Personal Accounts: The Future of Pension Provision

Table of Contents

OVERVIEW

• Catalyst
• Summary

EXECUTIVE SUMMARY

BACKGROUND TO PENSIONS REFORM IN THE UK

• Individuals' saving obligations to obtain significant pension income face bigger burdens
  • Demographic trends are making pension savings a necessity
  • The basic state pension forms the foundation of pension provision
  • Government policy is aimed at supporting the poorest of pensioners
  • The UK' s state pension is relatively meager in comparison to its European peers
• Currently, individuals are less concerned by saving into a pension but more interested in clearing debt
  • Affordability coupled with short-term preferences act as further barriers to pension savings
  • People are not prepared to take on higher pension savings during a market downturn but instead turn to clearing debt
  • Consumers have a short-term outlook when making saving and investment decisions
• The Government is reforming workplace pension provision from 2012 to make saving for retirement the norm
  • Automatic enrolment under the Pensions Act 2008 hopes to reform workplace pension provision
  • However, public-sector pension reform is a slow and controversial process and may not boost pension savings
• Automatic enrolment is designed to overcome the inertia preventing many people from saving
  • Automatic enrolment is seen positively as a way of overcoming people' s apathy towards pensions
  • Employees aged over 22 are eligible for automatic enrolment but policy should encourage people to start saving early
  • Policy must also place emphasis on financial education among young people to increase financial responsibility

PERSONAL ACCOUNTS: IMPLEMENTATION AND IMPLICATIONS

• Personal accounts hope to engage people with making minimum contributions towards pension savings
• Substantial cost implications for employers will detrimentally affect levels of contribution
  • For some, leveling down employers' contribution through the Personal Accounts scheme will make pension provision worse
  • Employers may be tempted to minimize costs of Personal Accounts through lower employee salaries
  • However, a contributions ceiling has been set to prevent the weakening of existing pensions provision
• Personal accounts should still ensure that it pays to save against the impact of means-testing
• The investment strategy must focus on achieving good retirement income for members
  • The default fund must reflect the characteristics of members in the personal accounts scheme
  • Retirement incomes of personal accounts members should be at the forefront of Trustees' minds when choosing an Investment objective
• Personal accounts do not represent an end to private pension schemes
  • The effectiveness of Personal Accounts is uncertain
  • Providers can win new business in the market with low-cost SIPPs
• Providers can seize opportunities to educate consumers where the government has failed
  • Providers and advisors should support people to exercise personal responsibility
  • Providers and key industry players must help people to separate the concepts of building up a pension fund and receiving pension income
  • Individuals are increasingly on their own in planning for retirement and need to understand the risks that they will shoulder
  • For the private pensions industry, targeted marketing rather than new product development, must be the focus

APPENDIX

• Definitions
  • Single premium policy
  • Regular premium
  • Wrap accounts
• Product definitions
  • Life-based savings products
  • Life Assurance
  • Single premium life
  • With-profit bond
  • Unit-linked bond
  • Income and growth bonds
  • Guaranteed equity bonds
  • Distribution bonds
  • Purchased life annuities
  • Other bonds
  • ISAs
• Further reading
• Ask the analyst
• Datamonitor consulting
• Disclaimer

FIGURES

• Figure: Pressure on the working age population is increasing as more people begin to retire
• Figure: The basic state pension forms the foundation of pension provision
• Figure: Affordability is the main challenge for individuals preventing them from saving into a pension
• Figure: The UK Pensions Reform is a slow moving process
• Figure: Ten million people are assumed to participate in the personal accounts scheme in 2012
• Figure: The future pensions market is one of helping individuals exercise personal responsibility
• Figure: Individuals will face 5 key risks that employers have previously shouldered with their final salary schemes