Occupational Pensions - UK - July 2007

Table of Contents

• Issues in the Market
• Key issues
• Market definitions
  • Figure 1: Types of private pension provision, UK
• Occupational schemes
• Defined-benefit (salary-related) schemes
• Defined-contribution (money-purchase) schemes
• Other work-related pensions
• Other definitions
• Abbreviations
• Market in Brief
• Active membership continues to recede
• Scheme administration and funding
• New insurance-administered business up strongly in 2006
• Improvements in the equity and bond markets help to reduce deficits
• Regulatory changes boost appeal of outsourcing
• Product developments centre on risk-sharing solutions
• FTSE 100 firms run the largest private-sector schemes
• Top five players in the insurance-administered sector control three fifths of the market
• IFAs generate the lion' s share of insurance-administered sales
• Minimal above-the-line advertising
• An occupational scheme is the most common pension type
  • Figure 2: Proportion of adults who are active members of a pension, by type, April 2007
• Occupational DC scheme members have shorter investment terms
  • Figure 3: Number of years making pension contributions, by type of pension, April 2007
• Merely half of those with the freedom to switch funds actually do so
  • Figure 4: Attitudes and experiences of occupational pension scheme members, April 2007
• Promising public support for personal accounts
• Broader Market Environment
• Key points
• Greater inducement for people to save
  • Figure 5: Total PDI, consumer expenditure and savings, 2003-12
• Implication
• Steady economic growth
  • Figure 6: GDP annual growth and proportion of workforce unemployed -- UK, 1997-2007
• Higher inflation requires pension savings to work harder
  • Figure 7: Average annual changes in the bank base rate, CPI and RPI -- UK, 1997-2007
• Implication
• Asset allocation weighted towards equities
• Rising stock markets help to reduce pension fund deficits
  • Figure 8: FTSE 100 and FTSE All Share -- daily index movements, May 1997-May 2007
• Implication
• What does this mean for the future of DB schemes?
• Could some schemes reopen?
• Corporate UK needs to wake up to the longevity risk
  • Figure 9: Cohort life expectancy at age 60, by gender, 1981-2054
• Implication
• Recommendation
• An ageing population puts greater stress on pension funds
  • Figure 10: Projected size of the UK population, by age band, 2007-44
• Implication
• New age discrimination laws means more workers will retire later
• Internal Market Environment
• Key points
• A pension forms an integral part of the benefits package
  • Figure 11: Top five company benefits and top five most desired, January 2007
• Most common type is still a final-salary pension
• Routes to closure
• PPF levy is an extra cost burden
• Reducing pension liabilities
• The Money-purchase movement
• Transfer of risk
• Contribution rates are much lower for DC schemes
  • Figure 12: Employer and employee contribution rates for active members of private-sector occupational pension schemes, by type of scheme, 2004 and 2005
• Apathy reigns
• Few employees keep track of their fund' s performance
• Implication and recommendation
• A minority of workers shun or defer joining the company scheme
• Implication and recommendation
• Pensions simplification
• Admin upheaval for trustees and administrators
• New opportunities for life and pensions companies
• Further reform
• The Pensions Regulator exerts its influence
• Trigger points
• Improving trustee knowledge
• Competitive Context
• Pension substitutes
  • Figure 13: Summary of retirement funding strategies
• Growing number of amateur property investors
• The pension-ISA combo
• Equity release provides a solution for some
• Strengths and Weaknesses in the Market
  • Figure 14: Occupational/group pensions -- SWOT analysis, 2007
• Scheme Size and Membership
• Key points
• Private-sector schemes in decline
  • Figure 15: Number of private-sector occupational pension schemes in the UK, by scheme size, 2002-06
• Implication
• Just 6% of private-sector employers run an occupational scheme
• Only half the number of private-sector schemes were open in 2006
  • Figure 16: Status of private-sector schemes, 2006
• DC schemes make up the majority of occupational pensions
  • Figure 17: Number of private-sector occupational schemes, by benefit structure and size band, 2005
• Active membership has also declined over the past decade
  • Figure 18: Number of private-sector occupational scheme members, 1995-2006
• Note on double counting
• Three in four members were contracted out in 2006
  • Figure 19: Active members of private-sector schemes, by route to being contracted-out, 2006
• One in ten active members were paying AVCs in 2005
• Public-service sector
• Value of Funded Pensions
• Key points
• Framework for workplace pensions
  • Figure 20: Types of workplace pension, 2007
• Outsource or in-house?
• The self-administered sector is the largest in value
  • Figure 21: Value of assets in funded pensions, 1997-2005
• Implication
• A note about the data
• Pension Contributions
• Key points
• Employers up their contributions to reduce deficits
  • Figure 22: Contributions to private pension schemes -- UK, 2001-05
• Insurance-Administered Sector
• Key points
• In-force business continues to decline
  • Figure 23: Insurance-administered occupational pension business in force, 2001-05
• Lump-sum investment drives new business growth...
  • Figure 24: New insurance-administered occupational pension business, 2001-06
• ...mainly in the area of TIPs and buyouts
  • Figure 25: New insurance-administered occupational pension business, by sub-sector, 2005 and 2006
• Providers take the long view to the buyout market
• Single-premium business will continue to grow strongly
  • Figure 26: Forecast of new insurance-administered occupational business, 2006-11
• In-force GPP business
  • Figure 27: GPP business in force, 2001-05
• New GPP sales soar
  • Figure 28: New GPP business, 2001-06
• Implication
• New GPP business set to rocket
  • Figure 29: Forecast of new GPP business, 2006-11
• Factors incorporated
• Market Share
• Key points
• Prudential tops the rankings in the insurance-administered sector
  • Figure 30: Top 20 insurance companies in the occupational pensions market, by net premiums, 2004 and 2005
• Individual pensions sector
• The largest plcs are among the largest employers in the UK
  • Figure 31: The top 20 listed companies by market capitalisation, January 2007
• Companies and Products
• Supply structure
  • Figure 32: The main participants in the occupational pensions market
• Employers
• Insurance companies
• Prudential
• Legal & General
• Standard Life
• Investment management
• Pensions IFAs
• Benefit consultants
• Other professional services
• Brand Communication and Promotion
• Key points
• Pensions adspend dips following A-Day
  • Figure 33: Total advertising expenditure on pension and annuity products, 2005-07
• Limited use of consumer advertising...
• ...but investment is likely to rise over the coming years
• Hargreaves Lansdown tops the pensions advertiser rankings
  • Figure 34: Advertising expenditure by the top ten pensions advertisers, 2006 and 2007
• Channels to Market
• Key points
• Most group pension business is sold with advice
• Non-intermediated channel represents a small but growing share of new regular-premium group pensions business
  • Figure 35: Distribution breakdown of new insurance -- administered occupational pension business -- regular premium, 2001-06
• IFAs win the lion' s share of single-premium group pensions business
  • Figure 36: Distribution breakdown of new insurance -- administered occupational pension business -- single premium, 2001-06
• Implication
• The Consumer -- Pension Participation
• Key points
• Survey background
• Less than a third of non-retired adults are members of an occupational pension
  • Figure 41: Proportion of adults who are active members of a pension, by type, April 2007
• Paid-up pensions
• Transfers made easier
• One in ten occupational scheme members are saving in a personal pension
  • Figure 42: Cross-analysis of pension types, April 2007
• Small decline in those contributing to DB schemes
  • Figure 43: Proportion of adults who are active members of a pension, by type, 2006 and 2007
• Implication
• Shift in the direction of SIPPs
• Implication
• Still much confusion over pension type
  • Figure 44: Proportional split of occupational schemes, by benefit type, 2006 and 2007
• Implication
• Gender gap is much narrower in the occupational pension sector
  • Figure 45: Proportion of adults who are active members of a pension, by type and by gender, age, socio-economic group, marital status, lifestage and Special Group, April 2007
• Implication
• Pension participation peaks in the 45-54 age group
• Implication
• Ownership levels are highest among the wealthier groups
  • Figure 46: Proportion of adults who are active members of a pension, by type and by tenure, working status, gross annual household income, ACORN category and region, April 2007
• Implication
• Raise awareness and build the brand via broadsheet ads
  • Figure 47: Proportion of adults who are regularly contributing to a pension, by type and by new technology usage, newspaper readership, commercial TV viewing and supermarket usage, April 2007
• Implication and opportunity
• CHAID analysis
  • Figure 48: Target groups identified for the occupational and personal pensions markets, April 2007
• Driver 1: employment
• Driver 2: income
• Driver 3: age
• Implication and opportunity
• The Consumer -- Length of Contributions
• Key points
• DB scheme members have been saving for longer than their DC counterparts
  • Figure 49: Number of years making pension contributions, by type of pension, April 2007
• Implication
• Sharp fall in the proportion of new joiners to occupational schemes
  • Figure 50: Number of years making occupational pension contributions, 2006 and 2007
• Implication
• A small proportion of adults have left starting a pension late
  • Figure 51: Number of years making pension contributions, by gender, age and socio-economic group, April 2007
• Implication
• The Consumer -- Attitudes and Experiences
• Key points
• Around half of occupational scheme members were auto-enrolled
  • Figure 52: Attitudes and experiences of group pension scheme members, April 2007
• Implication
• DB schemes have greater pulling power
• Implication: employer contributions are essential
• One in eight members have the option to the select their own funds
• Implication
• Inform and educate to engage members
  • Figure 53: Cross-analysis of attitudes and experiences of group pension scheme members, April 2007
• Implication
• C2DEs are less enthused about their pension
  • Figure 54: Attitudes and experiences of group pension scheme members, by gender and socio-economic group, April 2007
• Younger members particularly need better access to info and advice
  • Figure 55: Attitudes and experiences of group pension scheme members, by age group, April 2007
• Implication
• Recent joiners are more likely to have a choice of funds
  • Figure 56: Attitudes and experiences of group pension scheme members, by length of time making contributions, April 2007