Examining the interaction between saving and contributions to Personal Pension Plans. Evidence from the BHPS

This paper analyses the effects of social security reforms on saving in Britain. Following the 1986 Social Security Act, the UK pension system has partially shifted from an unfunded basis towards a partially funded basis. Under the new pension scheme, individuals are given the option of contracting out of the earning related pension scheme into a personal pension plan comparable to the IRA pension plan existing in the US. Individuals are also given the possibility of making additional contributions to their pension plan. These contributions represent an attractive form of saving in that they receive a more generous tax treatment than other conventional forms of saving. We use the BHPS dataset for the years 1991 to 2003 to investigate the interactions between voluntary additional contributions to personal pension plans (PPP) and saving in conventional forms. In particular, we test whether contributions to the PPP crowd out saving or constitute additional saving. We estimate the determinants of the amount saved in conventional forms and for retirement purposes with different estimation strategies by allowing the two choices to be correlated. According to our findings, the introduction of private pension schemes has not exhibited a crowding out effect on private saving.