Sector Insight: Personal Pensions - Retirement Anxiety
Pension providers are struggling to overcome consumers' apathy about providing for old age.
The UK is heading into a pension crisis, with consumer confidence in the industry at a low ebb following a string of pension fund scandals and collapses, and far too few workers saving enough for their retirement. The UK pensions savings gap is estimated to be between u30bn and u57bn, with the Association of British Insurers (ABI) saying that there are about 8.3m workers not paying into either an individual or occupational pension scheme. Adding to the pressure to save, the government last month announced its intention to raise the retirement age to 68 by 2050.
The current maximum basic individual state pension is u82.05 a week. Last November, Lord Turner's Pension Commission report recommended revising the basic state pension and increasing the state pension age. The government is still considering its recommendations, but on one point Lord Turner was clear: even these significant changes in the state pension will not provide individuals with adequate funds for a comfortable retirement, so people should make their own arrangements.
One of the key problems is that people are living longer, so whatever pension savings they have need to last for a longer retirement. This, coupled with a decreasing birth rate, is squeezing pension funds, whether private or public.
While the stock market has performed well in recent years, losses in the early part of the decade - when the FTSE index lost almost a third of its value - meant investments, including pension equity, suffered. With house prices rising consistently, many now view their home as their key retirement asset.
Many changes to pensions regulation in recent years have been made with the intention of encouraging people to save for retirement. Stakeholder pensions were introduced in 2001 as a way to allow people on all levels of income to contribute to a personal pension. While the value of the individual pensions market initially increased as a result, by about 40% in 2001-02, it was not sustained and fell to 1% the following year.
A-Day - 6 April 2006 - saw the biggest recent overhaul of pension rules. The most important change was an increase in the amount individuals can contribute to their pension. The move is expected to stimulate growth in tax- efficient pension saving, and may lead to different products becoming available.
Occupational pensions accounted for u55m worth of contributions in 2004, or about two-thirds of the value of all private pensions, according to Mintel. Individual pensions accounted for 27%, worth u15bn. Over the past five years, contributions to occupational schemes have grown faster than payments to individual pensions.
In 2004 there were 22.7m individual pensions, down from 23.7m in 2003 - the first significant drop in the number of active policies since 1985. This fall is likely to be due to people consolidating multiple pension pots to get better rates.
By 2004, stakeholder pensions accounted for just over 2.3m contracts and in terms of the value of premiums, they constituted 14% of all new individual pension business last year. Overall, though, this segment is struggling: between 2001 and 2005 the total number of individual funds fell by 42.5%. 'Traditional' personal pension contracts fell almost 70% from 2000-05; stakeholder contracts dropped 36% from 2001-05.
Among the key players in the personal pensions market, Aviva, Standard Life and Lloyds TSB Group (including Scottish Widows) are the top three in terms of net written premiums. There has been little change among the big players in recent years, although consolidation is a trend. In 2005 the top five companies accounted for almost 60% of the top 20 firms' business, up from 53% in 2004.
There is a lack of consumer trust in the market, but this means there is room for companies to build their brands in this area. …