

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