The Department for Work and Pensions (DWP)’s Pensim2 model is a dynamic microsimulation model. The principal purpose of this model is to estimate the future distribution of pensioner incomes, thus enabling analysis of the distributional effects of proposed changes to pension policy.
Pensim2 is one of a number of dynamic microsimulation models in existence around the world. In general these models are used for modelling the relationship between economic variables like pensions, savings, labour market status, earnings and related parameters in a long-run scenario (over the course of several decades into the future). This is done by using large scale datasets containing representative samples of individuals and households (either from administrative or household survey data) and then ‘growing’ the sample through time by simulating the relevant life events for each individual and each family. Over time, complete synthetic life histories are built up for each individual, including data on mortality, labour market status and work history, retirement age, savings and pensions contributions, and so on. The model is divided into ‘modules’, each of which determines a number of economic outcomes.