Pensions Market Assessment 2009
Key Note Publications Ltd, August 2009, Pages: 272
The 11.8 million UK residents over state pension age in 2009 are forecast to increase to 12.5 million in 2015 and 14.6 million in 2030. To generate the financial resources needed to support the country's pensioners, the Treasury is relying on UK gross domestic product (GDP) rising by nearly a quarter in real terms between 2006/2007 and 2015/2016, but the huge overhangs of national and personal debt and the constraints imposed by climate change and resource shortages make this forecast look over-optimistic.
The savings pattern in the UK, including the pattern of pension saving, is skewed by means testing. For many people, the future loss of means-tested welfare payments outweighs the possible benefits of saving. According to official statistics, almost one household in two had less than £1,500 in savings in 2007, and half of these households had no savings at all. However, the potential to save is limited. In 2007, the 60% of households with the lowest incomes were, on average, spending more than their income. Only the top 10% of households by income appeared, in 2007, to be saving adequately for the future.
Premium inflows for individual pensions reflect the fiscal benefits of pension saving for higher-rate taxpayers: a quarter of all tax relief on pension contributions goes to the top 1.5% of earners. The expected launch of Personal Accounts in 2012 is intended to revitalize mass-market pensions, but they are unlikely to make much difference to the volume of pension saving.
New consumer research shows that more than seven people in ten believe that pensions policy in the UK is in a mess. Five people in every six agree that a national debate is needed to decide how pensions will be paid for in the future. Almost seven people in ten say that pensions are currently too complex. Fewer than one person in four believes it is possible for workers on ordinary incomes to save enough for a comfortable retirement, and more than three in four women say they cannot afford to increase their savings.
Almost seven in ten individuals say that in the future more pensioners will access money through equity release. Nearly one person in two believes there is no point in making a big effort to buy a home if it then has to be sold to pay care-home fees. Nearly nine people in ten think there must be a national debate on organizing and funding the care of the frail elderly.
Individuals' pension worries are well founded. Overall, UK households, which put an average of just £20.20 a week into life insurance and pension contributions in 2007, are investing only around a fifth of the amount that would be needed, continuously over a working lifetime, to fund a simple but comfortable retirement. The few who are investing adequate sums are outnumbered by those who are not making any pension contributions at all.
Government predictions of future economic well-being appear too optimistic when the underlying constraints are examined. The basic rate of income tax will almost certainly have to be increased significantly. This could encourage pension saving if full basic-rate tax relief on contributions is continued, but individuals will have many other pressures on their incomes, including higher National Insurance contributions and higher fuel duties.
Pension funds face an era of low overall returns, owing to factors such as probable weak economic growth, higher costs for non-renewable resources and, particularly in the UK and the US, inflation resulting from the increases in the money supply. Many individuals have lost confidence in pension saving because of the ongoing abandonment of defined-benefit schemes, volatile fund values, and frequent government meddling with pension regulations. The planned Personal Accounts are unlikely to lead to a great advance in pension saving.
Property still offers advantages over conventional pensions. Property is tangible, it can be a source of income, and it can yield capital at a time of the owner's choosing. People on low to moderate incomes often cannot afford both to buy a home and to build up a pension fund, and in this case it is logical to opt for property and to use equity release for retirement income. Individual Savings Accounts (ISAs) also offer more flexibility than a conventional pension, although people who save in ISAs risk having to spend these savings if they need to apply for means-tested welfare benefits.
The objective for state and private pension income — to provide everyone with a comfortable standard of living — is unattainable. The future of retirement provision is likely to be a mixture of equity release, business ownership, part-time work, cash savings and investments (including ISAs), financial support within extended families, and conventional pensions.
The UK's housing shortage should protect the property market from a collapse. The prospects for small local businesses, which can generate retirement income for their owners, are improving because expensive fuel prompts shorter supply chains. On the other hand, personal and household debt and inevitably higher taxes will be a drag on new savings, and frequent changes in regulation damage the public's confidence in pensions.
The major role of insurance companies in pension provision in coming years is likely to be as managers of state and communal funds. Insurers also have an expanding role as providers of equity release to individual homeowners. Private pensions will probably become a niche product for individuals well within the top quintile of income distribution.
The world economy will have to come to terms with its own boundaries, including the scaling back of state and private pension expectations. Repercussions may include social disquiet, leading to authoritarianism in an effort to ensure that economic activity is not disrupted, or alternatively to a revival of community politics, which would foster local industries and encourage the retention of profits in local funds.
Executive Summary
1. Introduction
REPORT OVERVIEW
DEFINITIONS
2. Strategic Overview
MARKET DYNAMICS
Pensioners: Current and Future Numbers and Costs
Table 2.1: Estimated and Forecast Spending on State Pensions and Other Benefits
for UK Pensioners at 2006/2007 Prices (£bn), 2006/2007 and 2015/2016
Numbers Saving for Private or Occupational Pensions
Table 2.2: Proportion of UK Residents of Working Age Who Are Accruing
a Non-State Pension by Sex and Age (%), 2008
Credit Kills a Savings Culture
Table 2.3: Value of UK Households’ Savings (% of households),
2002/2003, 2004/2005 and 2006/2007
How Much Can People Afford to Save?
Table 2.4: Average UK Household Income and Expenditure
by Gross Income Decile Group (£), 2007
Table 2.5: Average UK Household Pension Contributions and Other Savings
by Gross Income Decile Group (£), 2007
Table 2.6: Average UK Household Pension Contributions and Other Savings
by Age of Household Reference Person (£), 2007
Pension Inflows
Table 2.7: New Sales of Accumulation and Protection Products in the UK —
Regular Premiums by Type of Product (£m), 2004-2008
Table 2.8: New Sales of Accumulation and Protection Products in the UK —
Single Premiums by Type of Product (£m), 2004-2008
Figure 2.1: New Pensions, Savings and Investment Business
in the UK by Value (£m), 2004-2008
Table 2.9: New Sales of Regular-Premium Individual Pensions
by Type (£m), 2008
Table 2.10: New Sales of Single-Premium Individual Pensions
by Type (£m), 2008
Table 2.11: New Sales of Regular-Premium Occupational Pensions
by Type (£m), 2008
Table 2.12: New Sales of Single-Premium Occupational Pensions
by Type (£m), 2008
Will Personal Accounts Save the Day?
DISTRIBUTION
Whole-of-Market Advisers Dominate
COMPETITIVE STRUCTURE
MARKETING ACTIVITY
THE CONSUMER
MARKET FORECASTS
KEY POINTS
3. The State Pension
MEANS-TESTING TRAP
DUBIOUS BENEFIT OF EARNINGS LINK
Table 3.1: UK Price and Earnings Indices
(2004/2005=100), 2004/2005-2008/2009
Figure 3.1: UK Price and Earnings Indices
(2004/2005=100), 2004/2005-2008/2009
SECOND-TIER STATE PENSIONS: PREPARE FOR CUTS
SERPS
State Second Pension
UNIVERSAL PROTECTED PENSION REJECTED
GOVERNMENT SPENDING ON PENSIONERS
Table 3.2: Actual and Planned UK Government Spending on Pensioners’ Benefits
(£m and index 2002/2003=100), 2002/2003-2010/2011
KEY POINTS
4. Personal Pensions
UNSUITABLE FOR THE MASS MARKET
Table 4.1: Number of Personal Pension Contributors in the UK and Average
Annual Contribution by Income Band, Employment Status and Type of Product
(000 and £), Year Ending 5th April 2006
Table 4.2: Number of Members of Personal Pension Schemes in the UK and
Their Annual Contributions (000 and £m), 2001/2002 and 2007/2008
GOVERNMENT ‘BRIBE’
UNREALISTIC FORECASTS
INVESTING FOR PROFITS?
KEY POINTS
5. Occupational Pensions
SINGLE PENSIONS REGIME
GOODBYE GOLD STANDARD
SAFETY NETS
DOWNSIDE OF GLOBALISATION
Table 5.1: Number of Active Members of Occupational Pension Schemes
in the UK by Sector (million), 1991-2007
Table 5.2: Proportion of Salary Contributed to Private-Sector Occupational
Pension Schemes in the UK by Size and Type of Scheme (%), 2007
KEY POINTS
6. Annuities and Other Pension Incomes
QUASI-LIBERALISATION
Unsecured Income
Alternatively Secured Income
Secured Income
ANNUITY CHOICES
Standard Annuities
Impaired-Life and Enhanced Annuities
Niche Annuities
Investment-Linked Annuities
Flexible and Variable Annuities
TINY POTS
Figure 6.1: Pension Annuities Sold by Size of Fund
(number), 2008
Table 6.1: Pension Annuities Sold by Size of Fund
(number and %), 2004-2008
RATES SLUMP
Table 6.2: The Highest Annuity Rates Offered in the UK
by Sex and Age (£), August 2000-April 2009
Figure 6.2: The Highest Annuity Rates Offered in the UK
by Sex and Age (£), August 2000-April 2009
Table 6.3: The Highest Annuity Rates Offered in the UK
by Sex and Age at Constant 2000 Prices (£), August 2000-April 2009
KEY POINTS
7. Preparing for the Fourth Age
FUNDING DEPENDENCY
DECLINE OF INSURANCE TO PAY FOR CARE
Table 7.1: Sales of Point-of-Need Policies for Long-Term Care in the UK
by Volume and Value (number, £000 and £), 1997-2007
KEY POINTS
8. Advertising
COLLAPSE IN PENSIONS ADVERTISING
Table 8.1: Major Pension Providers by Expenditure on Advertising
to Consumers in the UK (£m and %), 1995
Table 8.2: Main Media Advertising Expenditure on Pensions
by Type of Product (£000), Years Ending 31st March 2000, 2007 and 2009
Table 8.3: Main Media Advertising Expenditure on General Pensions
by Brand (£000), Year Ending 31st March 2009
EQUITY RELEASE THE WAY AHEAD
Table 8.4: Main Media Advertising Expenditure on Equity Release
by Brand (£000), Year Ending 31st March 2009
INTERMEDIARIES: MUTED
KEY POINTS
9. An International Perspective
LOOMING ISSUE OF HIGH DEPENDENCY RATIOS
Figure 9.1: Actual and Forecast Old-Age Dependency Ratios
by European Country, 2008-2060
Table 9.1: Actual and Forecast Old-Age Dependency Ratios
by European Country, 2008-2060
GERMANY’S PAINFUL POLICIES
ITALY INTRODUCES FLOATING PENSIONS
FRANCE THINKS AHEAD
PAN-EUROPEAN DIMENSIONS
LOOKING AHEAD OUTSIDE EUROPE
Going for Broke in the US
Australia’s Superannuation Model
KiwiSaver
Singapore: the Paternalistic State
China’s Dependency Dilemma
LOSSES ROLLING ROUND THE WORLD
PENSIONS ARE A SPECIAL CASE
KEY POINTS
10. PEST Analysis
POLITICAL FACTORS
The Impact of ‘A Day’ in 2006
The 2009 Budget
ECONOMIC FACTORS
How to Calculate Pension-Fund Liabilities?
Persistent Toxic Assets
Piling on the Debt
Table 10.1: Additions to the UK National Debt
(£bn), June 2007-February 2009
Should Pay Curbs Apply to Senior Executives and Directors?
Tighter Regulation
SOCIAL AND TECHNOLOGICAL FACTORS
Longevity a Mixed Blessing
Limited Utility of Technology
KEY POINTS
11. Consumer Dynamics
INTRODUCTION
PENSIONS POLICY IS A MESS
Table 11.1: Pensions Policy in the UK is in a Mess
(% of respondents), 2009
OVERWHELMING SUPPORT FOR NATIONAL PENSIONS DEBATE
Table 11.2: We Need a National Debate About How to Pay
for Future Pensions (% of respondents), 2009
WHY DO PENSIONS HAVE TO BE SO COMPLEX?
Table 11.3: Pension Choices Are Overcomplicated
(% of respondents), 2009
TRUST IN BANKS REMAINS SHAKEN
Table 11.4: Banks, Building Societies and Insurance Companies
Are Not Regulated Effectively (% of respondents), 2009
AVERAGE INCOME INSUFFICIENT TO SAVE FOR A COMFORTABLE RETIREMENT
Table 11.5: Workers on Average Incomes Can Afford to Save Enough Money
to Live Comfortably in Retirement (% of respondents), 2009
NO SPARE CASH
Table 11.6: I Could Not Afford to Save Any More Money
Than I Do at Present (% of respondents), 2009
LOW REWARD, LOW INCENTIVE
Table 11.7: Low Interest Rates Discourage Me from Saving
(% of respondents), 2009
UNPREDICTABLE FUTURE A DETERRENT TO SAVING
Table 11.8: It is Not Worth Saving for Retirement Because
the Future is Too Unpredictable (% of respondents), 2009
WORKING LONGER IS A DOUBLE-EDGED SWORD
Table 11.9: If More Pensioners Have to Work to Make Ends Meet, it Will be
Harder for Young People to Find Jobs (% of respondents), 2009
SELF-RELIANCE MAY BE A VIRTUE BUT
Table 11.10: There is No Point Struggling to Buy a House if You Risk Having to
Sell it to Pay the Fees of a Care Home (% of respondents), 2009
EQUITY RELEASE IS AN OPTION
Table 11.11: In the Future, More Pensioners Will Raise Money by Releasing Equity
in Their Home (% of respondents), 2009
UNDERVALUING THE ELDERLY
Table 11.12: As a Society, We Underuse the Wisdom and Skills of
Elderly People (% of respondents), 2009
WHO SHOULD PAY FOR THE ELDERLY?
Table 11.13: Families Should Take on More of the Financial Responsibility
for Looking After Old and Infirm Members (% of respondents), 2009
DEMAND FOR NATIONAL DEBATE ON FUNDING THE ELDERLY
Table 11.14: We Need a National Debate About Organising and Funding Care
for Frail Elderly People (% of respondents), 2009
PENSION CREDIT: A REWARD FOR NOT SAVING?
Table 11.15: Means-Tested State Benefits Like Pension Credit Reward Those
Who Did Not Bother to Save for a Pension (% of respondents), 2009
SUPPORT FOR CHANGES TO PENSION TAX RELIEF
Table 11.16: Tax Relief on Pension Contributions Should Be Limited
to the Basic Rate of 20% (% of respondents), 2009
KEY POINTS
12. Company Profiles
INTRODUCTION
Less Choice
AEGON
AVIVA
Table 12.1: Aviva PLC — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
AXA GROUP
BARCLAYS
Table 12.2: Barclays PLC — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
CANADA LIFE
EQUITABLE LIFE
FRIENDS PROVIDENT
Table 12.3: Friends Provident PLC — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
HSBC
Table 12.4: HSBC Holdings PLC — Financial Performance
($000, number, $ and %), Years Ending 31st December 2006-2008
JUST RETIREMENT
Table 12.5: Just Retirement (Holdings) PLC — Financial Performance
(£000, number, £ and %), Years Ending 30th June 2006-2008
KEY RETIREMENT SOLUTIONS
Table 12.6: Key Retirement Solutions Ltd — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
LEGAL & GENERAL
Table 12.7: Legal & General Group PLC — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
LIVERPOOL VICTORIA FRIENDLY SOCIETY
LLOYDS BANKING GROUP
Table 12.8: Lloyds Banking Group PLC — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
Table 12.9: Scottish Widows PLC — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
NATIONAL FARMERS UNION MUTUAL
PEARL GROUP
PRUDENTIAL
Table 12.10: Prudential PLC — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
THE ROYAL BANK OF SCOTLAND GROUP
Table 12.11: The Royal Bank of Scotland Group PLC — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
ROYAL LONDON MUTUAL
Table 12.12: The Royal London Mutual Insurance Society Ltd — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
STANDARD LIFE
Table 12.13: Standard Life PLC — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
WINDSOR LIFE
Table 12.14: Windsor Life Assurance Company Ltd — Financial Performance
(£000, number, £ and %), Years Ending 31st December 2006-2008
ZURICH FINANCIAL SERVICES GROUP
KEY POINTS
13. The Future
HONESTY IS THE BEST POLICY
SAFER WITH PROPERTY
AMASSING CAPITAL OUTSIDE A PENSION FUND
PENSION CHIMERA
WHAT ROLE FOR THE PRIVATE SECTOR?
MARKET PROSPECTS
UNREST
KEY POINTS
14. Glossary
15. Further Sources
Associations
Publications
General Sources
Government Sources
Other Sources
Sources
- AEGON
- AVIVA
- AXA GROUP
- BARCLAYS
- CANADA LIFE
- EQUITABLE LIFE
- FRIENDS PROVIDENT
- JUST RETIREMENT
- KEY RETIREMENT SOLUTIONS
- LEGAL & GENERAL
- LIVERPOOL VICTORIA FRIENDLY SOCIETY
- LLOYDS BANKING GROUP
- NATIONAL FARMERS UNION MUTUAL
- PEARL GROUP
- PRUDENTIAL
- THE ROYAL BANK OF SCOTLAND GROUP
- ROYAL LONDON MUTUAL
- STANDARD LIFE
- WINDSOR LIFE
- ZURICH FINANCIAL SERVICES GROUP
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