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Annuities - UK - August 2008

ISSUES IN THE MARKET
Key issues
Report coverage and definitions
Figure 1: Overview of the annuity and retirement income market, 2008
Common product types
Single or joint life
Cash lump sum
Open market option
Alternatives
Pensions simplification and income drawdown
Alternatively secured pensions
Pension products
 ABBREVIATIONS
INSIGHTS AND OPPORTUNITIES
Educate and inform
Test drive retirement
Mix and match
Cascade pensions down the generations
Consolidate people’s pension pots for free
MARKET IN BRIEF
Robust performance
New sectors gaining ground
A positive outlook
Influential factors
Personal accounts present new opportunities and concerns
Customer inertia remains an issue
Competitive environment
Industry innovation
Advisers play a key role in the dissemination of products
Advertising activity picks up
Summary findings of Mintel’s consumer research: pension ownership
Retirement plans
Low annuity awareness among the target audience
FAST FORWARD TRENDS
Trend 1: The Rise of Behavioural Economics
See the issue from an irrational standpoint
People need to be given the occasional nudge
Too much choice is a bad thing
Choice architecture
Trend 2: Generation Name Game
Maggie’s children face a tough financial future
Proposals
Education is at the heart of it
Weighing up the costs of Money Guidance
BROADER MARKET ENVIRONMENT
Key points
The over-65s will account for a quarter of the UK population by 2046
Figure 2: Projected size of the UK population, by age band, 2008-46
Implications
Increasing life expectancy
Figure 3: Cohort life expectancy at age 65, by gender, 1985-2055
Implications: Offloading risk
Shorter assumed life expectancy has its benefits
Falling share prices hit pension funds…
Figure 4: FTSE 100 and FTSE All Share indices– daily index movements, June 2000-June 2008
Stormy outlook for some sectors
…but higher bond yields drive up annuity rates
Gilt yields are also up
Figure 5: Historical monthly medium, long and ultra long gilt yields, January 2000-June 2008
The long-term view is less rosy
Rising inflation erodes pensioners’ income and pushes up the cost of RPI-linked annuities
Figure 6: Average annual changes in the bank base rate, CPI and RPI – UK, 2000-08
Implications and opportunities
INTERNAL MARKET ENVIRONMENT
Key points
Individual pension policies up by a fifth in a decade
Figure 7: Size of the defined-contribution pension pool, 1996, 2001-06
Implications and opportunities
Personal accounts will expand the DC pool…
Figure 8: The size of the target market for personal accounts, 2007 and 2012
…but annuity providers have concerns
Annuity rates have picked up over recent months, but the long-term trend points down
Figure 9: Annual annuity income and gilt rates, January 1990-July 2008
Still too much consumer inertia
Figure 10: External versus internal volume sales of new pension annuities – proportional distribution, 2000, 2003 and 2005-07
Implications and opportunities
FSA clampdown
ABI set to propose wealth warnings on marketing material
COMPETITIVE CONTEXT
Key points
Pension substitutes
Figure 11: Summary of retirement funding strategies
Home as pension…
…but will falling prices affect people’s plans?
Equity release poses a minor threat to traditional pensions
A more holistic approach needed
Figure 12: Ownership of savings and investment products, by all pension holders, DC pension holders and those who are saving for retirement outside of a pension, June 2008
Implication and opportunity
Income drawdown is the main alternative to buying an annuity…
Figure 13: Size of the pension annuities market versus the income drawdown market – new business, 2003-07
Implication and opportunity
…although more suited to those with large pension pots
Figure 14: Average pension annuity versus income drawdown premiums, 2003-07
Most annuitants fail to exercise their OMO right
Figure 15: Proportional distribution of external and internal sales of pension annuity and income drawdown products, 2007
Implication and opportunity
STRENGTHS AND WEAKNESSES IN THE MARKET
Opportunity knocks
Figure 16: The UK annuity market – a summary of strengths, weaknesses, opportunities and threats, 2008
WHO’S INNOVATING?
Key points
Growth in non-conventional products
Postcode rating – a controversial or winning formula?
More provider interest in impaired life sector
Launch of more flexible products is reviving the market
AEGON’s ‘Income for Life’ product
Do variable annuities have the potential to break into the mainstream?
Phased retirement
Age 75 rule inhibiting real innovation
TRADE PERSPECTIVE
About the respondents
Providers acknowledge that consumer education is key…
…but expert guidance would also help
Getting the message across
An evolving market
Scope for greater product flexibility
MARKET SIZE AND FORECAST
Key points
Pension annuity business in-force
Figure 17: Pension annuity business in force – payments per annum, 1997-2006
Implication and opportunity
Annuity sales are booming
Figure 18: New pension annuity business – number of new contracts and the value of new premiums, 2003-07
A surge in the number of retirees will fuel growth in the annuity market…
Figure 19: Forecast of new pension annuity business, 2008-12
Implication and opportunity
…and also sales of competitor products
Figure 20: Forecast of new income drawdown business, 2008-12
Implication and opportunity
Factors incorporated
SEGMENT PERFORMANCE
Key points
Three in five annuities are worth under £20,000
Figure 21: Proportional distribution of annuities sold, by fund size, 2007
Implication and opportunity
Sales of higher-value annuities picked up strongly in 2007
Figure 22: Number of annuities sold, by size of fund, 2003-07
Implication and opportunity
Product breakdown
Figure 23: Breakdown of pension annuities sold, by type of product, 2006
Non-conventional annuities are gradually gaining ground…
Figure 24: Breakdown of pension annuitiy sales (volume and value), by main product type, 2007
Investment-linked annuities are more suitable for those with large funds
…as enhanced annuities become more popular
Figure 25: Number of new enhanced/impaired life annuity contracts and as percentage of total annuties sold, 2003-07
Implication and opportunity
MARKET SHARE
Key points
Provider rankings
Figure 26: Top 15 providers in the UK annuity market, by new business (APE), 2007
Top five responsible for over two thirds of new business in 2007
Figure 27: Top five providers’ share of the UK annuity market, by new business (APE), 2007
COMPANIES AND PRODUCTS
Key points
New entrants make their presence felt in the enhanced annuity sector
Annuity rates vary from provider to provider
Figure 28: Pension annuities product comparison – non-smoker, ranked by level monthly income, July 2008
Smokers benefit from more favourable rates
Figure 29: Pension annuities product comparison – smoker, ranked by level monthly income, July 2008
BRAND COMMUNICATION AND PROMOTION
Key points
Annuity advertising up by two thirds in 2007/08
Figure 30: Advertising expenditure on annuities, by advertiser, 2006-08
Implication
Top advertisers
The press accounts for the majority of adspend
Figure 31: Proportional distribution of advertising expenditure on annuities, by media type, 2006-08
CHANNELS TO MARKET
Key points
Most new annuity business is generated by IFAs…
Figure 32: New pension annuity premiums, by sales channel, 2003-07
…but direct channels are growing their distribution share
Figure 33: Proportional distribution of new pension annuity premiums, by sales channel, 2003-07
Implication and opportunity
THE CONSUMER – PENSION OWNERSHIP
Key points
About Mintel’s consumer survey
Half of all non-retired adults have a private pension
Figure 34: Ownership of pension products, by type, June 2008
Implication and opportunity
Just over half of all pension holders are members of a defined-benefit scheme…
Figure 35: Benefit structure of pension held, by pension holders, June 2008
…but many will be members of closed schemes
14 million have a money-purchase pension
Implications
Many people have multiple pension pots
Figure 36: Ownership of pension products and retirement savings – cross-analysis, June 2008
Implication and opportunity
Capture them while they’re young
Figure 37: Type of pension owned. by gender, age, socio-economic group, working status and household income, June 2008
Implications
ABC1 third agers are a major target group
Figure 38: Type of pension owned by marital status, lifestage, Mintel’s Special Groups and tenure, June 2008
Implication and opportunity
Little regional variation outside of London
Figure 39: Type of pension owned by region and ACORN category, new technology usage, newspaper readership and commercial TV viewing, June 2008
THE CONSUMER – PENSION FUND VALUE
Key points
Half of all pension holders have no idea what their pension fund is worth…
Figure 40: Value of pension fund, June 2008
Implications
…but the proportion varies depending on the type of pension held
Figure 41: Value of pension fund, by type of pension owned, June 2008
Implication
Men tend to have much larger pension pots than women
Figure 42: Value of pension fund, by gender and age group, June 2008
Implication and opportunity
A quarter of ABs have pension funds worth over £50,000
Figure 43: Value of pension fund, by socio-economic group, June 2008
THE CONSUMER – RETIREMENT PLANS
Key points
Most pension holders plan to stop working at state pension age
Figure 44: Age planning to retire, by pension holders and non-pension holders, June 2008
Personal pension holders are more likely to retire later than occupational scheme members
Figure 45: Planned retirement age, by type of pension owned, June 2008
The luck of the baby boom generation
Figure 46: Planned retirement age, by gender and age group (DC pension holders only), June 2008
THE CONSUMER – TARGETING OPPORTUNITIES
Key points
Most DC pension holders have not heard of annuities
Figure 47: Awareness, advice needs and attitudes towards annuities, by gender, June 2008
A significant minority are interested in the alternatives
Awareness improves with age
Figure 48: Awareness, advice needs and attitudes towards annuities, by age group, June 2008
Awareness of OMO is highest among those with larger pension funds
Figure 49: Awareness, advice needs and attitudes towards annuities, by value of pension fund, June 2008
Personal pension holders are keen to take expert advice…
Figure 50: Awareness, advice needs and attitudes towards annuities, by type of pension, June 2008
…but there is little interest in annuities overall
Figure 51: Interest in different annuity products and expected buying activity, by pension type, June 2008
Implication and opportunity
The later people retire the less likely they are to take a lump sum
Figure 52: Interest in different annuity products and expected buying activity, by age planning to retire, June 2008
Income drawdown interests those with moderately-sized pension funds
Figure 53: Interest in different annuity products and expected buying activity, by pension fund value, June 2008
Men appear more proactive than women
Figure 54: Interest in different annuity products and expected buying activity, by gender and age group, June 2008
Wealthy ABs are more prone to considering all the options
Figure 55: Interest in different annuity products and expected buying activity, by socio-economic group, June 2008
Further analysis

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