Report: Simplification and the Pensions Market for Wealthy Customers, 2005 TOC

CHAPTER 1 EXECUTIVE SUMMARY

The current specialist pensions market for the wealthy
The specialist pensions market following Simplification
Product focus: Specialist pension products

CHAPTER 2 INTRODUCTION

What is this report about?
Who is the target reader?
How to use this report

MARKET CONTEXT: THE CURRENT SPECIALIST PENSIONS MARKET FOR THE WEALTHY

Introduction
Key findings
The specialist pensions market is marked by complexity and a wide range of products: There are eight major types of specialist pension product in the UK; Complex rules have shaped the specialist pensions market
The specialist pensions market is a significant element of the UK pensions landscape: £4.1bn new business premiums were paid into the specialist pensions market in 2004; Insurers gain most specialist pension premiums from EPPs and Section 32 Transfers; The specialist pensions market holds around £145bn in assets
Tax incentives have been the most important factor in the development of the specialist pensions market: Tax incentives have made the UK the largest market for private pensions investment in Europe; The lack of other tax benefits has pushed investment into pensions; Pensions are the major tax efficient vehicle for employers looking to reward their most valuable staff; Pensions are the only financial product to attract significant tax reliefon individuals income; The UK has one of the lowest levels of state pension provision in Europe, driving wealthy individuals to look for private pension cover; The tax advantages associated with pensions are particularly attractive to wealthy customers; Wealthy customers more complex pension needs have driven the creation of a range of specialist pension products; The wealthys requirement for greater control over investment and greater investment choice is key to the SIPP market; The wealthys desire to invest pension funds (or borrow against them) in assets relating to the individual has driven the SSAS market; UURBs and FURBs are designed to allow wealthy employees to make pension contributions in excess of contribution limits
The market for specialist pensions is made up of a small number of individuals with a large amount of assets: The market for specialist pensions is small in terms of individuals; HNW customers hold 39% of liquid assets in the UK.; HNWs are the section of the UK population that are showing strongest growth; Wealthy customers are financially aware and demanding; 83% of eligible wealthy customers are contributing to a pension scheme; Wealthy customers do not see pensions as products to be bought or reviewed frequently
Wealthy customers are financially confident and aware
The specialist pensions market is preparing for a complete transformation on April 6 2006: The basic tenets of Pensions Simplification are indeed simple; Full concurrency; Payment limits; Lifetime allowance; Protection against the lifetime allowance; Tax free cash lump sum changes; Pension age changes; Types of pension; Preparations for Simplification are already affecting the specialist pensions market; Wealthy customers are taking advantage of a number of loop-holes pre-Simplification; The volume of Simplification legislation is confusing advisers

CHAPTER 3 THE FUTURE DECODED: THE SPECIALIST PENSIONS MARKET FOLLOWING SIMPLIFICATION

Introduction
Key findings
Quantitative forecasts: New Style SIPPs will dominate the new specialist pensions landscape after Simplification: Specialist pensions will be transformed by Simplification into "New Style" products; New Style SIPPs will become a major player in the UK pensions market by 2009 with annual premiums of £4.6bn and total assets of £53bn; SIPPs new business premiums will rocket while other specialist pensions dry up; SIPPs will make up 34% of total specialist pensions assets by 2009
Qualitative forecasts: There will be a surge in demand for pensions from wealthy customers following Simplification
Flexibility of investment, allocation, borrowing and benefits will shape the market for pensions for the wealthy after Simplification: Contributions: High lifetime allowances will attract the wealthy to invest in pensions; Allocation: Greater freedom to allocate and borrow within pension funds, particularly in residential property, will excite wealthy customers; The liberation of the pensions term assurance market will make this the most cost effective way to buy life assurance; Ancillary investments will add to the attraction of pensions; Simplification has introduced some restrictions on investment; Borrowing: The ability to borrow against pension funds will drive funding; Vesting: Vesting options will broaden greatly after Simplification; Avoiding annuities will be a key attraction to wealthier customers
The Competitive market post-Simplification will be more transparent: Cost and range of investments will be key comptetive factors after Simplification; Life companies will struggle to adapt to the unprotected specialist pensions market following Simplification
Downward pressure on prices will shape the market but profit potential will remain strong
Distribution: "complification" will continue to drive the need for in depth advice

CHAPTER 4 PRODUCT FOCUS: SPECIALIST PENSIONS

Key findings
Self Invested Personal Pensions (SIPPs): Flexible and fashionable: The structure of SIPPs is a wrapper into which a wide range of investments can be placed; SIPPs are an individual product but require trustees; SIPPs are not an insurance product; SIPPs are generally charged on the basis of the underlying assets; SIPPs offer a broad range of permissable investments; Prohibited investments; SIPP Customers are generally wealthy, however the market is broadening; The majority of SIPP customers have considerable pensions savings; Some segmentation is already emerging within the SIPP customer market; Competition - Insurance companies have lost control of the SIPP market; James Hay is by far the largest provider in the SIPP market; Datamonitor estimates the SIPP market to be worth £1.4bn in 2004; Premiums paid into SIPPs in 2004 reached £1.4bn, with the majority of this market being made up of specialist providers; Growth has been steady in the insurer SIPP market; SIPPs are set to gain in the run up to Simplification; SIPPs will be the product of choice for wealthy individuals following Simplification; SIPPs will benefit at the expense of occupational schemes following Simplification; Group SIPPs and wrap platforms will drive New Style SIPP growth; The development of Group SIPP market; SIPPs and wraps look set to grow in tandem; The market for SIPP products will reach £4.6bn in 2009
Small Self-Administered Schemes (SSAS): Still SSASy after Simplification: SSASs are the pension product where the interests of the employer and the member can be most closely aligned; There are five main types of SSAS; Interaction with the employing company is the key feature of SSASs; The administration of SSASs causes problems; The pensioner trustee system is inadequate; SSASs are aimed at those involved in the management of smaller firms; James Hay is the biggest player in the SSAS market; Datamonitor estimates that £400m was paid into SASSs in 2004; Some SSAS assets are being transferred into SIPPS; SSASs continue to have a number of structural advantages over SIPPs; SSASs will face increased competition from SIPPs post-Simplification; Datamonitor forsees moderate growth in the SSAS market
Executive Pension Plans (EPPs): Extremely Poor Prospects: EPPs are occupational money purchase schemes; Contributions into EPPs are focused on the employer; EPPs are essentially taxed as occupational pension schemes; Tax free cash is a key benefit of EPPs; EPPs appeal primarily to Senior Managers and Controlling Directors; EPPs are the pension of choice for senior managers; EPPs compete with SSASs for Controlling Directors pensions; Insurers dominate the market for EPPs; The total market for EPPs was £1.2bn in 2004; EPPs are the largest specialist pensions market for insurance companies; EPPs will gain some new business in the run up to Simplification; EPP premiums will fall below £400m per annum after Simplification; EPPs will lose new business to SIPPs and Personal Pensions post-Simplification; EPPs will see a fund drain post-Simplification
AVCs and FSAVCs: No longer concurrent?: AVCs and FSAVCs allow the topping up of occupational pensions; AVCs and FSAVCs appeal to those concerned about their pension pots; The FSAVC market is dominated by insurers; The AVC market has been inconsistent in recent years while FSAVCs have been in decline; FSAVCs have fallen 21% per annum since 2004; The total AVC new premiums were £396m in 2004; New Style AVCs will gain benefits post-Simplification, while FSAVCs will merge into the New Style personal pensions market; FSAVCs assets will see a high level of asset attrition post-Simplification, while premiums will disappear; The AVC market will be boosted by Simplification
Section 32 Transfers: going out with a bang: Section 32 Transfers allow customers to buy out their entitlement from occupational pension schemes; Customers holding Section 32 Transfers are looking for control and consolidation; The market for Section 32 Transfers has been fairly stable in recent years; Insurers hold all Section 32 Transfers; Push and pull factors are driving the market for Section 32 Tranfers prior to A Day; Concerns over closed funds are driving the market for Section 32 Transfers prior to Simplification; Insurance companies are actively seeking Section 32 funds in the run up to Simplification; Section 32 Transfers premiums will peak in 2005
Unapproved Retirement Benefit Schemes: Unnecessary after Simplification: Unnaproved Schemes allow investment in pensions beyond the approved limits but with minimal tax advantages; Unapproved schemes can be funded or unfunded; FURBs are niche products for the most highly valued employees; The FURB market is dominated by specialist providers; There are no reliable figures for sizing the FURB market; FURBs will see some boost pre-Simplification; UURBs and FURBs will disappear after Simplification

CHAPTER 5 DATA

European Comparative Tables

High Net Worth and Mass Affluent Individuals

Product take up and preferences of wealthy customers

Specialist pensions - historic market figures

Specialist pensions - current and forecast market figures

CHAPTER 6 APPENDIX

Definitions: Additional Voluntary Contributions (AVCs); Concurrency; Controlling directors; Defined contribution pensions scheme; Defined benefits pensions scheme; Executive Pension Plans (EPPs); High net worth (HNW); Free Standing Additional Voluntary Contributions (FSAVCs).; Funded Unapproved Retirement Benefit Schemes (FURBs):; Mass affluent; Mass market; Self Invested Personal pensions (SIPPs); Small Self Administered Schemes (SSAS); Section 32 Transfers; Unfunded Unapproved Retirement Benefit Schemes (UURBs); Vest
Research methodology: Consumer Data; Datamonitors Global Wealth Model; The UK sub model; Forecasting methodology; Datamonitors Life and Penisions Forecasting model; Historical figures; Forecasts figures
Supplementary data: Tax advantages of opening an EPP pre-Simplification for those in excess of the lifetime allowance; Details of SSAS investments pre-Simplification
Further reading
SPP writing team

List of Tables

Table 1: Proportion of salary replaced by 1st pillar pension, 2002
Table 2: James Hay holds a very large share of the SIPP market, 2005
Table 3: Key figures for SSAS providers, 2005
Table 4: Proportion of SSAS policies that were transferred into SIPPs, 2004
Table 5: Private pension assets (2nd and 3rd pillars) held in major European countries, 1998-2003e
Table 6: Private pensions per head of population, 2002
Table 7: HNW and Mass affluent individuals, 1999-2004
Table 8: HNW and Mass affluent individuals, 2004e-2009f
Table 9: Do you currently have contributions paid into any of the following pension schemes?
Table 10: Which of the following financial products do you think you might consider taking out, topping up or changing over the next five years?
Table 11: Which method would you prefer to use overall when arranging a financial product?
Table 12: To what extent do you agree or disagree with the following statements relating to your knowledge of financial services?
Table 13: Specialist pensions held by insurance companies new business single premiums 2000-2004
Table 14: Specialist pensions held by insurance companies new business regular premiums 2000-2004
Table 15: Specialist pensions total new business premiums held by insurance companies 2000-2004
Table 16: Specialist pensions new business premiums forecast, 2004-2009
Table 17: Specialist pensions assets under management forecast 2004e-2009f

List of Figures

Figure 1: Insurers gained most specialist pensions new business premiums from EPPs, 2004
Figure 2: Wealthy individuals represent a high proportion of liquid assets in the UK market, 2002
Figure 3: James Hay is comfortably the largest competitor in the SIPP market, 2004
Figure 4: SIPPs have the highest new business premiums in the specialist pensions market, 2004e
Figure 5: Insurers gained most specialist pensions new business premiums from EPPs, 2004
Figure 6: Specialist pensions hold around £145bn in liquid assets, 2004
Figure 7: Private pension assets per head of working population, 2002
Figure 8: Wealthy customers account for only 12% of the UK adult population, 2003
Figure 9: Wealthy individuals represent a high proportion of liquid assets in the UK market, 2002
Figure 10: The wealthy population is set to continue to grow rapidly, particularly at the top end, 2005
Figure 11: A high proportion of eligible wealthy customers are making contributions into their pensions, 2003
Figure 12: Investments are the financial products HNW individuals are most likely to buy or change in the next five years, 2003
Figure 13: Financial awareness is high among HNW customers, 2003
Figure 14: New premiums paid into SIPPs will come to dominate the specialist pensions market, 2004- 2009f
Figure 15: SIPP assets will grow at the expense of many other specialist pensions post-Simplification
Figure 16: 52% of SIPP providers have average fund sizes in excess of £200,000
Figure 17: James Hay is comfortably the largest competitor in the SIPP market, 2004
Figure 18: The SIPP market is dominated by single premium payments, 2000-2004
Figure 19: The SIPP market is set to go through a period of explosive growth, 2004e-2009f
Figure 20: James Hay holds a very large share of the SSAS market, 2005
Figure 21: New SSAS premiums paid to insurers are declining rapidly
Figure 22: Datamonitor believes SSASs will have a future after Simplification
Figure 23: EPP sales revived in 2004
Figure 24: The EPP market will go into decline post-Simplification
Figure 25: New business premiums into FSAVCs fell 21% per annum 2000-2004
Figure 26: AVCs peaked in 2002
Figure 27: New premiums into FSAVCs will disappear post-Simplification
Figure 28: AVC premiums will recover somewhat after Simplification
Figure 29: Section 32 Transfer premiums paid to insurance companies have averaged around 600m 2000-2004
Figure 30: The market for Section 32 Transfers will end post-Simplification
Figure 31: Unapproved schemes can provide for excess pension benefits