Personal Pensions & the Future for Stakeholder Retirement Products - UK - March 2006

INTRODUCTION AND ABBREVIATIONS
Report content
Key sources
Global information and research
Consumer research
ACORN
 ABBREVIATIONS
PREMIER INSIGHT
A large untapped market indicates opportunities going forward
Many consumers have retirement saving products but are not paying into them
Defining spending priorities
Young women are key to new business
Wealthy ‘unmarrieds’ might commit…to a pension plan
Urban Prosperity have more capacity to save
Those in the South may be key to the transfer market
EXECUTIVE SUMMARY
Economic environment has left little appetite for pensions
Mind the savings gap…it’s growing
State provision will not be enough for retirement
Individual pensions only have supplemental role
Stakeholder pensions have reformed other individual pension products
Pensions simplification will dissolve traditional differences among individual pension products
Future state pension provision gets media coverage, perhaps stimulating future contributions
Individual pensions represent a third of all private pensions
Most individual pensions are ‘personal pensions’ but stakeholder pensions have taken market share
Figure 1: Value (APE)* of new individual pensions business, by product type, 2000-05
New personal pensions contracts for have decreased by 70% over the past five years
Key players…no change at the top
Distribution and advice – depolarisation to open up new channels
Advertising spend is down and focused on niche products
Consumer financial activity – evidence of a growing ‘savings culture’?
Financial product ownership
Consumer attitudes and targeting opportunities
Industry views
The future
BACKGROUND AND DEFINITIONS
Basic state pension/pensions credit
State second pension (S2P)/additional state pension
Private pensions
Occupational pensions
Additional voluntary contributions (AVCs)
Individual pensions
Personal pensions
Stakeholder pensions
Group personal pensions
Free-standing additional voluntary contributions (FSAVCs)
Self-invested personal pensions (SIPPs)
Recent changes to products and new proposals for change
Launch of stakeholder product suite
Stakeholder pension scheme amendment in 2005
The Pensions Commission – Turner Report
Reforming existing state pension provision
National Pensions Savings Scheme (NPSS) – a new mechanism for saving
Implications of the Turner Report for the market
A-day and pensions simplification
MARKET DRIVERS
Introduction
Current levels of income from the state pension will not facilitate a comfortable retirement
Figure 2: Basic state pension levels, weekly income, 2005/06 tax year
An ageing population spending more time in retirement will put a strain on the state system
Figure 3: Population growth estimates, by age group, 1995-2010
Length of time spent in retirement is set to increase
Retirees draw income from a variety of sources in their retirement
Figure 4: Gross income of pensioner couples, by source of income, 2003/04
Private pension provision has been predicated on past stock investment performance
Figure 5: FTSE 100 Index, October 1996-October 2005
Alternative investments have grown as a consequence of poor relative returns of the stockmarket
Figure 6: UK house prices (£), 1996-2005
Putting all eggs into one property basket does not make a balanced investment portfolio
ISAs have continued to grow
Figure 7: Value of funds held in stocks and shares ISAs and cash ISAs, 2000-05
Consumers are more sensitive to base rate changes – low annuity rates have produced disappointing returns
Figure 8: Bank of England base rate, 1992-2005
The savings gap – 8.3 million adults are not saving anything at all for a pension
Many are servicing debts rather than prioritising pensions saving
Younger savers have specific affordability issues
Consumer saving is expected to increase
Figure 9: PDI, consumer expenditure, savings and saving ratio, 2000-10
A-day may stimulate saving among those with higher incomes and will lead to convergence between personal pension products
A-day changes to contribution limits will alter the pensions landscape…probably
Figure 10: Current annual contribution limits for personal and stakeholder pensions, by age of contributor, 2005
Figure 11: Expected annual contribution limits for indivduals from 6 April 2006
A-day will enable more ways to access savings and greater choice upon retirement
Occupational pensions are becoming less reliable – potentially paving the way for a greater role for personal pensions
Personal and stakeholder pensions pots are small and will need to grow
Figure 12: Number of individuals holding personal and stakeholder pensions (1), by employment status, annual earnings (2) and fund value, 2002/03.
Personal pension transfers are increasingly leading to ‘consolidation’
Converging markets – stakeholder and personal pensions
Competitive pressures from stakeholder pensions have reduced the cost of personal pensions
Figure 13: Typical lifetime costs of personal and stakeholder pensions, 2005
The future cost of pensions
Both types of pension allow the customer to vary the amount of contributions
Two cautionary notes on varying contributions
Stakeholder pensions have increased their investment flexibility
Introducing SIPPs
Pensions simplification, not property, will drive growth of SIPPs
Chancellor’s U-turn on SIPPs in residential property
Emotional drivers prevent many from acknowledging the pension problem
Consumers have faith that the state pension will come good
New initiatives may instil trust in the industry and subsequent new growth
Traditional pension providers and new entrants attempt to enhance their brands
MARKET SIZE AND NEW BUSINESS TRENDS
The occupational pensions market represents two thirds of the private pensions market
Figure 14: UK contributions to private pension schemes, 1996-2004
Contributions to occupational pensions have grown faster than payments into individual pensions
Individuals’ and employees’ contributions into individual pensions have grown least
Employer-sponsored stakeholder pensions have stimulated employer contributions
The total number of individual pensions in force has dropped
Figure 15: Individual pension policies in force, 1985-2004
Most pension contracts (almost 70%) are standard personal pensions
Figure 16: Individual pension business in force at year end (OB), 2004
Standard personal pensions represent 50% of in-force individual pensions by value
Figure 17: Value of regular-premium individual pensions and FSAVCs in force, 2004
The average size of contributions has increased, reflecting fewer numbers of new contracts
Figure 18: Average single-premium contribution, Q3 2004 and Q3 2005
Average contributions to personal pensions are greater than stakeholder pensions, but only marginally
Figure 19: Average annual contributions* to personal and stakeholder pensions, by status and earned income, 2003/04
Employees pay more into personal pensions
Self-employed workers pay more into stakeholder pensions than personal pensions
New business – Trends
Stakeholder pensions have captured market share of new business
Figure 20: Value (APE)* of new individual pensions business, by product type, 2000-05
Contributions to individual pensions have remained static over the past four years
The number of new contracts is falling rapidly, but the value of contributions is up
Figure 21: New business – number of individual pensions contracts arranged, 2000-05
Figure 22: New business – all individual pensions, 2000-05
Regular premiums
Single premiums
Standard personal pensions – new contracts down by 70% over the past five years
Figure 23: New business – standard personal pensions, 2000-05
Personal pensions – regular-premium contracts decreased most
Stakeholder pensions have cannibalised standard personal pensions
Figure 24: Individual stakeholder pensions, 2000-05
KEY PLAYERS
The top five players account for roughly half of personal pensions business
Figure 25: Pension providers in order of business ranking, by total* UK net written premiums**, 2003 and 2004
Aviva is largest player in individual pensions
Figure 26: Individual pensions business – rankings based on total uk net premiums, 2003 and 2004
Figure 27: Market share of Top five, ten and 20 in individual pensions business, 2003 and 2004
DISTRIBUTION AND ADVICE
Buying with or without advice is key distinction
Figure 28: Distribution of new individual pensions** business, APE 2000-05
Figure 29: Distribution of standard personal pensions and stakeholder pensions, Q3 2005
Stakeholder pensions and the Basic Advice process
Depolarisation creating a new breed of distribution channel
Menu of services providing clarity or confusion?
Research shows that multi-tied channels will be increasingly popular
Figure 30: ‘Which of the following reasons has stopped you from taking personal advice on financial products?’, 2005
Figure 31: Responses to ‘If you wanted to get financial advice tomorrow, where would you look or go to first to find out how to get it?’ (Prompted), 2005
Online distribution is difficult with a complex product
Corporate distribution strategies are increasingly reliant on multi-platform distribution
ADVERTISING AND PROMOTION
Figure 32: Pensions media coverage, 2004-06
Figure 33: Share of pensions advertising, by outlet, December 2004-November 2005
Note on methodology
Figure 34: Top 20 pension advertising spenders, December 2004-November 2005
Advertising expenditure has focused on niche products (not personal and stakeholder pensions)
CONSUMER FINANCIAL ACTIVITY
The mood of the consumer seems uncertain
Relationship with the main financial services providers
Overall activity levels should be high
Figure 35: Savings, investment, borrowing and debt repayment – consumers’ expected activity, September 2004-December 2005
Middle earners are becoming more active
Figure 36: Expected financial activity, by socio-demographic and income groups, December 2005 and average for the last 16 quarters
Pension management and saving will be the main activities
Figure 37: Leading financial activities planned in the next six months, December 2004-December 2005
Subdued time for the property market
Figure 38: Intended mortgage and property purchase activity, December 2003-December 2005
HSBC gains in terms of MFSP share
Figure 39: Leading main financial services providers: market shares, December 2004-December 2005
HSBC will build up the level of its deposits in 2006
Figure 40: Saving, investment and lending market sizes, by expected customer demand and brand leaders (overall % intending to undertake activity in brackets), December 2005
HSBC will have the most active customer base
Figure 41: Activity levels of main financial providers’ customer bases, December 2005
Halifax, HSBC and Nationwide BS have the highest proportion of savers
Figure 42: Activity intentions and current household financial situation, by MFSP, December 2005
THE CONSUMER AND PRODUCT OWNERSHIP
Retirement product ownership
Occupational pension ownership is the most common
Figure 43: Pension ownership, January 2006
Implications – pension providers could capture a slice of the ISA market
Women aged 25-34 are under-represented in their pension ownership
Figure 44: Pension ownership, by gender, age and socio-economic group, January 2006
Implications
Target ‘unmarrieds’ in the higher and middle income groups
Figure 45: Pension ownership, by marital status, lifestage, age/socio-economic group and tenure, January 2006
Implications
Pension message needs to get through to the Urban Prosperity group
Figure 46: Pension ownership, by working status, annual income, TV region and ACORN category, January 2006
Implications
Iceland shoppers may be good savers and are under-represented in pension ownership
Figure 47: Pension ownership, by new technology users, newspaper readership, commercial TV viewing and supermarket usage, January 2006
Implications
Level of pensions contributions and retirement savings
Figure 48: Levels of retirement saving, January 2006
Market to consumers by their natural thresholds
Figure 49: Levels of retirement saving, by gender, age and socio-economic group, January 2006
Implications
The pre-/no family group can probably afford to save more than they are
Figure 50: Levels of retirement saving, by marital status, lifestage, age/socio-economic group and tenure, January 2006
Those in the Urban Prosperity category could save more
Figure 51: Levels of retirement saving, by working status, annual income, TV region and ACORN category, January 2006
Broadsheets are key to those saving over £300 per month
Figure 52: Levels of retirement saving, by new technology users, newspaper readership, commercial TV viewing and supermarket usage, January 2006
Implications
Levels of regular saving by retirement product
Figure 53: Pension product ownership versus and amounts saved (contributions by retirement product), January 2006
Further analysis
CONSUMER ATTITUDES AND TARGETING OPPORTUNITIES
Attitudes towards retirement saving
25-34-year-olds don’t think they are too young for pension planning
Figure 54: Attitudes towards retirement saving, January 2006
Implications
Are the 25-34-year-olds starting to feel guilty about not starting a scheme?
Figure 55: Attitudes towards retirement saving, by gender, age and socio-economic group, January 2006
Implications
Marriage matters
Figure 56: Attitudes towards retirement saving, by marital status, lifestage, age/socio-economic group and tenure, January 2006
Target the Urban Prosperity group for ‘with advice’ products
Figure 57: Attitudes towards retirement saving, by working status, annual income, TV region and ACORN category, January 2006
Implications
Go to Iceland to shift ‘without advice’ products
Figure 58: Attitudes towards retirement saving, by new technology users, newspaper readership, commercial TV viewing and supermarket usage, January 2006
Implications
Reasons for not investing in pensions
Is ‘no spare money’ the real reason for not investing?
Figure 59: Reasons for not investing in pensions, January 2006
Implications
Young women trust more
Figure 60: Reasons for not investing in pensions, by gender, age and socio-economic group, January 2006
Implications
Families who don’t have any current provision don’t have spare cash
Figure 61: Reasons for not investing in pensions, by marital status, lifestage, age/socio-economic group and tenure, January 2006
Implications
Londoners have more money and trust pension companies more than average
Figure 62: Reasons for not investing in pensions, by working status, annual income, TV region and ACORN category, January 2006
Implications
Mid-market tabloid readers trust less, but are less likely to cite ‘no spare money’ for their lack of pension provision
Figure 63: Reasons for not investing in pensions, by new technology users, newspaper readership, commercial TV viewing and supermarket usage, January 2006
Lack of trust converts into ‘alternative investment’ behaviour
Figure 64: Reasons for not investing in pension products versus type of retirement provision expected to be relied upon, January 2006
Implications
 FURTHER STATISTICAL ANALYSIS
Repertoire analysis shows personal pension owners are more active
Figure 65: Repertoire analysis of consumers’ retirement saving products, January 2006
Repertoire analysis shows that affordability perceptions need to be broken down
Figure 66: Number of reasons given by consumers for not currently investing in retirement saving products, January 2006
CHAID analysis showing target groups
Figure 67: Consumer groups with the highest penetration (rate of take-up), by pension product type, January 2006
Cluster analysis identifies consumer-based typologies
Figure 68: Cluster group distribution for personal and stakeholder pension typologies, January 2006
Satisfied and Sorted (27%)
Active Amenables (28%)
Toe Dippers (26%)
Young, Gifted and Broke (19%)
Socio-demographic analysis of clusters
Figure 69: Clusters, by gender, age and socio-economic group, January 2006
Figure 70: Clusters, by marital status, lifestage and tenure, January 2006
Figure 71: Clusters, by working status, income group, TV region and ACORN category, January 2006
Figure 72: Clusters, by new technology users, newspaper readership, commercial TV viewing and supermarket usage, January 2006
75% feel that it is unrealistic to depend only on the state pension during retirement
Figure 73: ‘It is unrealistic to depend only on the state pension for an income retirement’, by socio-economic group, December 2005
As potential customers get older they are less willing to extend their retirement age
Figure 74: ‘I am willing to work beyond 60 (female retirement age) to provide myself with a higher retirement income’, female responses, by age, December 2005
Older workers are hanging on in there?
Figure 75: ‘I am willing to work beyond 65 (male retirement age) to provide myself with a higher retirement income’, male responses, by age, December 2005
Implications
INDUSTRY VIEWS
A-day implications (pensions simplification)
Pensions pricing and transfer market
Future business development challenges
THE FUTURE
Population dynamics will underpin demand for private pension provision
Public pension provision will not be enough – the message will get through
Economics may favour pension saving in the future
There will be fewer products and these will be differentiated by advice
The NPSS is the great unknown
FORECAST
Figure 76: Forecast of new individual pension business in the UK, 2005-10
Regular long-term savings expected to remain unpopular
Spending priorities due for a reality check?
Sensitivity analysis
 FACTORS USED IN THE FORECAST