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Annuities - UK - August 2012

“The annuity market will be required to undergo some changes in order to keep pace with the changing pensions industry as a whole. Regulation will be a key factor in framing these changes as the industry will have to adapt to a new regulatory landscape over the next year or so. Providers must be careful not to take annuity business for granted. Currently annuities are the only option for a large portion of the population, but with people working longer and saving less in pension pots and the development of annuity alternatives, providers could be forced to adapt their business models.”

– Stephanie Seenan, Financial Services Analyst

Some of the questions answered in this report include:

  • How will the annuity market change as a result of the regulation onslaught?
  • The RDR – catastrophic for potential annuitants?
  • Will ‘third way’ products gain a foothold in the market?
  • Will the North American approach to pensions make its way across the pond?
  • Enhanced annuities – can a collaborative approach help to bolster this market?

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Table of contents

  1. Introduction

      • Market background and product definitions
        • Figure 1: Overview of the annuity and retirement income market, 2012
      • Single and joint life policies
        • The Open Market Option
          • The ABI Code of Conduct
            • Alternative Solutions
              • Abbreviations
              • Executive Summary

                  • The market
                    • Annuity sales are expected to rise
                      • Figure 2: Value of new pension annuity business, at current prices – fan chart, 2007-17
                    • Market factors
                      • Regulation set to change the way the industry operates
                        • Changing pension landscape
                          • Quantitative easing is bad news for annuity rates
                            • Companies, products and innovations
                              • Top four providers account for 60% of new business in 2011
                                • Figure 3: Top five providers’ share of the UK annuity market, by new business (APE), 2011
                              • Innovations in the annuity market
                                • The consumer
                                  • Nearly two-thirds of over 45s have private pension provision
                                    • Savings and investment ownership
                                      • Figure 4: Savings and investment product ownership – Pension ownership, May 2012
                                    • A third expect to work beyond the state pension age
                                      • Figure 5: Retirement plans, May 2012
                                    • Understanding of annuities is high among potential annuitants
                                      • Figure 6: Understanding and awareness of annuities, May 2012
                                    • Nearly two-thirds of potential annuitants have an understanding of the OMO
                                      • Figure 7: Understanding of the OMO, May 2012
                                    • What we think
                                    • Issues in the Market

                                        • How will the annuity market change as a result of the regulation onslaught?
                                          • The RDR – catastrophic for potential annuitants?
                                            • Will ‘third way’ products gain a foothold in the market?
                                              • Will the North American approach to pensions make its way across the pond?
                                                • Enhanced annuities – can a collaborative approach help to bolster this market?
                                                • Trend Application

                                                  • The OMO will foster increased competition in the annuities market
                                                    • Life begins at 65
                                                      • Pension providers sign up to the ABI Code of Conduct in an attempt to do what’s best for the customer
                                                      • Internal Market Environment

                                                        • Key points
                                                          • Concerns around retirement savings levels
                                                            • ABI reforms set to increase pension pots for retirees
                                                              • A concerning proportion of firms have no agreed pension reform costs absorption strategy
                                                                • Figure 8: Likely strategies to be used by (large) employers to meet increased costs resulting from the new pension reforms, 2012
                                                              • Number of external annuity sales creep up
                                                                • Figure 9: Share of external versus internal new pension annuity sales, 2001-11
                                                              • How will quantitative easing affect annuities?
                                                                • Gilt rates nose dive as a result of UK’s safe haven status
                                                                  • Figure 10: Annual annuity income and gilt rates, January 1990-August 2012
                                                              • Broader Market Environment

                                                                • Key points
                                                                  • Increased longevity creates the need for a pensions rethink
                                                                    • Figure 11: Cohort life expectancy at age 65, by gender, 1981-2057
                                                                  • Pressure on state mounts with an increasing number of pensioners
                                                                    • Figure 12: Projected size of the UK population, by age band, 2012-56
                                                                  • Flat base rate makes for meagre returns on savings
                                                                    • Figure 13: Average monthly changes in the Bank of England base rate, CPI RPI – UK, October 2007 –March 2012
                                                                  • Stock market volatility does little to help pension funds
                                                                    • Figure 14: FTSE 100 and FTSE All-Share – daily index movements, January 2003-May 2012
                                                                  • Gilt yields continue to be low and are not helped by QE
                                                                    • Figure 15: Historical monthly medium, long and ultra-long gilt yields, January 2002–April 2012
                                                                • Regulatory Environment

                                                                  • Key points
                                                                    • Regulation is the key influencing factor in the annuity market over the next few years
                                                                      • The RDR
                                                                        • Gender equalisation
                                                                          • Solvency II
                                                                            • New ABI Code of Conduct
                                                                            • Competitor Products

                                                                              • Key points
                                                                                • Foreign Pension providers may start eating into the UK market
                                                                                  • Annuity and income drawdown volumes decrease
                                                                                    • Figure 16: New sales of pension annuities versus income drawdown plans, 2006-11
                                                                                  • Annuity premium value creeps up, as drawdown values stutter
                                                                                    • Figure 17: Average pension annuity versus income drawdown premiums, 2006-11
                                                                                  • Two-thirds of income drawdown sales are external
                                                                                    • Figure 18: Proportional distribution of external and internal sales of pension annuity and income drawdown products, 2011
                                                                                • SWOT Analysis

                                                                                    • Figure 19: SWOT Analysis
                                                                                • Who’s Innovating

                                                                                  • Key points
                                                                                    • Nationwide annuity service launched
                                                                                      • Fixed-term annuity ‘get out clauses’
                                                                                        • Annuity Exchange launched a shop-around tool
                                                                                          • Prudential releases desktop app for IFAs
                                                                                            • More enhanced annuity products hit the market
                                                                                            • Market Size and Forecast

                                                                                              • Key points
                                                                                                • Deferred retirement takes its toll on annuities
                                                                                                  • Figure 20: New pension annuity business – number of new contracts and the value of new premiums, 2006-2011
                                                                                                • Uncertainty in the pensions industry will keep new annuity business growth levels subdued
                                                                                                  • Figure 21: Value of new pension annuity business, at current prices – fan chart, 2007-17
                                                                                                  • Figure 22: Volume of new pension annuity business – fan chart, 2007-17
                                                                                                  • Figure 23: Forecast of new pension annuity business, at current and constant prices, 2007-17
                                                                                                • Overall annuity outlook is cautiously optimistic
                                                                                                  • Forecast methodology
                                                                                                  • Segment Performance

                                                                                                    • Key points
                                                                                                      • Small annuity pots account for the largest share of overall sales
                                                                                                        • Figure 24: Proportional distribution of annuities sold, by fund size, 2011
                                                                                                      • Mid-sized annuity funds see growth in sales numbers in 2010-11
                                                                                                        • Figure 25: Number of annuities sold, by size of fund, 2007-11
                                                                                                      • Enhanced and unit-linked annuity contracts saw huge growth in 2010-11
                                                                                                        • Figure 26: Breakdown of pension annuity sales, by main product type, 2005, 2010-11
                                                                                                      • Enhanced annuity market shows notable growth in 2011
                                                                                                        • Figure 27: Number of new enhanced/impaired life annuity contracts and as a percentage of total annuities sold, 2005-11
                                                                                                    • Market Share

                                                                                                      • Key points
                                                                                                        • Aviva retains top market share position
                                                                                                          • Figure 28: Top 15 providers in the UK annuity market, by new APE premiums, 2011
                                                                                                        • Top four providers account for 60% of new business in 2011
                                                                                                          • Figure 29: Top five providers’ share of the UK annuity market, by new business (APE), 2011
                                                                                                      • Companies and Products

                                                                                                        • Aviva
                                                                                                          • Company description
                                                                                                            • Product range
                                                                                                              • Distribution
                                                                                                                • Key data
                                                                                                                  • Recent activity
                                                                                                                    • Prudential
                                                                                                                      • Company description
                                                                                                                        • Product range
                                                                                                                          • Distribution
                                                                                                                            • Key data
                                                                                                                              • Recent activity
                                                                                                                                • Legal & General
                                                                                                                                  • Company description
                                                                                                                                    • Product range
                                                                                                                                      • Distribution
                                                                                                                                        • Key data
                                                                                                                                          • Recent activity
                                                                                                                                            • Canada Life
                                                                                                                                              • Company description
                                                                                                                                                • Product range
                                                                                                                                                  • Distribution
                                                                                                                                                    • Key data
                                                                                                                                                      • Recent activity
                                                                                                                                                        • Just Retirement
                                                                                                                                                          • Company description
                                                                                                                                                            • Product range
                                                                                                                                                              • Distribution
                                                                                                                                                                • Key data
                                                                                                                                                                  • Recent activity
                                                                                                                                                                  • Brand Communication and Promotion

                                                                                                                                                                    • Key points
                                                                                                                                                                      • Annuity advertising spend more than doubles in the last year
                                                                                                                                                                        • Figure 30: Above-the-line consumer advertising expenditure on annuities and income drawdown products, 2010-12
                                                                                                                                                                      • Aviva tops the advertiser charts for annuity adspend
                                                                                                                                                                        • Figure 31: Top six advertisers of annuities and income drawdown products, 2010-12
                                                                                                                                                                      • Internet advertising of annuities continues to increase
                                                                                                                                                                        • Figure 32: Advertising expenditure on annuities and income drawdown products, by media type, 2010-12
                                                                                                                                                                      • Annuity targets are comfortable with technology usage
                                                                                                                                                                        • Figure 33: Understanding of annuities, May 2012
                                                                                                                                                                      • Note about NMR data
                                                                                                                                                                      • Channels to Market

                                                                                                                                                                        • Key points
                                                                                                                                                                          • IFAs account for the bulk of new annuity premium sales
                                                                                                                                                                            • Figure 34: New pension annuity premiums, by sales channel, 2007-11
                                                                                                                                                                          • IFAs also dominate the income drawdown sales channel
                                                                                                                                                                            • Figure 35: New pension income drawdown premiums, by sales channel, 2007-11
                                                                                                                                                                        • Savings and Investment Ownership

                                                                                                                                                                          • Key points
                                                                                                                                                                            • Some 13% of over 45s have a DC pension
                                                                                                                                                                              • Figure 36: Savings and investment product ownership, May 2012
                                                                                                                                                                              • Figure 37: Savings and investment product ownership – pensions only, May 2012
                                                                                                                                                                            • Pension owners not putting all of their eggs in one basket
                                                                                                                                                                              • Figure 38: Savings and investment product ownership, by most popular savings and investment product ownership, May 2012
                                                                                                                                                                            • Men are more likely to hold a pension than women
                                                                                                                                                                              • Figure 39: Most popular savings and investment product ownership, May 2012
                                                                                                                                                                            • Pension ownership higher amongst the better-off
                                                                                                                                                                              • Figure 40: Most popular savings and investment product ownership, May 2012
                                                                                                                                                                          • Retirement Plans

                                                                                                                                                                            • Key points
                                                                                                                                                                              • Automatic retirement at the state pension age is an outdated view
                                                                                                                                                                                • Figure 41: Retirement plans, May 2012
                                                                                                                                                                              • People looking to retire before state pension age display high levels of pension ownership
                                                                                                                                                                                • Figure 42: Savings and investment product ownership, by retirement plans, May 2012
                                                                                                                                                                              • Those nearer retirement have a more realistic view of their retirement plans
                                                                                                                                                                                • Figure 43: Retirement plans, May 2012
                                                                                                                                                                              • Self-employed are most likely to expect to work beyond state pension age
                                                                                                                                                                                • Figure 44: Retirement plans, May 2012
                                                                                                                                                                            • Understanding of Annuities

                                                                                                                                                                              • Key points
                                                                                                                                                                                • Nearly 70% of over 45s with a DC pension know what an annuity is
                                                                                                                                                                                  • Figure 45: Understanding and awareness of annuities, May 2012
                                                                                                                                                                                • Men more likely to have an understanding of annuities
                                                                                                                                                                                  • Figure 46: Understanding and awareness of annuities, by Gender, May 2012
                                                                                                                                                                                • Understanding of annuities higher, closer to retirement
                                                                                                                                                                                  • Figure 47: Understanding of annuities, by Age, May 2012
                                                                                                                                                                                • Saving and investment product ownership is higher among the annuity-aware
                                                                                                                                                                                  • Figure 48: Savings and investment product ownership, by understanding of annuities, May 2012
                                                                                                                                                                                • Only a minority of annuity-prepared DC pension owners expect to retire at state pension age
                                                                                                                                                                                  • Figure 49: Retirement plans, by understanding of annuities, May 2012
                                                                                                                                                                              • Understanding and Awareness of the Open Market Option

                                                                                                                                                                                • Key points
                                                                                                                                                                                  • The open market option has good awareness levels
                                                                                                                                                                                    • Figure 50: Understanding of the OMO, May 2012
                                                                                                                                                                                  • Awareness and understanding of annuities and OMO go hand-in-hand
                                                                                                                                                                                    • Figure 51: Understanding and awareness of open market option, by understanding of annuities, May 2012
                                                                                                                                                                                  • OMO-aware are less likely to plan to retire at the state pension age
                                                                                                                                                                                    • Figure 52: Retirement plans, by understanding of the OMO, May 2012
                                                                                                                                                                                • Appendix – Market Size

                                                                                                                                                                                    • Figure 53: Value of new pension annuity business, at current prices – fan chart, 2012-17
                                                                                                                                                                                    • Figure 54: Volume of new pension annuity business, at current prices – fan chart, 2012-17
                                                                                                                                                                                • Appendix – Savings and Investment Ownership

                                                                                                                                                                                    • Figure 55: Most popular savings and investment product ownership, May 2012
                                                                                                                                                                                    • Figure 56: Next most popular savings and investment product ownership, May 2012
                                                                                                                                                                                    • Figure 57: Pension product ownership, May 2012
                                                                                                                                                                                • Appendix – Retirement Plans

                                                                                                                                                                                    • Figure 58: Retirement plans, May 2012
                                                                                                                                                                                • Appendix – Understanding of Annuities

                                                                                                                                                                                    • Figure 59: Understanding of annuities, May 2012
                                                                                                                                                                                • Appendix – Understanding and Awareness of the Open Market Option

                                                                                                                                                                                    • Figure 60: Understanding of the OMO, May 2012

                                                                                                                                                                                Companies Covered

                                                                                                                                                                                • Aviva Plc
                                                                                                                                                                                • Financial Services Authority (The)
                                                                                                                                                                                • Great-West Lifeco Inc
                                                                                                                                                                                • Lloyds Banking Group

                                                                                                                                                                                Annuities - UK - August 2012

                                                                                                                                                                                £1,995.00 (Excl.Tax)