Annuities - UK - July 2009

ISSUES IN THE MARKET
Key issues in the market
Abbreviations
FUTURE OPPORTUNITIES
Breaking down advice barriers
An issue of trust
More choice and flexibility – but beware too much complexity
Creating more realism about retirement expectations
MARKET IN BRIEF
Annuity sales continue on an upward trend
Figure 1: New pension annuity business – number of new contracts and the value of new premiums, 2003-09
Conventional annuities are beginning to lose ground
Market drivers should ensure growth over the long term
Economic downturn leads to increased uncertainty in annuity market
Prudential remains the leading annuity provider
Figure 2: Top five providers’ share of the UK annuity market, by new business (APE), 2008
Small pension pots drive product and distribution developments
Figure 3: Proportional distribution of annuities sold, by fund size, 2008
Direct annuity sales set to grow
Figure 4: Proportional distribution of new pension annuity premiums, by sales channel, 2004-08
Key consumer findings
Pension product ownership
Retirement plans and expectations
Figure 5: When planning to retire, June 2009
Attitudes towards annuities
Figure 6: Attitudes towards annuities/retirement income, June 2009
INTERNAL MARKET ENVIRONMENT
Key points
Individual pension policies increase…
Figure 7: Size of the defined-contribution pension pool, 1997, 2002 and 2007 
… but membership of DC schemes is shrinking
A large proportion of consumers remain disengaged with pensions
Figure 8: Attitudes towards pension based-savings, January 2009
Personal accounts will boost the market over the long-term
Uncertainty over annuity rates
Figure 9: Annual annuity rates and gilt rates, January 1990-June 2009
OMO continues to create headlines
Figure 10: External versus internal volume sales of new pension annuities – proportional distribution, 2000-08
Industry take positive action to develop the OMO
Regulatory and legislative developments
RDR
FSA comparative tables
BROADER MARKET ENVIRONMENT
Key points
Ageing population boosts annuity market
Figure 11: UK adult population data and dependency ratios, 2009-56
Increased life expectancy propels ageing population…
Figure 12: Cohort life expectancy at age 65, by gender, 1985-2055
… and drives innovation in the annuities market
Pensioner income data reveal change in approach to retirement
Figure 13: Breakdown in gross pensioner income (weekly average at constant prices, 2007-08), 1994-95-2007-08
Inflationary trends – good and bad news for annuitants
Figure 14: Average annual changes in the Bank of England base rate, CPI and RPI – UK, 2000-09
Share prices experiences a turbulent year
Figure 15: FTSE 100 and FTSE All Share indices – daily index movements, June 2000-May 2009
Gilt yields fluctuate due to economic policy
Figure 16: Historical monthly medium, long and ultra long gilt yields, January 2000-March 2009
COMPETITIVE CONTEXT
Key points
Annuities protected by legislation…
… but a significant number have alternative retirement strategies
Figure 17: Overview of potential retirment income solutions, June 2009
Equity release provides a different approach to retirement income…
Figure 18: Total value of equity release sales by SHIP members, 1991-2009
…but is it losing its appeal?
STRENGTHS AND WEAKNESSES IN THE MARKET
Figure 19: UK annuity market, SWOT analysis, 2009
WHO’S INNOVATING?
Key points
Annuity innovation has been buoyant in recent years
Annuity Plus bridges the gap between standard and enhanced annuities
Prudential launches Income Choice Annuity
Developments in direct sales…
… and innovation in the IFA market
Annuity portals and e-enablement to improve IFA margins
TRADE PERSPECTIVE
Participating companies
Annuity market faces a variety of challenges
Deferred retirements, falling pension pots and increased volatility
Changing consumer needs will dictate future innovation…
… and there will be further developments in annuity pricing
The internet is having an impact, but IFAs remain the key channel of distribution
Mixed views over industry action to increase the uptake of the OMO
Personal accounts will have limited impact for the short-to-medium term
MARKET SIZE AND FORECAST
Key points
Annuity sales continue to rise
Figure 20: New pension annuity business – number of new contracts and the value of new premiums, 2003-09
Annuity payments increase as market expands
Figure 21: Pension annuity business in force – payments per annum, 1997-2008
Pension annuity market forecast
Figure 22: New pension annuity business – number of new contracts and the value of new premiums, 2003-14
Almost 40% of annuities sold are for less than £10,000
Figure 23: Proportional distribution of annuities sold, by fund size, 2008
Larger pension funds increase since A-day
Figure 24: Number of annuities sold, by size of fund, 2004-08
Factors used in this forecast
MARKET SEGMENT PERFORMANCE
Key points
Annuity market is shifting away from conventional annuities
Figure 25: Breakdown of pension annuitiy sales (volume and value), by main product type, 2008 and 2004
Enhanced annuity sales continue to increase
Figure 26: Number of new enhanced/impaired life annuity contracts and as percentage of total annuties sold, 2003-08
Enhanced annuities – becoming a mainstream product?
Third-way sales reach £1 billion in 2008…
… but market turbulence hits variable annuity sector
INCOME DRAWDOWN OVERVIEW
Key points
Sidestepping the annuity
Income drawdown sales decline in 2008
Figure 27: Income drawdown new business, 2004-08
Average income drawdown fund size falls
Figure 28: Average pension annuity versus income drawdown premiums, 2004-08
IFAs likely to be scrutinised as income drawdown funds decline
Figure 29: New income drawdown premiums, by sales channel, 2004-08
MARKET SHARE
Key points
Prudential holds 21% of the UK annuity market
Figure 30: Top five providers’ share of the UK annuity market, by new business (APE), 2008
Some movement within top 15 rankings
Figure 31: Top 15 providers in the UK annuity market, by new business (APE), 2008
COMPANIES AND PRODUCTS
 MAJOR PLAYERS
Prudential
Aviva
AEGON
Legal & General
BRAND COMMUNICATION AND PROMOTION
Key points
Annuity adspend declines by 40% in 2008
Figure 32: Total adspend on annuities and income drawdown, 2006-08
Intermediary annuity adspend grows strongly
Figure 33: Overview of annuity adspend, 2006-08
Enhanced annuity provider tops advertisers in 2008
Figure 34: Top annuity adverstiers, 2006-08
Press advertising dominates
Figure 35: Adspend by media type, 2006-08
CHANNELS TO MARKET
Key points
Direct sales increase…
Figure 36: Proportional distribution of new pension annuity premiums, by sales channel, 2004-08
…although IFAs continue to dominate annuity sales
Figure 37: New pension annuity premiums, by sales channel, 2004-08
IFA community faces challenges
THE CONSUMER – PENSION OWNERSHIP
Key points
Pension savings gap is clear
Figure 38: Financial products owned, June 2009
Balance shifting in the pension market
Figure 39: Proportion of pension holders with a DB scheme, DC scheme or unknown scheme, June 2009
Major gap in pension savings among the under 35s
Figure 40: Pension product ownership, by age group, June 2009
Pension ownership closely aligned to affluence
Figure 41: Pension product ownership, by socio-economic group and gross annual household income, June 2009
Groups for consumer analysis
Annuity targets more likely to be third age, AB and male
Figure 42: Potential retirement strategies (product owership), by demographics, June 2009
Many annuity targets have additional sources of retirement income
Figure 43: Cross analysis of financial products owned, June 2009
THE CONSUMER – RETIREMENT PLANS AND EXPECTATIONS
Key points
Most people expect to retire at state pension age
Figure 44: When planning to retire, June 2009
Retirement reality kicks in after people reach 55
Figure 45: When planning to retire, by demographics June 2009
Some 23% of annuity targets expect to retire before state pension age
Figure 46: When planned to retire, by financial products owned, June 2009
Mixed expectations of standard of living during retirement
Figure 47: Financial expectations at retirement, June 2009
Retirement expectations alter with age
Figure 48: Financial expectations at retirement, by demographics, June 2009
A quarter of annuity targets expect a comfortable retirement
Figure 49: Financial expectations at retirement, by financial products owned. June 2009
Retirement plans and expectations are generally aligned
Figure 50: When planned to retire, by financial expectations at retirement, June 2009
THE CONSUMER – ATTITUDES TOWARDS ANNUITIES
Key points
Half of all non-retirees don’t understand what an annuity is
Figure 51: Attitudes towards annuities/retirement income, June 2009
Understanding increases with age
Figure 52: Attitudes towards annuities/retirement income, by demographics, June 2009
Internet is having a impact on confidence regarding annuities
Figure 53: Attitudes towards annuities/retirement income, by demographics, June 2009
Attitudes toward annuities varies among holders of different pension products
Figure 54: Attitudes towards retirement and retirement planning, by financial products owned, June 2009
People planning a phased retirement are the most aware of annuities
Figure 55: Attitudes towards annuities/retirement income, by when planned to retire, June 2009
Income for partner and flexibility are most popular features
Figure 56: Annuities features most interested in, June 2009
Different features appeal to personal and occupational pension holders
Figure 57: Annuities features most interested in, by financial products owned, June 2009
Retirement plans impact preferred features and benefits
Figure 58: Annuities features most interested in, by when planned to retire, June 2009
 TARGET GROUP ANALYSIS
Figure 59: Overview of annuity target groups, June 2008
Annuity aware
Annuity unaware
Annuity ambivalent
Figure 60: Attitudes towards annuities/retirement income, by target groups, June 2009
Figure 61: When planned to retire, by target groups, June 2009
Figure 62: Annuities features most interested in, by target groups, June 2009
APPENDIX – PRODUCT BACKGROUND AND DEFINITIONS
Common product types
Single or joint life
Cash lump sum
Open market option
Alternatives
Pensions simplification and income drawdown
Alternatively secured pensions
Pension products
APPENDIX – INTERNAL MARKET ENVIRONMENT
 RETAIL DISTRIBUTION REVIEW
Splitting sales and advice
Figure 63: Proposed regulatory landscape, 2012
From commission to fees
Possible extension to non-investment markets
APPENDIX – THE CONSUMER – PRODUCT OWNERSHIP
Figure 64: Potential retirement strategies (product owership), by demographics, June 2009
APPENDIX – THE CONSUMER – RETIREMENT PLANS AND EXPECTATIONS
Figure 65: When planned to retire, by demographics, June 2009
Figure 66: Financial expectations at retirement, by demographics, June 2009
Figure 67: Financial expectations at retirement (continued), by demographics, June 2009
APPENDIX – THE CONSUMER – ATTITUDES TOWARDS ANNUITIES
Figure 68: Attitudes towards annuities/retirement income, by demographics, June 2009
Figure 69: Annuities features most interested in, by demographics, June 2009
Figure 70: Target groups, by demographics, June 2009