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Pensions Market Report 2013

  • January 2013
  • -
  • Key Note Publications Ltd

Executive Summary

In 2011, there were 12.2 million people of pensionable age, accounting for 19.4% of the total population; this is compared to 6.8 million people of pensionable age accounting for 13.6% of the population in 1951. It is clear that the UK’s population has begun to age rapidly since the middle of the last century, as better medical care and the development of the welfare state have allowed for longer lives. Between 2002 and 2010 alone, the number of people in the UK aged over 90 increased by 22.6%.

By 2035, the pensionable population is projected to be 15.6 million, accounting for 21.3% of the total population. The largest increase of all the age ranges will be in the over-85s category, which is set to see an increase of 115% between 2015 and 2035.

Those of 85 and over are entering what has been deemed the ‘Fourth Age’, with the Third Age having begun at retirement and lasting to approximately 84. Retirement planning, for those of the population who have planned for retirement — an ever decreasing proportion — is generally focused on the ‘Third Age’, when retirees are still able to be relatively active and independent. Pension planning as it stands tends not to focus on providing the enhanced levels of income necessary as individuals enter the ‘Fourth Age’ and may begin to have long-term care requirements.

With this in mind, it is hardly surprising that the Government’s expenditure on the various elements of the State Pension has grown by 28.9% between the tax year ending 2008 and the tax year ending 2012. By the tax year ending 2058, it is forecast that the Government will be spending 8.3% of gross domestic product (GDP) on benefits directed at pensioners, with the State Pension making up a considerable proportion of this. In February 2012, there were 12.7 million people receiving the State Pension, up from 11.8 million in February 2007.

The ageing population comes alongside an environment where the average family simply cannot afford to save. The proportion of households without any savings increased between 2007/2008 and 2010/2011 from 27% to 32%, with the continued poor economic performance being likely to blame. The current low interest rate environment is also discouraging saving, as returns received are, for all intents and purposes, negligible. 67.5% of the population said that they could not afford to save more than they currently did, according to Key Note’s exclusive market research conducted in October 2012. Only 27.4% said that workers on the average wage can afford to save enough for a comfortable retirement.

The burden is, therefore, increasingly falling on the Government to foot the bill for workers’ retirement. In 2011, benefit income made up 34.4% of the weekly income of pensioner couples and 58.8% of weekly income for single pensioners.

As a result of this growing burden, the Government has made a number of changes to UK pensions policy in the UK, including increasing the retirement age and introducing automatic enrolment into workplace pension schemes, in an effort to try to alleviate the mounting pressure on the state. However, at the same time the Government has also reduced the annual limit for contributions to pensions to minimise tax revenue lost through pension contributions.

There are numerous difficulties facing the pensions market in the UK at present. Again according to Key Note’s consumer research, 59.6% of the public said that pensions confused them, and 45.4% said that the future was too unpredictable to make saving for retirement worthwhile.

The average household in the UK was contributing just £19.70 a week to life assurance and pensions in 2010, which is not a sum sufficient to build a suitable retirement income. The number of people who are contributing inadequately are outnumbered by those who are not contributing at all.

The economic gloom the UK has experienced since the recession has resulted in an era of low overall returns for pension funds. Government bonds, one of the key investments pension funds are made up of, have been severely underperforming of late due to the Bank of England (BoE) using quantitative easing (QE) to try and infuse the economy with badly needed liquidity. At the same time, high inflation has been eroding incomes in real terms for pensioners and the value of funds held in savings accounts for savers.

Many individuals appear to have lost confidence in pension saving because of the ongoing abandonment of defined-benefit (DB) schemes, volatile fund values, and the wave of demutualisations during the early years of the previous decade, coupled with the failure of Equitable Life, the world’s oldest life assurer. This has resulted in persistent under-saving and a general ennui on behalf of the public to make savings towards their future.

The UK’s economy began to grow again in the third quarter of 2012, struggling out of the longest double-dip recession since the Second World War. However, the UK is far from out of the woods yet and must face a world vastly changed by the recession — in March 2012, Brazil overtook the UK as the world’s sixth-largest economy, for instance.

The future of pensions provision in the UK is hard to discern. The sheer number of legislative changes regarding pensions at the time of writing is likely to vastly change the way pensions are sold in the UK in the future, but whether this will be sufficient to provide a secure retirement income for the UK’s rapidly ageing population still remains to be seen.

Table Of Contents

Pensions Market Report 2013
Table of Contents

Foreword

Executive Summary

Introduction

REPORT OVERVIEW
DEFINITIONS

Strategic Overview

ECONOMIC TRENDS
Population
Life Expectancy
GOVERNMENT SPENDING ON PENSIONERS
NUMBER OF PEOPLE SAVING FOR PRIVATE OR OCCUPATIONAL PENSIONS
RATE OF SAVING
How Much Can People Afford to Save?
Pension Inflows
PENSIONERS' INCOMES
DISTRIBUTION
Individual Pensions
Occupational Pensions
Retirement Income Products
COMPETITIVE STRUCTURE
PENSIONS REFORM
Automatic Enrolment
Pensions Act
Finance Act
Age Discrimination
RETAIL DISTRIBUTION REVIEW
SOLVENCY II

The State Pension

INTRODUCTION
STATE PENSION AND OTHER GOVERNMENT PROVISIONS
Basic State Pension
Non-Contributory State Pension and Benefits
Second State Pensions
Means Testing
STATE PENSION REFORM
The End of Contracting Out
Changes to S2P Payments
The Budget: A Flat-Rate Pension?
Autumn Statement

Personal Pensions

INTRODUCTION
Allowance Limits
Market Size
Income from Personal Pensions

Occupational Pensions

BACKGROUND
Defined Benefit Versus Defined Contribution
Market Size
By Benefit Structure
Private-Sector Contributions
Income from Occupational Pensions
THE PENSION PROTECTION FUND

Annuities

BACKGROUND
EU Gender Directive
INCOME OPTIONS
Secured Income
Income Drawdown: Flexible Versus Capped
ANNUITY CHOICES
Standard Annuity
Enhanced and Impaired-Life Annuities
Investment-Linked Annuity
Market Size
By Size of Fund
By Age

Preparing for the Fourth Age

HEALTHY LIFE EXPECTANCY
DECLINE OF INSURANCE TO PAY FOR CARE

Advertising

BACKGROUND
MAIN MEDIA ADVERTISING EXPENDITURE

An International Perspective

HIGH DEPENDENCY RATIOS IN EUROPE
NUMBER OF PENSION FUNDS
In Selected OECD Countries
In Selected Non-OECD Countries
DEFINED BENEFIT OR DEFINED CONTRIBUTION?
INVESTMENT IN PENSION FUNDS
OECD Countries
Selected Non-OECD Countries
EXPENDITURE: PUBLIC VS PRIVATE

PEST Analysis

POLITICAL
The Budget
ECONOMIC
Quantitative Easing
UK Deficit
SOCIAL
Longevity
The Jobs Market
TECHNOLOGICAL

Consumer Dynamics

INTRODUCTION
ANALYSIS OF RESULTS
S1: "Recent Government Policy, Which Will See Pensioners Lose the Higher Personal Income Tax Allowance They Were Previously Entitled To and Could Cause Pensioners To Lose Money in Taxes, Is Unfair"
S2: "I Cannot Afford to Save More Than I Do Currently"
S3: "Automatic Enrolment in Workplace Pension Schemes Will Benefit UK Pensions Provision"
S4: "Pensions Confuse Me"
S5: "Low Interest Rates Discourage Me From Saving"
S6: "People Working Longer to Make Sufficient Provisions for Retirement Are a Contributing Factor to the Current Level of Youth Unemployment"
S7: "It Is Right to Increase the State Pension Age Because People Are Living Longer and the UK Is in Debt"
S8: "The Future Is Too Unpredictable to Make Retirement Saving Worthwhile"
S9: "I Am Certain I Will Have Sufficient Income in My Retirement to Live Comfortably"
S10: "Automatic Enrolment in Workplace Pension Schemes Will Benefit Me"
S11: "Family Members Should Take a Greater Proportion of the Financial Burden of Caring for the Old and the Infirm"
S12: "The Complexity of UK Pensions Policy Deters Me From Contributing to a Pension"
S13: "I Think the Retirement Age for Women Should Be Lower Than That of Men"
S14: "I Have Not Currently Planned Any Way to Fund My Retirement"
S15: "Workers on the Average Wage Can Afford to Save Enough for a Comfortable Retirement"
S16: "I Have Made Financial Provisions (i.e. by Purchasing Long-Term Care Insurance) for the Possibility That I Will Need Residential Care in My Old Age"
S17: "I Will Rely on the Release of Equity in My Property to Fund My Retirement"

Competitor Analysis

INTRODUCTION
Less Choice
AEGON
Corporate Strategy
Product and Brand Development
Profitability
Future Developments

AVIVA PLC

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

AXA GROUP

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

BARCLAYS

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

CANADA LIFE

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

EQUITABLE LIFE

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

FRIENDS LIFE

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

HSBC

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

JUST RETIREMENT GROUP

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

KEY RETIREMENT SOLUTIONS

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

LEGAL and GENERAL

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

LV= (LIVERPOOL VICTORIA)

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

LLOYDS BANKING GROUP

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

NATIONAL FARMERS UNION MUTUAL

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

PHOENIX GROUP HOLDINGS

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

PRUDENTIAL

Corporate Strategy
Product and Brand Development
Profitability
Future Developments

REASSURE

Corporate Strategy
Product and Brand Development
Profitability
Future Developments
ROYAL LONDON MUTUAL
Corporate Strategy
Product and Brand Development
Profitability
Future Developments
STANDARD LIFE
Corporate Strategy
Product and Brand Development
Profitability
Future Developments
ZURICH FINANCIAL SERVICES GROUP
Corporate Strategy
Product and Brand Development
Profitability
Future Developments

The Future

ECONOMIC FORECASTS
Population
PROJECTED GOVERNMENT EXPENDITURE ON STATE PENSION AND RELATED BENEFITS
The Future of Pensioners' Benefits: Means Testing?
THE FUTURE OF OCCUPATIONAL PENSIONS
Automatic Enrolment
ANNUITY RATES
ALTERNATE RETIREMENT INCOMES
CONCLUSION

Further Sources

Associations
Publications
General Sources
Government Publications
Other Sources
Key Note Sources
Key Note Ltd

Understanding Consumer Survey Data

Number, Profile, Penetration
Social Grade
Standard Region

Key Note Research

The Key Note Range of Reports

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