The Changing Face of Retirement Planning - UK - April 2006

INTRODUCTION AND ABBREVIATIONS
Putting savings in context…
…while examining the rapidly changing pensions environment
Understanding consumer attitudes towards retirement planning
Market definitions
Key sources
Global information and research
Consumer research
ACORN
 ABBREVIATIONS
PREMIER INSIGHT
Scope for a female-oriented pension product?
A need to engage with customers
Is there room for a ‘retirement ISA’?
Recognising different objectives
Reaching the disinterested
EXECUTIVE SUMMARY
Real grounds for concern over retirement savings
How large is the savings gap?
And how is the government hoping to narrow it?
Simplifying and refining the current regime
An interesting economic climate…
…teamed with a shift towards immediate consumption
Employers still have a huge role to play
Figure 1: Monthly retirement savings, February 2006
Signs of growing confidence in the stock market
Cash savings steadily increasing…
…while property becomes ever more important
A significant proportion must rely on the state
Supplementing traditional retirement savings vehicles
Who to turn to when planning retirement?
Consumers know that they will have to act
Delaying retirement may be on the cards for many
Figure 2: Willingness to work beyond the state pension age, February 2006
How can people be tempted to increase their savings?
Is the pension still the best savings vehicle?
Figure 3: Agreement with the statement ‘A pension is still the best means to save for my retirement’, February 2006
Headline figure suggests support for compulsion
Soft retirement and simpler pension products could be the way forward
CHANGING DEMOGRAPHICS AND WORKING PATTERNS
In just three decades, the over-55s will account for more than a third of the population
Figure 4: UK population trends, by age group, 2006-36
Growing life-expectancy drives increase in pensioner numbers
Figure 5: Trends in life-expectancy at birth, 1901-2041
Figure 6: Life-expectancy at birth and selected ages, by sex, 1981-2001
State spending projections suggest falling par capita incomes for pensioners
Figure 7: State spending on pensions as a percentage of GDP, 2003/04-2053/54
Extending the working life
Figure 8: Employment in the over-50s, by gender and age, 1979-2004
Is economic activity more relevant than the dependency ratio?
‘Soft retirement’ further reducing the dependency ratio?
QUANTIFYING THE SAVINGS GAP
Non-financial assets account for most of the household sector’s wealth
Figure 9: Composition of household wealth, 2004
Figure 10: Household balance sheet, 1998-2004
Measuring existing pension arrangements
Figure 11: Pension provision of UK adult population, 1994-2004
Three in ten working adults are non-savers…
Figure 12: Current pension accrual, November 2005
…and one in seven are under-saving
Figure 13: Main types of savers, November 2005
The IFS suggests that many look set to fall short of benchmark replacement rates…
Figure 14: Projected pension replacement rate among over-50s who are currently in paid work
…and even optimistic assumptions show a significant shortfall
Figure 15: Percentage of individuals predicted to have income below the Pension Credit Guarantee when they reach the state pension age
Putting a financial value on the size of the savings gap
Pensions crisis? What crisis?
Refocusing the debate on the ‘economic support ratio’…
…and questioning the importance of saving
A powerful argument, but questions remain
SIMPLIFICATION AND STREAMLINING – REFORMING PENSION LEGISLATION
Stakeholder pensions start the process of pensions simplification…
…although the target market, arguably, remains largely unimpressed
Expanding on the stakeholder scheme…
…and ‘tweaking’ the stakeholder features
A-day – consolidating decades of pension legislation
Changing contribution limits offer greater flexibility for investors
Figure 16: Current annual contribution limits for personal and stakeholder pensions, 2005
Figure 17: Expected post-A-day annual contribution limits, 2006/07-2010/11
More fundamental changes to be seen in the post-A-day market
Relaxation in annuity regulations should appeal to many
Annuity variants address criticisms over flexibility and inheritability…
…but their potential impact remains debatable
Rebuilding trust in the pensions industry
The Turner Report – combating the savings gap
Reforming existing state pensions provision
National Pensions Savings Scheme (NPSS) – a new mechanism for saving
Full implications of the Turner Report are, as yet, unclear
THE SAVINGS AND INVESTMENT ENVIRONMENT
A new period of low interest rates…
Figure 18: Bank of England base rate, 1995-2006
…offering both advantages and disadvantages to those saving for retirement
Could low inflation actually exacerbate the savings gap?
Competitive pressures lead to shifting real rewards for savers and borrowers
Figure 19: Effective real interest rates, instant access deposit account, credit card and standard variable-rate mortgage, 1996-2005
The average high street savings account produces negative returns…
…while the real cost of borrowing has tumbled…
…which will, in turn, impact upon how consumers plan for their retirement
A quiet recovery in the equities market…
Figure 20: FTSE 100 index, 1996-2005
…but many are still suffering from the after-effects
Is steady growth enough to attract mainstream attention?
The impact of gilt yields
Figure 21: Annual gilt yields, 1976-2005
CONSUMER SPENDING, SAVING AND BORROWING BEHAVIOUR
Real disposable income increases steadily
Figure 22: Total PDI, consumer expenditure, savings and the savings ratio, 2000-10
Pensions – or clothes?
Figure 23: Average weekly expenditure on selected items, 2004/05
Retirement savings appear to rank fairly low in the list of consumer priorities
Consumers envisage significant investment activity…
Figure 24: Savings, investment, borrowing and debt repayment – consumers’ expected activity, September 2004-December 2005
…with pensions contributions being high on the list of priorities
Figure 25: Savings, investment, borrowing and debt repayment – consumers’ expected activity, September 2004-December 2005
Good intentions do not necessarily translate into actions
Has cheap credit helped fuel a ‘live for today’ attitude?
Figure 26: Consumer credit gross lending, by product category, 2001-05
A debt time bomb to rival the demographic dangers…
…and one that could have a major impact
Remortgaging – the pawnshop of the 21st Century?
Further advances half as high again as individual pension contributions
A combination of factors hint at a shift in priorities
Pension adspend tumbles…
Figure 27: Pension adspend, 2000/01-2004/05
…and overall spending highlights just where advertisers’ priorities lie
Figure 28: Total financial services adspend, by product type, year to November 2005
Can pension providers compete with the consumer giants’ advertising budgets?
Trust in providers – and the government – is still an issue
Constantly changing regulations leave many confused
PRESENT PENSION ARRANGEMENTS
State pensions offer a fairly meagre income…
Figure 29: Weekly state pension levels, 2005/06 tax year
…although the Pension Credit offers some assistance
Employers, not employees, the biggest contributors to pension schemes
Figure 30: UK contributions to private pension schemes, 1996-2004
Private pension provision still leaves much to be desired
Figure 31: Participation in private pension schemes, 2003/04
Contribution levels are relatively low…
Figure 32: Monthly retirement savings, February 2006
…leading to a high number of small funds
Figure 33: Number of individuals holding personal and stakeholder pensions (1), by employment status, annual earnings (2) and fund value, 2002/03
Employer-sponsored pensions account for half of new individual pension business
Figure 34: New individual APE pension business, by product type, 2005
New pension contributions show signs of recovery
Figure 35: New business – all individual pensions, 2000-05
Standard personal pensions wane in popularity
Figure 36: New business – standard personal pensions, 2000-05
Individual stakeholder sales slump in 2005
Figure 37: New business – individual stakeholder pensions, 2001-05
Group schemes showing some progress
Figure 38: New business – GPPs and employer-sponsored stakeholder schemes, 2000-05
EQUITY INVESTMENTS
ISAs offer a straightforward tax-free wrapper…
…but consumers appear to be increasingly disenchanted
Figure 39: Equity ISA subscriptions, 1999/2000-2004/05
Unit trust funds recovering after a difficult few years
Figure 40: Value of unit trust/OEIC funds under management, total and ISA funds, 1995-2005
New appetite for equity investment
Figure 41: Gross retail sales of unit trusts and OEICs, 1996-2005
CASH SAVINGS – THE LOW-RISK OPTION
More than 25 million savings accounts
Figure 42: Estimation of savings market size in terms of volume, November 2005
Cash deposits steadily increasing
Figure 43: UK individual private sector holdings of selected Sterling assets, 1999-2004
Instant access accounts growing in importance
Figure 44: Number of individual interest-bearing sight and time accounts and total sterling deposits at year-end (MBBG panel only), 1999-2004
Mini cash ISAs start to replace standard savings accounts
Figure 45: Number of mini cash ISAs and amounts subscribed during year, 1999/2000-2004/05
Retirement planning one of the key reasons for taking out an ISA
Figure 46: Key motivations for investing in an ISA, March 2005
NS&I sales slow in 2004/05…
Figure 47: National Savings & Investments sales, 2003/04 and 2004/05
…but account balances show steady increases
Figure 48: Total held in National Savings & Investments accounts, 2002/03-2004/05*
FUNDING RETIREMENT THROUGH PROPERTY
Private residential housing stock worth around £3.5 trillion…
…highlighting its importance in the retirement savings landscape
A decade of price rises
Figure 49: Average mix-adjusted property prices, 1995-2005
For most homeowners, the increase in wealth is illusory – but not for retirees
The mortgage market further highlights the importance of housing…
Figure 50: Gross new mortgage lending, 1997-2005
…but also the risks of an unbalanced asset portfolio
Remortgaging could have a major impact
Figure 51: Breakdown of new mortgage lending, 1995-2005
Further advances – wiping out pension contributions at a stroke?
Highlighting the importance of an holistic view of financial services
Buy-to-let – a new weapon in the investor’s armoury…
…with clear advantages when it comes to retirement saving
Explosive growth – but signs that the boom is tailing off
Figure 52: Value and volume of new buy-to-let mortgage lending, 1999-2005
More than 630,000 outstanding buy-to-let mortgages – and growing
Figure 53: Value and number of outstanding buy-to-let mortgages, 1999-2005
Returns predicted to remain good for buy-to-let investors…
Figure 54: Rates of return on BTL properties, by cash purchase and geared investment, Q4 2003-Q4 2005
…although the assumptions look fairly optimistic in today’s market
Buy-to-let investors looking for capital, not necessarily income
How much risk are prospective landlords exposing themselves to?
Equity release – another way to make property pay
Figure 55: Total value of equity release sales by SHIP members, 1991-2005
Figure 56: Forecast of sales of the equity release schemes by SHIP members, 2005-10
Equity release – ‘spending the kids’ inheritance’ on a grand scale
THE CONSUMER – OWNERSHIP AND CONTRIBUTIONS
One in eight will be entirely reliant on the state in their retirement
Figure 57: Current pension provision, February 2006
A new wave of company pensions
Figure 58: Current pension provision, by gender, age and socio-economic group, February 2006
Affluent have far greater ownership of retirement savings vehicles
Part-time workers are having to fend for themselves
Figure 59: Current pension provision, by TV region, working status and marital status, February 2006
Broadsheet readers look to spread their investments
Figure 60: Current pension provision, by Mintel’s Special Groups, media usage and ACORN group, February 2006
Iceland shoppers are the least likely to be saving
Figure 61: Current pension provision, by supermarket usage and commercial TV viewing, February 2006
Almost half save less than £100 a month
Figure 62: Monthly retirement savings, February 2006
Even higher contributors are not guaranteed a sizeable retirement income
Men save significantly more than women
Figure 63: Current level of contributions to a pension or retirement savings vehicle each month, by gender, age and socio-economic group, February 2006
Contributions are highest in London
Figure 64: Current level of contributions to a pension or retirement savings vehicle each month, by TV region, working status and marital status, February 2006
Having a family can put contributions on hold
Figure 65: Current level of contributions to a pension or retirement savings vehicle each month, by Mintel’s Special Groups and media usage, February 2006
Clear link between postcode and pensions
Figure 66: Current level of contributions to a pension or retirement savings vehicle each month, by ACORN category, supermarket usage and commercial TV viewing, February 2006
Investing in the alternatives – does freedom of choice promote saving?
Figure 67: Current level of contributions to a pension or retirement savings vehicle each month, by choice of retirement savings vehicle, February 2006
Cash is still king
Figure 68: Alternative means of funding retirement, February 2006
Following the sun
Property gaining ground on more traditional investments
Alternative savings vehicles largely the preserve of the affluent
Figure 69: Alternative means of funding retirement, by gender and socio-economic group, February 2006
The gender divide – risk or security?
Taking time to prepare for retirement
Figure 70: Alternative means of funding retirement, by age, February 2006
A North/South divide?
Figure 71: Alternative means of funding retirement, by TV region, February 2006
Part-timers concentrate on cash savings
Figure 72: Alternative means of funding retirement, by working and marital status, February 2006
A life of saving to reap its own rewards?
Figure 73: Alternative means of funding retirement, by Mintel’s Special Groups, February 2006
Broadsheet readers – downbeat, but still comparatively well placed
Figure 74: Alternative means of funding retirement, by media usage, February 2006
A place in the sun?
Figure 75: Alternative means of funding retirement, by supermarket usage and commercial TV viewing, February 2006
Company pensions and security
Figure 76: Alternative means of funding retirement, by current pension contributions, February 2006
Cash ISAs and stocks/shares are key secondary savings options
Figure 77: Repertoire of alternative means of funding retirement, February 2006
Looking outside the financial services industry for advice
Figure 78: Sources of advice when arranging a pension, February 2006
The affluent consider has a wider range of options
Figure 79: Sources of advice when arranging a pension, by gender and socio-economic group, February 2006
Younger respondents are most likely to turn to the Internet
Figure 80: Sources of advice when arranging a pension, by age, February 2006
Those with access to company schemes likely to trust their employer’s advice
Figure 81: Sources of advice when arranging a pension, by current contributions, February 2006
THE CONSUMER – EXPECTATIONS AND ASPIRATIONS
Most realise that the state pension will not offer a comfortable retirement
Figure 82: Opinion of the adequacy of the state pension, February 2006
Figure 83: Opinion of the adequacy of the state pension, by gender, age and socio-economic group, February 2006
Regional differences could reflect living costs
Figure 84: Opinion of the adequacy of the state pension, by region, working status and marital status, February 2006
Using the ‘red tops’ to increase awareness
Figure 85: Opinion of the adequacy of the state pension, by Mintel’s Special Groups and media usage, February 2006
A need to educate regular television viewers
Figure 86: Opinion of the adequacy of the state pension, by ACORN group, supermarket usage and commercial TV viewing, February 2006
Early retirement is still a dream for two fifths of the UK
Figure 87: Plans for early retirement, February 2006
Figure 88: Plans for early retirement, by gender, age and socio-economic group, February 2006
Southerners least likely to be planning early retirement
Figure 89: Plans for early retirement, by region, working status and marital status, February 2006
Further evidence of pessimism among broadsheet readers
Figure 90: Plans for early retirement, by Mintel’s Special Groups and media usage, February 2006
Waitrose shoppers are the best informed and most likely to plan to retire early
Figure 91: Plans for early retirement, by ACORN group, supermarket usage and commercial TV viewing, February 2006
Considerable scope for legislating for ‘soft retirement’
Figure 92: Willingness to work beyond the state pension age, February 2006
Figure 93: Willingness to work beyond the state pension age, by gender, age and socio-economic group, February 2006
Those in the South most prepared to stay in employment
Figure 94: Willingness to work beyond the state pension age, by region, working status and marital status, February 2006
Broadsheet readers again show their concern over retirement income
Figure 95: Willingness to work beyond the state pension age, by Mintel’s Special Groups and media usage, February 2006
Wealthy Achievers – affluent enough to not need to delay retirement?
Figure 96: Willingness to work beyond the state pension age, by ACORN group, supermarket usage and commercial TV viewing, February 2006
Alternative investors look to beat the state pension age
Figure 97: Attitudes towards early retirement, state pension and working past the state pension age, by current pension contributions, February 2006
Working themselves into an early grave?
THE CONSUMER – NARROWING THE SAVINGS GAP
Risk – or trust – is the key issue
Figure 98: Factors that would encourage greater pension saving, February 2006
More flexible regulations could increase contributions
Creating incentives for pension saving
Targeting the under-savers
Figure 99: Factors that would encourage greater pension saving, by gender and socio-economic group, February 2006
Returns are key for younger respondents
Figure 100: Factors that would encourage greater pension saving, by age, February 2006
North Westerners most resistant to increasing pension savings
Figure 101: Factors that would encourage greater pension saving, by TV region, February 2006
Full-time workers particularly interested in property investments
Figure 102: Factors that would encourage greater pension saving, by working and marital status, February 2006
Dual-income householders most likely to trade security for higher returns
Figure 103: Factors that would encourage greater pension saving, by Mintel’s Special Groups, February 2006
Broadsheet readers and the quest for a comfortable retirement
Figure 104: Factors that would encourage greater pension saving, by media usage, February 2006
Incentivising the shoppers
Figure 105: Factors that would encourage greater pension saving, by supermarket usage, February 2006
Avid television viewers unlikely to increase their contributions without considerable encouragement
Figure 106: Factors that would encourage greater pension saving, by commercial TV viewing, February 2006
Real disillusion with pensions
Figure 107: Agreement with the statement ’A pension is still the best means to save for my retirement‘, February 2006
Figure 108: Agreement with the statement ’A pension is still the best means to save for my retirement‘, by gender, age, socio-economic group and TV region, February 2006
Are families wary of the inflexibility of traditional pensions?
Figure 109: Agreement with the statement ’A pension is still the best means to save for my retirement‘, by working status, marital status, Mintel’s Special Groups and media usage, February 2006
Disillusion high among personal pension owners
Figure 110: Agreement with the statement ’A pension is still the best means to save for my retirement‘, by current pension contributions, February 2006
Pension companies – can they be trusted?
Figure 111: Agreement with the statement ’I mistrust pension companies‘, February 2006
Mistrust highest at the extremes of the social scale
Figure 112: Agreement with the statement ’I mistrust pension companies‘, by gender, age, socio-economic group and TV region, February 2006
ABC1 families most wary of pension companies
Figure 113: Agreement with the statement ’I mistrust pension companies‘, by working status, marital status, Mintel’s Special Groups and media usage, February 2006
Personal pension contributors further demonstrate their disillusionment
Figure 114: Agreement with the statement ‘I mistrust pension companies’, by current pension contributions, February 2006
Almost half agree with compulsory pension saving
Figure 115: Agreement with compulsory pension saving, February 2006
Figure 116: Agreement with compulsory pension saving, by gender, age, socio-economic group and TV region, February 2006
The retired are particularly keen on compulsion
Figure 117: Agreement with compulsory pension saving, by working status, marital status, Mintel’s Special Groups and media usage, February 2006
Clear reluctance to be forced to start a pension
Figure 118: Agreement with compulsory pension saving, by current pension contributions, February 2006
Cost is the biggest single reason for not starting a pension
Figure 119: Reasons for not starting a pension, February 2006
Affordability key for the less affluent
Figure 120: Reasons for not starting a pension, by gender and socio-economic group, February 2006
Time, not money, is key for the youngest respondents
Figure 121: Reasons for not starting a pension, by age, February 2006
Scope for sales to younger, affluent consumers
Figure 122: Reasons for not starting a pension, by Mintel’s Special Groups, February 2006
Does ‘I can’t afford to save’ just mean ‘I don’t want to save’?
Figure 123: ‘Everyday indulgences’, by reason for not saving, February 2006
Foregoing a family holiday – and jumping to the top of the pension league
Adding up the cost of ‘the little extras’
Reframing contribution levels
THE FUTURE
A-day – the great imponderable
Simplification should boost contributions…
…but not necessarily the number of people who are saving
Post-retirement options could tempt more investors…
…but, again, the real impact remains in doubt
Simplification will have no impact unless providers can engage consumers…
…and consumers are unlikely to engage until they see good reasons for doing so
Employer involvement will be crucial
Will today’s pensioners serve as a warning?
Soft retirement will help manage the transition
FORECAST
Figure 124: Forecast of the house purchase and alterations market compared to personal pensions and funded/unfunded pension schemes markets, at current and constant prices, 2005-11
 FACTORS USED IN THE FORECAST