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Occupational and Group Pensions - UK - June 2009

The UK workplace pensions industry is currently going through a very challenging transitional period. In the private sector, generous final-salary occupational pensions are quickly becoming a thing of the past as burdensome regulations and the poor economic environment are making them too expensive to run. In their place new and often existing employees are being offered less generous but cheaper to run ‘money purchase’ contract based schemes – where most of the risks and responsibility is on them, not the employer.

Key issues in the market
  • The recession has accelerated the decline in final salary scheme pension provision in the UK.

  • Contract based defined contribution GPP schemes have become more popular but employers continue to scale back their level of contributions.

  • An increase in the number of firms going into administration has raised concerns over the strength of the Pension Protection Fund.

  • The pension buy-out market has heated up during the past year as the effects of the credit crunch have made it cheaper for insurers to acquire company pension liabilities.

  • The government has worked to reform the pension system but frequent legislative changes are raising concerns over too much government manipulation.

  • Increased longevity will put a greater strain on retirement income which may force many retirees to work after reaching retirement age.

  • Personal Accounts are due to launch in 2012 and should increase pension participation in the UK but could create problems for private suppliers of workplace pensions.

  • Consumer research for this report has indicated a relatively apathetic attitude towards workplace based pension schemes – especially among the younger sections of the population.

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Table of contents

  1. Issues in the Market

      • Key issues in the market
        • Abbreviations
        • Future Opportunities

          • The case for ‘special’ access to pension funds
            • Pension scheme members need ‘Simplicity and Convenience’
              • The Rise of the Group SIPP?
                • Recent market crashes have exposed flaws in conventional wisdom
                  • The move to fee-based remuneration likely to benefit smaller providers
                  • Market in Brief

                    • Scheme size and membership
                      • Pension contributions
                        • Healthy rise in new insurance-administered business in 2008
                          • IFAs boost their share of company pension distribution in 2008
                            • Job security and satisfaction top priorities for employees – not pension
                              • Firms continue to cut back occupational pension provision
                                • Current economic difficulties could hinder short-term growth
                                  • Figure 1: Working age unemployment rate, 2004-09
                                • Standard Life tops insurance-administered pension market share table
                                  • Brand communication and promotion
                                    • Key consumer research findings
                                      • Pension product ownership
                                        • Length and value of contributions
                                          • Attitudes and behaviour towards pensions in general
                                            • Attitudes and behaviour towards workplace pensions
                                            • Internal Market Environment

                                              • Key points
                                                • Job security and satisfaction top priorities for employees not pension
                                                  • Figure 2: Factors considered important to employees, January 2009
                                                • Firms continue to cut back occupational pension provision
                                                  • Trust-based schemes still have some advantages…
                                                    • …but qualified trustees are becoming hard to find
                                                      • DC contribution levels are inadequate
                                                        • More employers are likely to adjust contribution levels
                                                          • Some individuals are not joining a company scheme
                                                            • Only a minority actively monitor their pension savings
                                                              • Active management might be better left to the experts
                                                                • Past mistakes have undermined faith in pensions
                                                                  • The 2009 budget introduces a change in pension tax rules…
                                                                    • …but also raises major concerns about government meddling
                                                                      • A more stable pensions legislative environment is needed
                                                                        • The planned launch of Personal Accounts in 2012…
                                                                          • …and its possible impact on the pensions industry
                                                                            • Auto-enrolment likely to create some issues
                                                                              • The PPF provides protection but is expensive
                                                                                • Current economic difficulties raise concerns over the PPF
                                                                                  • Pension buyout market activity likely to continue…
                                                                                    • …but are insurers taking on too much risk?
                                                                                      • Smaller providers could benefit from the move to fee-based remuneration
                                                                                      • Broader Market Environment

                                                                                        • Key points
                                                                                          • Life expectancy on the rise
                                                                                            • Figure 3: Cohort life expectancy at age 60, by gender, 1981-2056
                                                                                          • Average pensioner income drops significantly after 75
                                                                                            • Figure 4: Average gross weekly income of pensioner units*, by age, 2007/08
                                                                                          • Old age dependency ratio rising
                                                                                            • Figure 5: Projected size of the UK population, by age band, 2008-46
                                                                                          • Working beyond retirement age
                                                                                            • Figure 6: UK economic activity, by gender and age, 2002-10
                                                                                          • Social trends and increased job mobility
                                                                                            • Economic conditions may hinder saving rates…
                                                                                              • …but intentions to pay into a pension have been rising
                                                                                                • Figure 7: Intended life and pensions activity, Q3/Q4 2002- Q1/Q2 2009
                                                                                              • Stock market’s poor performance can damage faith in pension saving
                                                                                                • Figure 8: FTSE 100 and FTSE All-Share – daily index movements, April 2002-April 2009
                                                                                              • Unemployment rate rises to 7.1%
                                                                                                • Figure 9: Working age unemployment rate, 2004-09
                                                                                            • Competitive Context

                                                                                              • Key points
                                                                                                • Alternatives and supplements to workplace-based pensions
                                                                                                  • Figure 10: Summary of retirement funding strategies
                                                                                                • Pensions and pension alternatives
                                                                                                  • Personal Accounts will compete at the lower end of the market
                                                                                                    • Non-pension alternatives
                                                                                                      • ISAs
                                                                                                        • Buy-to-let property
                                                                                                        • Strengths and Weaknesses in the Market

                                                                                                            • Figure 11: Occupational/group pensions – SWOT analysis, 2009
                                                                                                        • Who’s Innovating?

                                                                                                          • Key points
                                                                                                            • Friends Provident considering ‘employee benefits’ wrap
                                                                                                              • BlackRock/Towers Perrin stochastic model
                                                                                                                • The Scottish Life online pension scheme reporting tool
                                                                                                                  • AWD Chase de Vere offers pension monitoring tool
                                                                                                                    • AXA introduces ‘Save More Tomorrow’ company pension scheme
                                                                                                                      • AEGON adds loyalty discount to Group Pensions offering
                                                                                                                        • HSBC offers employees group SIPP alongside ‘Sharesave’ scheme
                                                                                                                          • BT sets minimum annual employer contribution into Group SIPP
                                                                                                                          • Scheme Size and Membership

                                                                                                                            • Key points
                                                                                                                              • Private sector occupational pension scheme membership on the decline
                                                                                                                                • Figure 12: Number of private sector occupational pension schemes in the UK, by scheme size, 2003-07
                                                                                                                              • Status of private and public sector schemes
                                                                                                                                • Figure 13: Status of private and public sector schemes, 2007
                                                                                                                              • DC schemes significantly outnumber DB schemes
                                                                                                                                • Figure 14: Number of open and closed private sector single-section schemes, by benefit structure and size band, 2007
                                                                                                                              • Active occupational scheme membership
                                                                                                                                • Figure 15: Number of active occupational scheme members, by sector, 1991-2007
                                                                                                                              • Over three quarters of active members were contracted out in 2007
                                                                                                                                • Figure 16: Active members of private sector schemes, by route to being contracted out, 2007
                                                                                                                            • Value of Funded Pensions

                                                                                                                              • Key points
                                                                                                                                • 18% of pension funds held in the insurance administered sector in 2007
                                                                                                                                  • Figure 17: Value of assets in funded pensions, in real terms, 1997-2007
                                                                                                                              • Pension Contributions

                                                                                                                                • Key points
                                                                                                                                  • Slowdown in overall contributions in 2007
                                                                                                                                    • Figure 18: Contributions to private pension schemes, by scheme type – UK, 2002-07
                                                                                                                                • Market Size and Forecast - Insurance-Administered Sector

                                                                                                                                  • Key points
                                                                                                                                    • Rise in new business in 2008 as companies fund deficits
                                                                                                                                      • Figure 19: New insurance-administered occupational pension business, 2001-09(est)
                                                                                                                                    • In-force business reflects a decline in membership
                                                                                                                                      • Figure 20: Insurance-administered occupational pension business in force, 2002-07
                                                                                                                                    • Buyout market nearly doubles in 2008
                                                                                                                                      • Figure 21: New insurance-administered occupational pension business, by sub-sector, 2007 and 2008
                                                                                                                                    • Forecast
                                                                                                                                      • Figure 22: Forecast of new insurance-administered occupational business, 2004-14
                                                                                                                                    • GPP market size
                                                                                                                                      • New single-premium GPP contracts rise significantly
                                                                                                                                        • Figure 23: New GPP business, 2002-09
                                                                                                                                      • In-force GPP business
                                                                                                                                        • Figure 24: GPPs in force, 2002-07
                                                                                                                                      • Forecast
                                                                                                                                        • Figure 25: Forecast of new GPP business, 2004-14
                                                                                                                                      • Factors incorporated
                                                                                                                                      • Market Share

                                                                                                                                        • Key points
                                                                                                                                          • A shuffle among the top five occupational pension providers in 2007
                                                                                                                                            • Figure 26: Top 20 insurance companies in the occupational pensions market, based on UK gross written premium, 2006 and 2007
                                                                                                                                          • Lloyds top in the individual pension market
                                                                                                                                            • Figure 27: Top 20 insurance companies in the individual pensions market, based on UK gross written premium, 2006 and 2007
                                                                                                                                          • Top occupational pension providers also active in group pensions
                                                                                                                                            • Swiss Re and Deutsche Bank buy their way in
                                                                                                                                            • Companies and Products

                                                                                                                                              • Supply structure
                                                                                                                                                • Figure 28: The main participants in the occupational pensions market
                                                                                                                                              • Employers
                                                                                                                                                • Insurers
                                                                                                                                                  • Standard Life
                                                                                                                                                    • Prudential
                                                                                                                                                      • AEGON
                                                                                                                                                        • Legal & General
                                                                                                                                                          • Canada Life
                                                                                                                                                            • Investment management
                                                                                                                                                              • Pension IFAs
                                                                                                                                                                • Benefit consultants
                                                                                                                                                                  • Other professional services
                                                                                                                                                                  • Brand Communication and Promotion

                                                                                                                                                                    • Key points
                                                                                                                                                                      • Direct advertising of company pensions to consumers is rare
                                                                                                                                                                        • Pensions adspend declines by nearly 50% in the year to April 2009
                                                                                                                                                                          • Figure 29: Pension-related advertising expenditure, by sub-category, year to April 2005-09
                                                                                                                                                                        • Smaller provider adspend plummets
                                                                                                                                                                          • Figure 30: Pension-related advertising expenditure, by top ten advertisers, year to April 2005-09
                                                                                                                                                                        • Press takes up 60% of total adspend on pensions
                                                                                                                                                                          • Figure 31: Overview of media type used to advertise pensions-related products, year to April 2008 and 2009
                                                                                                                                                                      • Channels to Market

                                                                                                                                                                        • Key points
                                                                                                                                                                          • Most company pension business sold with advice
                                                                                                                                                                            • EBCs are active in the sale of group pensions
                                                                                                                                                                              • IFAs boost their share of new occupational pension regular premiums
                                                                                                                                                                                • Figure 32: Distribution breakdown of new insurance-administered occupational pension business – regular premium, 2003-08
                                                                                                                                                                              • Demand for independent advice even stronger for single premiums
                                                                                                                                                                                • Figure 33: Distribution breakdown of new insurance-administered occupational pension business – single premium, 2003-08
                                                                                                                                                                              • Over 90% of new regular- and single-premium GPP sales sold via IFAs
                                                                                                                                                                                • Figure 34: Distribution breakdown of new insurance-administered GPP business – regular and single premium, 2003-08
                                                                                                                                                                            • The Consumer – Pension Product Ownership

                                                                                                                                                                              • Key points
                                                                                                                                                                                • Just over a third of non-retired adults are saving in a workplace pension
                                                                                                                                                                                    • Figure 35: Ownership of pension products, by type, January 2009
                                                                                                                                                                                  • Cross-ownership of pensions
                                                                                                                                                                                    • Figure 36: Ownership of pension products and retirement savings – cross-analysis, January 2009
                                                                                                                                                                                  • Age and workplace pension membership
                                                                                                                                                                                    • Figure 37: Pension ownership, by age, January 2009
                                                                                                                                                                                  • Wages and socio-economic status
                                                                                                                                                                                    • Figure 38: Pension ownership, by socio-economic group and gross annual household income, January 2009
                                                                                                                                                                                  • Pension ownership by technology and media usage
                                                                                                                                                                                    • Figure 39: Type of pension owned. by daily newspaper readership, technology usage, internet usage frequency and web usage, January 2009
                                                                                                                                                                                • The Consumer – Length and Value of Contributions

                                                                                                                                                                                  • Key points
                                                                                                                                                                                    • Length of contributions
                                                                                                                                                                                      • 51% of workplace pension holders contributing for over ten years
                                                                                                                                                                                          • Figure 40: Number of years making pension contributions, by type of pension, January 2009
                                                                                                                                                                                        • The value of contributions rises over time
                                                                                                                                                                                          • Figure 41: Number of years making pension contributions, by value of contributions, January 2009
                                                                                                                                                                                        • Some last-minute pension saving among the 45-64s
                                                                                                                                                                                          • Figure 42: Number of years making pension contributions, by age, January 2009
                                                                                                                                                                                        • Income and length of contributions
                                                                                                                                                                                          • Figure 43: Number of years making pension contributions, by gross annual household income, January 2009
                                                                                                                                                                                        • Value of contributions
                                                                                                                                                                                          • One in five workplace pension savers paying in £100-199 a month
                                                                                                                                                                                              • Figure 44: Monthly pension contributions, by type of pension, January 2009
                                                                                                                                                                                            • Monthly contributions rise with age
                                                                                                                                                                                              • Figure 45: Monthly pension contributions, by gender, age, lifestage and marital status, January 2009
                                                                                                                                                                                            • Unsurprisingly wealthy contributing the most to pension pots
                                                                                                                                                                                              • Figure 46: Monthly pension contributions, by socio-economic group, working status, gross annual household income, TV region and household tenure, January 2009
                                                                                                                                                                                            • Media and technology usage and the value of contributions
                                                                                                                                                                                              • Figure 47: Monthly pension contributions, by daily newspaper readership, technology usage, internet usage frequency and web usage, January 2009
                                                                                                                                                                                          • The Consumer – Attitudes and Behaviour towards Pensions in General

                                                                                                                                                                                            • Key points
                                                                                                                                                                                              • Workplace pension members show the most faith in pension savings
                                                                                                                                                                                                  • Figure 48: Attitudes towards pension-based savings, by type of pension, January 2009
                                                                                                                                                                                                • Signs of greater engagement among younger consumers?
                                                                                                                                                                                                  • Figure 49: Attitudes towards pension-based savings, by gender, age, lifestage and marital status, January 2009
                                                                                                                                                                                                • Wealthy tend to have a positive view on pension saving
                                                                                                                                                                                                  • Figure 50: Attitudes towards pension-based savings, by socio-economic group, working status, gross annual household income, TV region and household tenure, January 2009
                                                                                                                                                                                                • Opinions on pensions by media and technology usage
                                                                                                                                                                                                  • Figure 51: Attitudes towards pension-based savings, by daily newspaper readership, technology usage, internet usage frequency and web usage, January 2009
                                                                                                                                                                                              • The Consumer – Attitudes and Behaviour towards Workplace Pensions

                                                                                                                                                                                                • Key points
                                                                                                                                                                                                  • Employees do not appear to appreciate the value of workplace pensions
                                                                                                                                                                                                      • Figure 52: Attitudes and experiences about saving in a workplace-based pension, by type of pension, January 2009
                                                                                                                                                                                                    • Very few interested in choosing where investments are held
                                                                                                                                                                                                      • Younger consumers likely to put less emphasis on the company pension
                                                                                                                                                                                                        • Figure 53: Attitudes and experiences about saving in a workplace-based pension, by gender, age, lifestage and marital status, January 2009
                                                                                                                                                                                                      • A case for offering younger savers ‘special’ access to pension funds
                                                                                                                                                                                                        • The more affluent one is, the more value placed on the company pension
                                                                                                                                                                                                          • Figure 54: Attitudes and experiences about saving in a workplace-based pension, by socio-economic group, working status, gross annual household income, TV region and household tenure, January 2009
                                                                                                                                                                                                        • Little evidence that consumers desire choice of investment
                                                                                                                                                                                                          • Trust an issue among the less affluent
                                                                                                                                                                                                            • Media usage and workplace pensions
                                                                                                                                                                                                              • Figure 55: Attitudes and experiences about saving in a workplace-based pension, by daily newspaper readership, technology usage, internet usage frequency and web usage, January 2009
                                                                                                                                                                                                          • The Consumer – Targeting Opportunities

                                                                                                                                                                                                            • Key points
                                                                                                                                                                                                              • Key target groups
                                                                                                                                                                                                                • Figure 56: Pension savings attitudinal groups, January 2009
                                                                                                                                                                                                              • Hesitant
                                                                                                                                                                                                                • Unresponsive
                                                                                                                                                                                                                  • Workplace Savers
                                                                                                                                                                                                                    • Pension Savvy
                                                                                                                                                                                                                      • Pension Savvy show highest level of pension ownership
                                                                                                                                                                                                                        • Figure 57: Pension savings attitudinal groups, by pension product ownership, January 2009
                                                                                                                                                                                                                      • Over a third of the Pension Savvy own more than one pension product
                                                                                                                                                                                                                        • Figure 58: Pension savings attitudinal groups, by number or products owned, January 2009
                                                                                                                                                                                                                      • Two thirds of the Pension Savvy contributing £100 or more a month
                                                                                                                                                                                                                        • Figure 59: Pension savings attitudinal groups, by value of contributions, January 2009
                                                                                                                                                                                                                      • Further evidence of the decline in pension provision
                                                                                                                                                                                                                        • Figure 60: Pension savings attitudinal groups, by length of contributions, January 2009
                                                                                                                                                                                                                      • Workplace Savers and the Pension Savvy more likely to be high earners
                                                                                                                                                                                                                        • Figure 61: Pension savings attitudinal groups, by gender, age, socio-economic group, lifestage and gross annual household income, January 2009
                                                                                                                                                                                                                      • Multiple pension ownership indicates a market for group SIPPs
                                                                                                                                                                                                                        • Figure 62: Type of pension savings, by number of products held, January 2009
                                                                                                                                                                                                                      • One in four high earners own multiple pension products
                                                                                                                                                                                                                        • Figure 63: Number of pension products held, by gender, age, socio-economic group, lifestage and gross annual household income, January 2009
                                                                                                                                                                                                                    • Appendix – Definitions, Industry Structure and Legislation

                                                                                                                                                                                                                      • Market background and definitions
                                                                                                                                                                                                                        • Figure 64: Types of private pension provision in the UK
                                                                                                                                                                                                                      • Definitions
                                                                                                                                                                                                                        • Occupational schemes
                                                                                                                                                                                                                          • Individual pensions
                                                                                                                                                                                                                            • Group pensions
                                                                                                                                                                                                                              • GPPs vs group stakeholder and group SIPPs
                                                                                                                                                                                                                                • GPPs provide significant benefits for employers
                                                                                                                                                                                                                                  • Workplace pensions structure
                                                                                                                                                                                                                                    • Figure 65: Types of workplace pension, 2007
                                                                                                                                                                                                                                  • Scheme administration
                                                                                                                                                                                                                                    • Benefit structures
                                                                                                                                                                                                                                      • The role of the Pensions Regulator
                                                                                                                                                                                                                                        • The Pensions Regulator and trustees
                                                                                                                                                                                                                                          • Types of occupational scheme closure
                                                                                                                                                                                                                                            • Reforming the UK pension system
                                                                                                                                                                                                                                              • A-day pensions simplification
                                                                                                                                                                                                                                                • Other definitions
                                                                                                                                                                                                                                                • Appendix – The Consumer: Pension Ownership

                                                                                                                                                                                                                                                    • Figure 66: Type of pension owned, by gender, age, lifestage and marital status, January 2009
                                                                                                                                                                                                                                                    • Figure 67: Type of pension owned, by socio-economic group, working status, gross annual household income, TV region and household tenure, January 2009
                                                                                                                                                                                                                                                    • Figure 68: Type of pension owned. by daily newspaper readership, technology usage, internet usage frequency and web usage, January 2009
                                                                                                                                                                                                                                                • Appendix – The Consumer: Length and Value of Contributions

                                                                                                                                                                                                                                                    • Figure 69: Number of years making pension contributions, by gender, age, lifestage and marital status, January 2009
                                                                                                                                                                                                                                                    • Figure 70: Number of years making pension contributions, by socio-economic group, working status, gross annual household income, TV region and household tenure, January 2009
                                                                                                                                                                                                                                                    • Figure 71: Number of years making pension contributions, by daily newspaper readership, technology usage, internet usage frequency and web usage, January 2009

                                                                                                                                                                                                                                                Companies Covered

                                                                                                                                                                                                                                                • Aberdeen Asset Management PLC
                                                                                                                                                                                                                                                • Aegon UK
                                                                                                                                                                                                                                                • Association of British Insurers
                                                                                                                                                                                                                                                • Association of Consulting Actuaries
                                                                                                                                                                                                                                                • Aviva Plc
                                                                                                                                                                                                                                                • AXA UK plc
                                                                                                                                                                                                                                                • Bank of England
                                                                                                                                                                                                                                                • Barclays Global Investors
                                                                                                                                                                                                                                                • British Airways Plc
                                                                                                                                                                                                                                                • British Broadcasting Corporation (BBC)
                                                                                                                                                                                                                                                • Canada Life Limited
                                                                                                                                                                                                                                                • Carbon Trust
                                                                                                                                                                                                                                                • Co-operative Insurance Society Ltd
                                                                                                                                                                                                                                                • Deutsche Bank AG
                                                                                                                                                                                                                                                • Diageo UK
                                                                                                                                                                                                                                                • Fidelity Investment Services Limited
                                                                                                                                                                                                                                                • Financial Services Authority (The)
                                                                                                                                                                                                                                                • Friends Provident plc
                                                                                                                                                                                                                                                • Government Actuary's Department (GAD)
                                                                                                                                                                                                                                                • Hargreaves Lansdown Plc
                                                                                                                                                                                                                                                • HBOS plc (Halifax Bank of Scotland)
                                                                                                                                                                                                                                                • Hewitt Associates
                                                                                                                                                                                                                                                • HSBC Private Bank (UK) Limited
                                                                                                                                                                                                                                                • Hymans Robertson
                                                                                                                                                                                                                                                • Lehman Brothers [UK]
                                                                                                                                                                                                                                                • Lloyds Banking Group
                                                                                                                                                                                                                                                • Merrill Lynch (UK)
                                                                                                                                                                                                                                                • Millfield Partnership Ltd
                                                                                                                                                                                                                                                • Money Portal Limited
                                                                                                                                                                                                                                                • Norwich Union
                                                                                                                                                                                                                                                • Office for National Statistics
                                                                                                                                                                                                                                                • Pensions Policy Institute
                                                                                                                                                                                                                                                • Prudential plc
                                                                                                                                                                                                                                                • Royal London Group
                                                                                                                                                                                                                                                • Scottish Life
                                                                                                                                                                                                                                                • Scottish Mutual
                                                                                                                                                                                                                                                • Scottish Widows Bank plc
                                                                                                                                                                                                                                                • Skandia UK
                                                                                                                                                                                                                                                • Standard Life Assurance Company
                                                                                                                                                                                                                                                • Standard Life Bank Limited
                                                                                                                                                                                                                                                • Standard Life Healthcare
                                                                                                                                                                                                                                                • Tesco Plc
                                                                                                                                                                                                                                                • Threadneedle Investment Services Ltd
                                                                                                                                                                                                                                                • Towers Perrin
                                                                                                                                                                                                                                                • Towry Law Group
                                                                                                                                                                                                                                                • Winterthur Life UK Limited
                                                                                                                                                                                                                                                • Woolworths Group plc
                                                                                                                                                                                                                                                • Zurich Financial Services

                                                                                                                                                                                                                                                Occupational and Group Pensions - UK - June 2009

                                                                                                                                                                                                                                                £1,995.00 (Excl.Tax)