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Annuities - UK - July 2009

The UK’s ageing population, and the current legislative stipulation that requires most of those with a defined contribution/money purchase pension to purchase an annuity by the age of 75, should ensure that the annuity market continues to experience strong growth over the long term. The introduction of an employer duty to automatically enrol their workers into a qualifying pension scheme from 2012 should also provide a substantial boost to the number of people requiring an annuity in the future. However, recent economic turbulence has created some short-term challenges for the market, including a significant fall in the value of pension funds and an increase in the number of people opting to delay their retirement.

A widespread lack of consumer awareness and understanding of annuity products and retirement income issues continues to undermine the market in terms of the gap in pension savings and may also contribute to negative consumer perceptions of the industry. At the same time, increased longevity is placing downward pressure on annuity rates. However, in recent years the annuity market has witnessed considerable innovation as providers develop more flexible annuity products in response to growing demand from the baby boomer generation and through the introduction of more sophisticated underwriting and pricing strategies. Over the last year, the industry has also taken steps to improve consumer outcomes through the increased promotion of and improvements to the open market option.

This report examines the UK annuities market, including recent developments and innovations in the market and analysis of the key players. Market size and future trends are also considered, while Mintel’s exclusively commissioned trade research explores retirement plans and expectations as well as attitudes towards annuity products.

Key issues in the market

Demographic trends will ensure strong growth in demand for retirement income products.

However, consumer awareness and understanding of annuities remains low.

Increased longevity is leading to downward pressure on annuity rates, although providers are trying to mitigate this risk through more sophisticated pricing strategies.

The ‘baby-boomer’ generation are more likely to require a flexible approach to retirement income than is offered by many conventional annuity products.

There has been a lot of innovation in recent years, as providers try to make annuity products more attractive and engaging to consumers.

The recession has reduced the size of many pension pots and has led some people to defer their retirement. Recent economic policy has also resulted in greater uncertainty in annuity rates.

Increased focus on the promotion and operation of the open market option has seen the implementation of an improved transfer system by many annuity providers, which is leading to a better customer experience.

Accessing independent advice continues to be a challenge for those with small pension pots. This is leading to the development of new direct sales channels and intermediary referral services.

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Table of contents

  1. Issues in the Market

      • Key issues in the market
        • Abbreviations
        • Future Opportunities

          • Breaking down advice barriers
            • An issue of trust
              • More choice and flexibility – but beware too much complexity
                • Creating more realism about retirement expectations
                • Market in Brief

                  • Annuity sales continue on an upward trend
                    • Figure 1: New pension annuity business – number of new contracts and the value of new premiums, 2003-09
                  • Conventional annuities are beginning to lose ground
                    • Market drivers should ensure growth over the long term
                      • Economic downturn leads to increased uncertainty in annuity market
                        • Prudential remains the leading annuity provider
                          • Figure 2: Top five providers’ share of the UK annuity market, by new business (APE), 2008
                        • Small pension pots drive product and distribution developments
                          • Figure 3: Proportional distribution of annuities sold, by fund size, 2008
                        • Direct annuity sales set to grow
                          • Figure 4: Proportional distribution of new pension annuity premiums, by sales channel, 2004-08
                        • Key consumer findings
                          • Pension product ownership
                            • Retirement plans and expectations
                              • Figure 5: When planning to retire, June 2009
                            • Attitudes towards annuities
                              • Figure 6: Attitudes towards annuities/retirement income, June 2009
                          • Internal Market Environment

                            • Key points
                              • Individual pension policies increase…
                                • Figure 7: Size of the defined-contribution pension pool, 1997, 2002 and 2007 
                              • … but membership of DC schemes is shrinking
                                • A large proportion of consumers remain disengaged with pensions
                                  • Figure 8: Attitudes towards pension based-savings, January 2009
                                • Personal accounts will boost the market over the long-term
                                  • Uncertainty over annuity rates
                                    • Figure 9: Annual annuity rates and gilt rates, January 1990-June 2009
                                  • OMO continues to create headlines
                                    • Figure 10: External versus internal volume sales of new pension annuities – proportional distribution, 2000-08
                                  • Industry take positive action to develop the OMO
                                    • Regulatory and legislative developments
                                      • RDR
                                        • FSA comparative tables
                                        • Broader Market Environment

                                          • Key points
                                            • Ageing population boosts annuity market
                                              • Figure 11: UK adult population data and dependency ratios, 2009-56
                                            • Increased life expectancy propels ageing population…
                                              • Figure 12: Cohort life expectancy at age 65, by gender, 1985-2055
                                            • … and drives innovation in the annuities market
                                              • Pensioner income data reveal change in approach to retirement
                                                • Figure 13: Breakdown in gross pensioner income (weekly average at constant prices, 2007-08), 1994-95-2007-08
                                              • Inflationary trends – good and bad news for annuitants
                                                • Figure 14: Average annual changes in the Bank of England base rate, CPI and RPI – UK, 2000-09
                                              • Share prices experiences a turbulent year
                                                • Figure 15: FTSE 100 and FTSE All Share indices – daily index movements, June 2000-May 2009
                                              • Gilt yields fluctuate due to economic policy
                                                • Figure 16: Historical monthly medium, long and ultra long gilt yields, January 2000-March 2009
                                            • Competitive Context

                                              • Key points
                                                • Annuities protected by legislation…
                                                  • … but a significant number have alternative retirement strategies
                                                    • Figure 17: Overview of potential retirment income solutions, June 2009
                                                  • Equity release provides a different approach to retirement income…
                                                    • Figure 18: Total value of equity release sales by SHIP members, 1991-2009
                                                  • …but is it losing its appeal?
                                                  • Strengths and Weaknesses in the Market

                                                      • Figure 19: UK annuity market, SWOT analysis, 2009
                                                  • Who’s Innovating?

                                                    • Key points
                                                      • Annuity innovation has been buoyant in recent years
                                                        • Annuity Plus bridges the gap between standard and enhanced annuities
                                                          • Prudential launches Income Choice Annuity
                                                            • Developments in direct sales…
                                                              • … and innovation in the IFA market
                                                                • Annuity portals and e-enablement to improve IFA margins
                                                                • Trade Perspective

                                                                    • Participating companies
                                                                      • Annuity market faces a variety of challenges
                                                                        • Deferred retirements, falling pension pots and increased volatility
                                                                          • Changing consumer needs will dictate future innovation…
                                                                            • … and there will be further developments in annuity pricing
                                                                              • The internet is having an impact, but IFAs remain the key channel of distribution
                                                                                • Mixed views over industry action to increase the uptake of the OMO
                                                                                  • Personal accounts will have limited impact for the short-to-medium term
                                                                                  • Market Size and Forecast

                                                                                    • Key points
                                                                                      • Annuity sales continue to rise
                                                                                        • Figure 20: New pension annuity business – number of new contracts and the value of new premiums, 2003-09
                                                                                      • Annuity payments increase as market expands
                                                                                        • Figure 21: Pension annuity business in force – payments per annum, 1997-2008
                                                                                      • Pension annuity market forecast
                                                                                        • Figure 22: New pension annuity business – number of new contracts and the value of new premiums, 2003-14
                                                                                      • Almost 40% of annuities sold are for less than £10,000
                                                                                        • Figure 23: Proportional distribution of annuities sold, by fund size, 2008
                                                                                      • Larger pension funds increase since A-day
                                                                                        • Figure 24: Number of annuities sold, by size of fund, 2004-08
                                                                                      • Factors used in this forecast
                                                                                      • Market Segment Performance

                                                                                        • Key points
                                                                                          • Annuity market is shifting away from conventional annuities
                                                                                            • Figure 25: Breakdown of pension annuitiy sales (volume and value), by main product type, 2008 and 2004
                                                                                          • Enhanced annuity sales continue to increase
                                                                                            • Figure 26: Number of new enhanced/impaired life annuity contracts and as percentage of total annuties sold, 2003-08
                                                                                          • Enhanced annuities – becoming a mainstream product?
                                                                                            • Third-way sales reach £1 billion in 2008…
                                                                                              • … but market turbulence hits variable annuity sector
                                                                                              • Income Drawdown Overview

                                                                                                • Key points
                                                                                                  • Sidestepping the annuity
                                                                                                    • Income drawdown sales decline in 2008
                                                                                                      • Figure 27: Income drawdown new business, 2004-08
                                                                                                    • Average income drawdown fund size falls
                                                                                                      • Figure 28: Average pension annuity versus income drawdown premiums, 2004-08
                                                                                                    • IFAs likely to be scrutinised as income drawdown funds decline
                                                                                                      • Figure 29: New income drawdown premiums, by sales channel, 2004-08
                                                                                                  • Market Share

                                                                                                    • Key points
                                                                                                      • Prudential holds 21% of the UK annuity market
                                                                                                        • Figure 30: Top five providers’ share of the UK annuity market, by new business (APE), 2008
                                                                                                      • Some movement within top 15 rankings
                                                                                                        • Figure 31: Top 15 providers in the UK annuity market, by new business (APE), 2008
                                                                                                    • Companies and Products

                                                                                                      • Major players
                                                                                                        • Prudential
                                                                                                          • Aviva
                                                                                                            • AEGON
                                                                                                              • Legal & General
                                                                                                              • Brand Communication and Promotion

                                                                                                                • Key points
                                                                                                                  • Annuity adspend declines by 40% in 2008
                                                                                                                    • Figure 32: Total adspend on annuities and income drawdown, 2006-08
                                                                                                                  • Intermediary annuity adspend grows strongly
                                                                                                                    • Figure 33: Overview of annuity adspend, 2006-08
                                                                                                                  • Enhanced annuity provider tops advertisers in 2008
                                                                                                                    • Figure 34: Top annuity adverstiers, 2006-08
                                                                                                                  • Press advertising dominates
                                                                                                                    • Figure 35: Adspend by media type, 2006-08
                                                                                                                • Channels to Market

                                                                                                                  • Key points
                                                                                                                    • Direct sales increase…
                                                                                                                      • Figure 36: Proportional distribution of new pension annuity premiums, by sales channel, 2004-08
                                                                                                                    • …although IFAs continue to dominate annuity sales
                                                                                                                      • Figure 37: New pension annuity premiums, by sales channel, 2004-08
                                                                                                                    • IFA community faces challenges
                                                                                                                    • The Consumer – Pension Ownership

                                                                                                                      • Key points
                                                                                                                        • Pension savings gap is clear
                                                                                                                          • Figure 38: Financial products owned, June 2009
                                                                                                                        • Balance shifting in the pension market
                                                                                                                          • Figure 39: Proportion of pension holders with a DB scheme, DC scheme or unknown scheme, June 2009
                                                                                                                        • Major gap in pension savings among the under 35s
                                                                                                                          • Figure 40: Pension product ownership, by age group, June 2009
                                                                                                                        • Pension ownership closely aligned to affluence
                                                                                                                          • Figure 41: Pension product ownership, by socio-economic group and gross annual household income, June 2009
                                                                                                                        • Groups for consumer analysis
                                                                                                                          • Annuity targets more likely to be third age, AB and male
                                                                                                                            • Figure 42: Potential retirement strategies (product owership), by demographics, June 2009
                                                                                                                          • Many annuity targets have additional sources of retirement income
                                                                                                                            • Figure 43: Cross analysis of financial products owned, June 2009
                                                                                                                        • The Consumer – Retirement Plans and Expectations

                                                                                                                          • Key points
                                                                                                                            • Most people expect to retire at state pension age
                                                                                                                              • Figure 44: When planning to retire, June 2009
                                                                                                                            • Retirement reality kicks in after people reach 55
                                                                                                                              • Figure 45: When planning to retire, by demographics June 2009
                                                                                                                            • Some 23% of annuity targets expect to retire before state pension age
                                                                                                                              • Figure 46: When planned to retire, by financial products owned, June 2009
                                                                                                                            • Mixed expectations of standard of living during retirement
                                                                                                                                • Figure 47: Financial expectations at retirement, June 2009
                                                                                                                              • Retirement expectations alter with age
                                                                                                                                • Figure 48: Financial expectations at retirement, by demographics, June 2009
                                                                                                                              • A quarter of annuity targets expect a comfortable retirement
                                                                                                                                • Figure 49: Financial expectations at retirement, by financial products owned. June 2009
                                                                                                                              • Retirement plans and expectations are generally aligned
                                                                                                                                • Figure 50: When planned to retire, by financial expectations at retirement, June 2009
                                                                                                                            • The Consumer – Attitudes towards Annuities

                                                                                                                              • Key points
                                                                                                                                • Half of all non-retirees don’t understand what an annuity is
                                                                                                                                  • Figure 51: Attitudes towards annuities/retirement income, June 2009
                                                                                                                                • Understanding increases with age
                                                                                                                                  • Figure 52: Attitudes towards annuities/retirement income, by demographics, June 2009
                                                                                                                                • Internet is having a impact on confidence regarding annuities
                                                                                                                                  • Figure 53: Attitudes towards annuities/retirement income, by demographics, June 2009
                                                                                                                                • Attitudes toward annuities varies among holders of different pension products
                                                                                                                                  • Figure 54: Attitudes towards retirement and retirement planning, by financial products owned, June 2009
                                                                                                                                • People planning a phased retirement are the most aware of annuities
                                                                                                                                  • Figure 55: Attitudes towards annuities/retirement income, by when planned to retire, June 2009
                                                                                                                                • Income for partner and flexibility are most popular features
                                                                                                                                    • Figure 56: Annuities features most interested in, June 2009
                                                                                                                                  • Different features appeal to personal and occupational pension holders
                                                                                                                                    • Figure 57: Annuities features most interested in, by financial products owned, June 2009
                                                                                                                                  • Retirement plans impact preferred features and benefits
                                                                                                                                    • Figure 58: Annuities features most interested in, by when planned to retire, June 2009
                                                                                                                                  • Target group analysis
                                                                                                                                    • Figure 59: Overview of annuity target groups, June 2008
                                                                                                                                  • Annuity aware
                                                                                                                                    • Annuity unaware
                                                                                                                                      • Annuity ambivalent
                                                                                                                                          • Figure 60: Attitudes towards annuities/retirement income, by target groups, June 2009
                                                                                                                                          • Figure 61: When planned to retire, by target groups, June 2009
                                                                                                                                          • Figure 62: Annuities features most interested in, by target groups, June 2009
                                                                                                                                      • Appendix – Product Background and Definitions

                                                                                                                                          • Common product types
                                                                                                                                            • Single or joint life
                                                                                                                                              • Cash lump sum
                                                                                                                                                • Open market option
                                                                                                                                                  • Alternatives
                                                                                                                                                    • Pensions simplification and income drawdown
                                                                                                                                                      • Alternatively secured pensions
                                                                                                                                                        • Pension products
                                                                                                                                                        • Appendix – Internal Market Environment

                                                                                                                                                          • Retail Distribution Review
                                                                                                                                                            • Splitting sales and advice
                                                                                                                                                              • Figure 63: Proposed regulatory landscape, 2012
                                                                                                                                                            • From commission to fees
                                                                                                                                                              • Possible extension to non-investment markets
                                                                                                                                                              • Appendix – The Consumer – Product Ownership

                                                                                                                                                                  • Figure 64: Potential retirement strategies (product owership), by demographics, June 2009
                                                                                                                                                              • Appendix – The Consumer – Retirement Plans and Expectations

                                                                                                                                                                  • Figure 65: When planned to retire, by demographics, June 2009
                                                                                                                                                                  • Figure 66: Financial expectations at retirement, by demographics, June 2009
                                                                                                                                                                  • Figure 67: Financial expectations at retirement (continued), by demographics, June 2009
                                                                                                                                                              • Appendix – The Consumer – Attitudes Towards Annuities

                                                                                                                                                                  • Figure 68: Attitudes towards annuities/retirement income, by demographics, June 2009
                                                                                                                                                                  • Figure 69: Annuities features most interested in, by demographics, June 2009
                                                                                                                                                                  • Figure 70: Target groups, by demographics, June 2009

                                                                                                                                                              Annuities - UK - July 2009

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