Pensions

Published by: Key Note Publications Ltd

Published: Oct. 1, 2007 - 224 Pages

Table of Contents

1. Introduction

OVERVIEW

Methodology

DefinitionS

2. Strategic Overview

MARKET DYNAMICS

Restructuring Around the World

UK Still Not Saving Enough

Table 1: Retirement Savings Behaviour in the UK (%), 2005-2007

Personal Accounts

How Much Money is Involved?

Earnings of £15,000 a Year

Earnings of £25,000 a Year

Earnings of £40,000 a Year

Changing the Pensions Landscape

A New Pensions Settlement for the 21st Century

A Day — Big Changes in April 2006

Working On

New Contexts for Forward Planning

MARKET SIZE

Who Has a Pension?

Table 2: Participation in Pensions in Great Britain by Type (000 and pensions per head), 2006

Table 3: Participation in Pensions in Great Britain by Type by Sex (% of adults), 2006

Figure 1: Participation in Pensions in Great Britain by Type by Sex (% of adults), 2006

Table 4: Participation in Pensions in Great Britain by Type by Household Income (% of adults), 2006

Figure 2: Participation in Pensions in Great Britain by Type by Household Income (% of adults), 2006

Table 5: Participation in Pensions in Great Britain by Type by Age (% of adults), 2006

Figure 3: Participation in Pensions in Great Britain by Type by Age (% of adults), 2006

Table 6: Participation in Pensions in Great Britain by Type by Social Grade (% of adults), 2006

Figure 4: Participation in Pensions in Great Britain by Type by Social Grade (% of adults), 2006

Liabilities Increasing Faster Than Assets

Fluctuating Contributions

Table 7: Employers' and Employees' Contributions to Individual Pensions in the UK by Type (£m), Years Ending 5th April 2002-2006

Table 8: Employers' and Employees' Contributions to Individual Pensions in the UK by Category† (£m), Years Ending 5th April 2002-2006

Table 9: Contributors to Personal Pensions by Category† (000), Years Ending 5th April 2002-2006

Distribution

Whole-of-Market and Multi-Tie Advisers Dominate

Table 10: Distribution of New Single Premium Pensions and Related Products in the UK by Channel (% and £m), Quarter 1 2005-Quarter 2 2007

Figure 5: Distribution of New Single Premium Pensions and Related Products in the UK by Channel (%), Quarter 1 2005-Quarter 2 2007

Competitive structure

Awards

MARKETING ACTIVITY

Consumer trends

Market outlook

Key points

3. The State Pension

State spending on pensioners

Table 11: UK Government Expenditure on Pensioners' Benefits (£m and index 2001/2002=100), 2001/2002-2007/2008

Universal Protected Pension

All change

Second-tier state pensions

Key points

4. Personal Pensions

Wasted effort?

A-Day boost

Table 12: Contribution Limits for Personal Pensions in the UK by Age (%†), Until 5th April 2006

Unknown future

FLUCTUATING POLICIES

Table 13: Individual Pension Business in Force at Year End (000 and £m), 1986-2006

Table 14: Contributions to Personal Pensions by Type by Income (000 and £), Year Ending 5th April 2004

Table 15: New Single-Premium Individual Pension Sales in the UK by Category (£m), Quarter 1 2006-Quarter 2 2007

women UNEQUAL

Table 16: Number of Personal and Stakeholder Pensions by Fund Values by Sex, Year Ending 5th April 2005

Figure 6: Number of Personal and Stakeholder Pensions by Fund Values by Sex, Year Ending 5th April 2005

Islamic pensions

SELF-INVESTED PERSONAL PENSIONS

tough in the middle

Key points

5. Occupational Pensions

Short historical life

Rule changes

Lower participation

Table 17: Membership of Occupational Pension Schemes in the UK by Type (000), 1996-2006

Figure 7: Membership of Occupational Pension Schemes in the UK by Type (000), 1996-2006

Table 18: Premiums Receivable for Occupational Pension Schemes in the UK by Type (£m), 1996-2006

Figure 8: Premiums Receivable for Occupational Pension Schemes in the UK by Type (£m), 1996-2006

Public SECTOR VERSUS private sector

Table 19: Occupational Scheme Membership in the UK by Category (million), 2000 and 2004-2006

Benefits for directors

Protecting pensions

Key points

6. Annuities and Other Pension Income Options

After `A Day'

More Choice

Unsecured Income

Alternatively Secured Income

Secured Income

Discriminating payments

Table 20: Pension Annuities and Income Drawdown in the UK (£m and %), 2002-2006

Wide selection

Standard

Investment Linked

Rates decline continues

Table 21: Top Annuity Rates for a Man and a Woman by Annual Income from a £100,000 Fund by Provider† (£‡ and index August 2000=100), August 2000, October 2002, May 2004, November 2005 and June 2007

Key points

7. Promotion

Collapse in pensions advertising

Table 22: Main Media Advertising on Pensions by Product Type (£000), Years Ending June 2001 and 2004-2007

Table 23: Major Pensions Providers in the UK by Main Media Advertising Expenditure (£m and %), 1995

Table 24: Main Media Advertising Expenditure on General Pensions (£000 and %), Year Ending June 2004

Table 25: Main Media Advertising Expenditure on General Pensions (£000 and %), Year Ending June 2007

Equity release — the new pension

Table 26: Main Media Advertising Expenditure on Equity-Release Products (£000), Year Ending June 2005

Table 27: Main Media Advertising Expenditure on Equity-Release Products (£000), Year Ending June 2007

Key points

8. An International Perspective

Context for planning

Europe — Public-sector costs

Table 28: Expenditure on Old-Age Benefits in the EU-25 (%, em, 000 and e), 2004

Looking ahead in Europe

Pan-European Pensions

Germany's Painful Policies

Italy — Pensions Linked to Economic Performance

France — Funding Ahead

outside Europe

The US — Public-Private Polarisation

Australia — Not a Pensioner's Paradise

New Zealand — The KiwiSaver

Singapore — Provident Fund Option

China's Overhang

Key Points

9. PEST Analysis

POLITICAL FACTORS

ECONOMIC FACTORS

Reluctant Savers

Figure 9: Pension Provision in the UK by Sex and Employment Status (%), 2005/2006

Inflationary Pressures

Table 29: Income and Expenditure of UK Households by Income Decile Group (£ and %), 2005/2006

Figure 10: Income and Expenditure of UK Households by Income Decile Group (£), 2005/2006

Table 30: UK Households' Pension Contributions, Savings and Debt Clearance by Income Decile Group (£ per household per week), 2004/2005 and 2005/2006

Low Incomes and Women's Pensions

Table 31: Women's and Men's Median Income Before Tax in the UK by Age (000 and £), 2004/2005

Table 32: Female and Male Taxpayers in the UK (000 and %), 2004/2005

Pensions for the Few

SociAL FACTORS

Table 33: Projected Change in the UK Population by Age (000), 2007-2017

TECHNOLOGICAL FACTORS

Key Points

10. Consumer Dynamics

OVERVIEW

Table 34: Summary of Results (% of respondents), 2007

Table 35: Summary of Results for Selected Statements (% of respondents), 2004, 2005 and 2007

CONTRIBUTING TO PENSIONS

Table 36: Contributing to Pensions (% of respondents), 2007

PROPERTY AS A PENSION AND WORKING ON BEYOND RETIREMENT AGE

Table 37: Attitudes Towards Property as a Pension and Working on Beyond Retirement Age (% of respondents), 2007

RAISING THE QUALIFYING AGE AND PLANNING FOR RETIREMENT

Table 38: Attitudes Towards Raising the Qualifying Age and Planning for Retirement (% of respondents), 2007

SAVING FOR RETIREMENT

Table 39: Attitudes Towards Saving for Retirement (% of respondents), 2007

HIGHER SAVINGS LIMITS AND TAX RELIEF ON PENSION CONTRIBUTIONS

Table 40: Attitudes Towards Higher Savings Limits and Tax Relief on Pension Contributions (% of respondents), 2007

FINANCIAL COMFORT AND THE ABILITY TO SAVE MORE

Table 41: Financial Comfort and the Ability to Save More (% of respondents), 2007

FINANCIAL HARDSHIP AND CONFIDENCE IN THE GOVERNMENT AS A WELFARE PROVIDER

Table 42: Financial Hardship and Confidence in the Government as a Welfare Provider (% of respondents), 2007

KEY POINTS

11. Company Profiles

INTRODUCTION

AEGON SCOTtISH EQUITABLE

Corporate Strategy

Advertising and Distribution

Profitability

Table 43: Financial Results for Scottish Equitable PLC (£000, number, % and £), Years Ending 31st December 2004-2006

Future Developments

AVIVA (NORWICH UNION)

Corporate Strategy

Advertising and Distribution

Profitability

Table 44: Financial Results for Aviva PLC (£000, number, % and £), Years Ending 31st December 2004-2006

Future Developments

AXA GROUP

Corporate Strategy

Advertising and Distribution

Profitability

Future Company Developments

Canada Life

Corporate Strategy

Advertising and Distribution

Profitability

Table 45: Financial Results for Canada Life Ltd (£000, number, % and £), Years Ending 31st December 2004-2006

Future Company Developments

EQUITABLE LIFE

Corporate Strategy

Advertising and Distribution

Profitability

Table 46: Financial Results for The Equitable Life Assurance Society (£000, number, % and £), Years Ending 31st December 2004-2006

Future Developments

FRIENDS PROVIDENT

Corporate Strategy

Advertising and Distribution

Profitability

Table 47: Financial Results for Friends Provident PLC (£000, number, % and £), Years Ending 31st December 2004-2006

Future Developments

HBOS

Corporate Strategy

Advertising and Distribution

Profitability

Table 48: Financial Results for Clerical Medical Investment Group Ltd (£000, number, % and £), Years Ending 31st December 2004-2006

Table 49: Financial Results for HBOS PLC (£000, number, % and £), Years Ending 31st December 2004-2006

Future Developments

LEGAL & GENERAL

Corporate Strategy

Advertising and Distribution

Profitability

Table 50: Financial Results for Legal & General Group PLC (£000, number, % and £), Years Ending 31st December 2004-2006

Future Developments

LLOYDS TSB

Corporate Strategy

Advertising and Distribution

Profitability

Table 51: Financial Results for Scottish Widows PLC (£000, number, % and £), Years Ending 31st December 2004-2006

Table 52: Financial Results for Lloyds TSB Group PLC (£000, number, % and £), Years Ending 31st December 2004-2006

Future Developments

PRUDENTIAL

Corporate Strategy

Advertising and Distribution

Profitability

Table 53: Financial Results for Prudential PLC (£000, number, % and £), Years Ending 31st December 2004-2006

Future Developments

Resolution

Corporate Strategy

Advertising and Distribution

Profitability

Table 54: Financial Results for Resolution PLC (£000, number, % and £), Years Ending 31st December 2004-2006

Future Developments

Royal London Mutual

Corporate Strategy

Advertising and Distribution

Profitability

Table 55: Financial Results for The Royal London Mutual Insurance Society Ltd (£000, number, % and £), Years Ending 31st December 2003-2005

Future Developments

STANDARD LIFE

Corporate Strategy

Advertising and Distribution

Profitability

Table 56: Financial Results for Standard Life PLC (£000, number, % and £), Years Ending 31st December 2005 and 2006

Future Developments

Windsor life

Corporate Strategy

Advertising and Distribution

Profitability

Table 57: Financial Results for Life Assurance Holding Corporation Ltd (£000, number, % and £), Years Ending 31st December 2004-2006

Future Developments

Zurich financial services

Corporate Strategy

Advertising and Distribution

Profitability

Future Developments

Key Points

12. The Future

Pension chimera

Supply and demand

Table 58: Trends in Life Expectancy and Healthy Life Expectancy at Birth in the UK by Sex (years and %), 1981 and 2001

Figure 11: Trends in Life Expectancy and Healthy Life Expectancy at Birth in the UK by Sex (years), 1981 and 2001

Property winning the retirement contest

Taxing questions

What role for the private sector?

Market prospects

Key points

14. Consumer Confidence

METHODOLOGY

KEY FINDINGS THIS QUARTER

THE WILLINGNESS TO BORROW

Confidence Improves

Table A: The Average Amount Consumers Are Willing to Borrow in Order to Purchase Expensive Items at Current and Constant November 2004 Prices (£ and £bn), February 2006-2007

Willingness to Borrow Slips Slightly

Table B: The Number of Adults Willing to Borrow in Order to Purchase Expensive Items (000 and %), February 2006-2007

SPENDING FROM SAVINGS

Slight Increase in Spending from Savings

Table C: The Average Amount Consumers Are Willing to Spend from Savings in Order to Purchase Expensive Items at Current and Constant November 2004 Prices (£ and £bn), February 2006-2007

Saving Grows in Relative Importance

Table D: The Average Amounts Adults Are Confident Spending to Purchase Expensive Items (£ and %), February 2006-2007

15. Further Sources

Associations

Publications

General Sources

Government and Advisory Sources

Companies and Other Sources

Bisnode Sources

Abstract

Commercial interest in pensions provision is increasingly focused on the management of occupational schemes, personal retirement saving for high-income individuals, and at-retirement and post-retirement products, including annuities. Most individuals are reluctant or unable to save adequately for retirement: three-quarters of those aged 30 and over who are not in defined-benefit pension schemes are not saving enough. Furthermore, defined-benefit schemes are themselves in sharp decline. The Government's initiative to boost pensions saving is the Personal Account, into which workers would be enrolled automatically, although this is not due to begin until 2012. Personal Accounts, and other developments in the Pensions Bill, continue to transform pensions, in which A Day in April 2006 was an important staging point. In addition to Personal Accounts, the Pensions Bill 2007 includes raising the minimum state pension age in stages to 68, reducing the number of years of National Insurance contributions to qualify for a state pension and converting the State Second Pension (S2P) into a flat-rate supplement. The thrust of these reforms is an attempt to force individuals to take more responsibility for their own pensions.

Key Note's exclusive consumer research suggests that, in 2007, people are finding saving more difficult than they did in 2004 and a growing proportion are willing to work beyond the normal retirement age. Occupational pensions are in steep decline, with just over one in four respondents to Key Note's survey agreeing that they have or will have a pension based on their earnings. Almost half of adults said that higher-rate tax relief on pension contributions is unfair and even more, nearly six in ten, agreed that property is the best pension investment.

The UK's low state pension, at £87.30 a week in 2007/2008, is augmented by means-tested credits that are complex to understand and claim. The Pensions Reform Group proposed a Universal Protected Pension (UPP) of between 25% and 30% of average earnings, but the Government did not adopt the plan, choosing Personal Accounts instead.

Stakeholder pensions failed in their target to significantly increase retirement saving among lower-income adults. In fact, almost a third of people who take out a personal pension stop paying within 3 years. Most individuals' pension funds are small: in the year ending 5th April 2005, only 2.2% of men and 0.5% of women with pension funds had £100,000 or more invested.

High earners continue to funnel money into pensions, encouraged by higher-rate tax relief. Self-invested personal pensions (SIPPs), widely available to people with funds of more than £100,000, are a strong sector, accounting for 27.9% of single-premium contributions in the first quarter of 2007. The pension changes introduced in April 2006 prompted many affluent contributors, especially those in their 30s and 40s — for whom tax relief was previously capped at low proportions of their income — to make larger contributions into their funds. At the same time, the imposition of a tax-privileged lifetime limit for individual pension funds spurred investment in physical assets, such as property, adding to property-price inflation.

Defined-benefit occupational pensions are in severe decline in the private sector, although company directors have protected pension plans for senior executives to a far greater extent than pensions for `ordinary' workers. The majority of the continuing contributors are in large schemes with more than 10,000 members. In the public sector, 5.1 million workers were in defined-benefit schemes as at 2006.

The Pension Protection Fund and the Financial Assistance Scheme are intended to improve public confidence in occupational pensions, but many issues remain, such as the lack of accuracy with which financial reporting standard (FRS) 17 values pensions fund assets and liabilities. The trend for private-equity firms to buy large companies and their pension schemes with borrowed money is a cause of concern for the future health of those pension funds.

A more liberal regime for maturing retirement funds began on 6th April 2006, from which date retirees no longer have to purchase an annuity by the age of 75, therefore clearing the way for different retirement products. Alternatives to annuities, such as income drawdown from pension funds, benefit from the slump in annuity rates, making them appear unattractive purchases. In real terms, annuity rates fell by more than 40% for both men and women between August 2000 and June 2007.

Canada Life, AXA and AEGON are among the most innovative providers of retirement income. All are controlled by companies outside the UK.

Pensions policy is subject to frequent changes, and this makes it difficult for individuals to plan ahead confidently. In any case, the majority of households would struggle to divert more money into pension saving. Only the top 20% of households by income have resources to inject into savings without making drastic economies in their spending. Debt is another relevant issue.

Pensions saving is set to become more difficult as pressures on personal incomes grow and barriers to longer participation in the workforce — including ill health, disability and lack of sufficient job vacancies — before becoming reliant on a pension are more apparent.

There is no single solution to the looming problems of retirement funding, although the majority of adults regard property as their best pension investment. However, the rising extent of pre-retirement equity withdrawal is cutting into the value of property as a pension resource.

Retirement planning requires several pillars and the complexities mean that customers should seek fee-paying independent financial advice. Personal Accounts are a sensible way ahead, but the intended freedom to opt out, without joining another type of pension plan, could be removed. Higher-rate tax relief on pension contributions is a subsidy to the already affluent and could be reduced to basic-rate relief, making an annual sum of around £4.3bn available to improve the state pension.

For quoted and mutual financial-services companies alike, mass-market multidecade pension plans are far less attractive than SIPPs for individuals able to afford maximum contributions or at- and post-retirement products: annuities exchanged for capital or fee-paying drawdown plans.

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