Occupational Pensions - UK

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