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KEY NOTE Market Report : PENSIONS UK : October 2004

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This report covers: pension, state, personal, annuities, occupational, stakeholder, Islamic, IPAS,SIPPS, qualifying age for state pensions, raised from 65 to 70

Companies and associations covered include: Aviva, AXA, UK,The, Equitable Life, Assurance Society, Friends Provident, HBOS, Legal and General, Life Assurance Holding Corporation, Lincoln National, UK, Lloyds TSB, Group, Marks and Spencer, Financial Services, Prudential, Scottish Equitable, Standard Life, Zurich,

EXECUTIVE SUMMARY

STRATEGIC OVERVIEW

Pension premium income fell in 2003. Overall, only contributors with incomes over £30,000 are putting enough into retirement funds and a significant proportion of both male and female employees are not in any kind of pension scheme.

In 2004, the pensions sector is led by a group of UK insurers comprising Norwich Union, Standard Life, Legal & General and Prudential, with the latter especially strong in group pensions and annuities. The next group includes the former mutual Friends Provident and the bancassurers HBOS and Lloyds TSB. European groups, including AXA, Aegon and Zurich, account for the majority of the remaining sales.

THE STATE PENSION

Past governments encouraged workers to contract out of the State Earnings-Related Pension Scheme (SERPS) by offering rebates. However, the rebates have been cut and contracting out is no longer so attractive. In April 2002, SERPS was replaced by the State Second Pension (S2P), which is intended particularly for people unable to work (for example, because they are caring for relatives) and for workers earning less than £10,800 a year.

The Pension Credit, introduced in October 2003, is intended to be a reward to pensioners for saving. However, critics of the Pension Credit say that the weekly income limits are too low and could dissuade recipients from taking part-time work.

PERSONAL PENSIONS

Personal pensions have a poor reputation resulting from companies' over-optimistic growth forecasts, lack of transparency and over-reliance on commission sales, which prompted agents to sell rather too hard. Pensions are often not profitable and to help keep companies in the market, the Government has announced the end of the 1% cap on stakeholder products and a new annual maximum charge of 1.5%, which will take effect from the start of the 2005/2006 tax year.

Pension saving is more attractive for higher-rate taxpayers than for basic-rate payers, because of the far larger government subsidy. Self-invested personal pensions (SIPPs), often available to investors whose pension fund exceeds £100,000, enable contributors to make their own decisions on where their money is invested, within defined limits. Currently, higher earners and the wealthy have far greater freedom to manage their own pensions than is granted to workers on average and below-average incomes.

ANNUITIES

The average purchase value of annuities is falling, yet the cost of buying each pound of annual income has increased sharply.

The EU's Draft Directive on Gender will prevent insurers from discriminating on gender grounds and would lead to higher annuities for women and smaller ones for men. Women have not received a fair pensions deal — they earn less than men, have numerous family responsibilities and when they come to retire their pension fund (if they have one at all) buys an income 4% to 5% less than a man would receive.

The pressure group Compulsory Annuity Purchase Protest Alliance (CAPPA) lobbies against the Government's current refusal to abolish the rule that individuals with ordinary pensions must trade their fund for an annuity by the time they reach 75. The Treasury maintains that if people could do as they wished with their pension funds, they would spend the entire amount and fall back on state support. However, the Pensions Bill before Parliament in summer 2004 would provide for funds under £10,000 to be withdrawn as cash.

OCCUPATIONAL PENSIONS

Between 31st March 2002 and 2003, the number of salary-related schemes fell by over 7%. In almost 60% of companies that have closed final-salary schemes to staff, directors are still offered salary-related pensions. Moreover, many schemes are in deficit.

The defined-contribution schemes towards which employers are moving are similar to personal pensions in that capital accumulates in a fund that is exchanged for an annuity on retirement. They are generally better value for employees than personal pensions, because employers contribute to them, although usually at a lower rate than to final-salary pensions.

AN INTERNATIONAL PERSPECTIVE

Ageing populations mean that there are increasingly fewer workers to every pensioner. This has serious implications for countries that rely on pay-as-you-go pensions, where workers pay current pensions. The move to funded pensions is more advanced in the UK than across Europe. The EU's Pensions Directive, which is supposed to come into effect in September 2005, would facilitate the creation of pan-European funded occupational pension schemes.

The Chinese have far fewer expectations of state help than is common in Western Europe. Future state pensions are in peril because there is very little money set aside to pay them. Customers are turning in a big way to long-term savings with insurance companies.

In Singapore, employees pay up to a fifth of their earnings into the Central Provident Fund and employers add up to 13%. This compulsory state-directed model has many long-term attractions.

In the US, the federal Pension Benefit Guaranty Corporation, which insures defined-benefit occupational schemes, believes that these schemes have a combined deficit of over $350bn. There are mounting pressures for the federal administration to shovel more public money into pension guarantees.

One aspect of the pensions problem that has not received enough attention is the likely response of pension recipients to the knowledge that younger people are struggling to support them. It could well be that financial pressures lead families to work as more cohesive units, all members contributing what they can. Slow, phased retirements lasting into the late 70s and even 80s and 90s could become normal before the middle of the 21st century.

PEST ANALYSIS

The political power of pensioners is rising in line with their numbers. The National Pensioners Convention presses for a higher basic state pension and has organised a 'Pensioners Manifesto' as a focus for debate in the next General Election campaign. The 2004 Labour Government is opposed to the concept of a much higher state pension, but the dangers to individuals of relying on private-sector pension provision is clear in the fund performance figures. The weighted average annual growth rate of UK pension funds over 5 years to 31st December 2003 was 1.8%, the 3-year return was -2.7% and, in 2003, funds returned average growth of 16%. The figures express volatility that can render any forecast meaningless.

THE FUTURE

In the environment of summer 2004, the forecast for pensions for the mass market looks somewhat bleak. UK households' £1 trillion of debts are a major brake on pension saving. New pension business is likely to decline unless pension saving is made compulsory.

The Pensions Bill simplifies the UK's pensions regime, but the changes will probably do little to increase private pension saving. The new pensions compensation fund, the Pension Protection Fund, is part of the Bill. Employers with occupational schemes will have to pay into the Protection Fund.

Options for the future include compulsory saving, which would result in lower consumer spending that could trigger or deepen a recession. Another radical way for government to support pension investments would be to grant higher-rate tax relief to every contributor, regardless of income. Higher basic state pensions are probably the best long-term option. For insurance companies, there would be no obligation to meet public policy objectives and insurers could instead focus on top-up pensions.

TABLE OF CONTENTS

Executive Summary

STRATEGIC OVERVIEW

THE STATE PENSION

PERSONAL PENSIONS

ANNUITIES

OCCUPATIONAL PENSIONS

AN INTERNATIONAL PERSPECTIVE

PEST ANALYSIS

THE FUTURE

1. Introduction

THE TOPIC

OBJECTIVES

METHODOLOGY

Original Research

Advertising Data

DEFINITION

2. Strategic Overview

MARKET DYNAMICS AND SEGMENTATION

Pension Problems Deepen

Long-Term Gamble

Table 1: Financial Assets and Liabilities of Households and Non-Profit Institutions (£bn and %), 1995 and 2003

The Pension Myth

Companies Shy of Pensions

Savings Gap Remains

Contributions to Pensions

Personal Pensions

Table 2: Contributions to Personal Pensions by Employers and Employees (£m), 1996/1997-2000/2001

Table 3: Members of and Contributions to Personal Pensions (000 and £m), Years Ending 5th April 2002 and 2003 and Year from 6th April 2003 to 5th January 2004

Table 4: Personal Pensions — Employer-Sponsored Schemes and Free-Standing Additional Voluntary Contributions (000 and £m), Years Ending 5th April 2002 and 2003 and Year from 6th April 2003 to 5th January 2004

Table 5: Personal Pension Members and Contributions Independent of Employers (000 and £m), Years Ending 5th April 2002 and 2003 and Year from 6th April 2003 to 5th January 2004

Table 6: Personal Pensions: Contributions and Contributors to Personal Pensions by Income and Status (000 and £), 6th April 2001 to 5th April 2002

Stakeholder Pensions

Table 7: Contributions and Contributors to Stakeholder Pensions by Income and Status (000 and £), 6th April 2001 to 5th April 2002

Pension Scheme Membership

Table 8: Pension Provision in the UK by Employment Status and Sex (%), 2002/2003

DISTRIBUTION

Table 9: Distribution of New Single-Premium Individual Personal Pensions in the UK (£m), 2000-2003

COMPETITIVE STRUCTURE

ADVERTISING

THE CONSUMER

MARKET FORECASTS

KEY POINTS

3. The State Pension

WHEN SURVIVAL BECOMES A PROBLEM

THE STATE EARNINGS-RELATED PENSION SCHEME

THE STATE SECOND PENSION

THE PENSION CREDIT

KEY POINTS

4. Personal Pensions

UNCERTAIN FUTURE

Table 10: Contribution Limits for Personal Pensions in the UK by Age (maximum % of salary), 2004

STAKEHOLDER PENSIONS

ISLAMIC PENSION

IPAS AND SIPPS

KEY POINTS

5. Annuities

STEEP RISE IN PURCHASE COSTS

LOW ANNUITY RATES

Table 11: Top Annuity Rates (£ and index 2000=100), 7th August 2000, 2nd October 2002 and 5th May 2004

KEY POINTS

6. Occupational Pensions

PERMANENT WORK IS TEMPORARY NOW

Table 12: Occupational Pension Schemes in the UK (number and %), 31st March 2002 and 2003

GOODBYE TO DEFINED BENEFITS

Table 13: Types of Occupational Pension Schemes in the UK (number), 31st March 2002 and 2003

WORSE PENSIONS EQUATE TO PAY CUT

KEY POINTS

7. Marketing Trends

ADVERTISING AND PROMOTION

Pensions Advertising is Muted to Say the Least

Table 14: Main Media Advertising Expenditure on Pensions by Type of Product (£000), Years Ending March 2002-2004

Table 15: Main Media Advertising Expenditure on General Pensions (£000), Year Ending March 2004

RADIO

DIRECT MAIL MORE IMPORTANT IN THE MARKETING MIX

KEY POINTS

8. An International Perspective

DEMOGRAPHIC IMBALANCE

EUROPEAN TRAUMAS

CHINA OPENS UP

MEXICO COPIES THE US

AUSTRALIA — NOT A PENSIONER'S PARADISE

PROVIDENT FUND OPTION

CROSS-BORDER VENTURES

KEY POINTS

9. PEST Analysis

POLITICAL FACTORS

Green Paper to Pensions Bill

Lasting Impact of Axing Tax Rebates

ECONOMIC FACTORS

Chancellor Borrows More

Debt Danger

Property Obsession

Moderate Earnings

Table 16: Number of Taxpayers by Income Band Before Tax (000 and %), 2004/2005

The Squeezed Middle

Table 17: Distribution of Wealth Including Dwellings in the UK (% of marketable wealth held), 1976-2004

Table 18: Distribution of Wealth Excluding Dwellings in the UK (% of marketable wealth held), 1976-2004

State Spending on Pensioners

FSA Projection Rates are too High

SOCIAL FACTORS

Pensioners' Political Power

Table 19: Projected Change in the UK Population by Age (million), 2004-2012

TECHNOLOGICAL FACTORS

KEY POINTS

10. Consumer Dynamics

STAYING IN WORK — ARE THERE ENOUGH JOBS?

Table 20: Overall Levels of Agreement to Statements About Pensions (% of respondents), 2000 and 2002

Contradictory Trends

Table 21: Summary of Results (% of respondents), 2004

LACK OF SUPPORT FOR RAISING MINIMUM STATE PENSION AGE

"I Think The Qualifying Age For The State Pension Should Be Raised From 65 To 70"

"When People Retire, They Should Be Able To Use Their Personal Or Stakeholder Pension Fund In Any Way They Like"

Table 22: Raising the State Pension Age and Using Personal or Stakeholder Funds (% of respondents), 2004

LUKEWARM ON SAVING

"Everyone Should Save As Much As They Can For A Pension"

"I Would Like To Save More Money To Draw On In The Future But I Cannot Afford To"

Table 23: Saving for the Future (% of respondents), 2004

FINAL-SALARY PENSIONS ON THE WAY OUT

"My Pension Is Or Will Be Based On My Final Salary"

"I Contribute Regularly To A Personal Or Stakeholder Pension"

Table 24: Final-Salary Pensions, and Regular Payments to Personal and Stakeholder Pensions (% of respondents), 2004

PROBLEM NOT SO MUCH GIVING UP AS FAILING TO START

"I Have Contributed To A Personal Or Stakeholder Pension In The Past But No Longer Do So"

"It Is Not Worth Planning For Retirement Because The Future Is Unpredictable"

Table 25: No Longer Contributing to a Personal or Stakeholder Pension and Not Worth Planning for the Future (% of respondents), 2004

LACK OF TRUST

"I Trust Pension Companies To Invest Pension Contributions Wisely"

"I Would Have More Confidence In Personal Pensions If The Government Guaranteed Their Payment"

Table 26: Trust in Pension Companies and Confidence in Personal Pensions (% of respondents), 2004

THE YOUNG ARE NOT CONCERNED ABOUT THE FINANCIAL FUTURE

"People Paying In To Personal And Stakeholder Pensions Should Know In Advance How Much Their Contributions Will Earn"

"The Limit On The Amount Of Savings People Can Have Before They Lose Entitlement To Means-Tested Benefits Should Be Higher"

Table 27: Knowing the Value of Contributions in Advance and Limits on Savings are too Low (% of respondents), 2004

SUPPORT FOR TAX RELIEF

"Tax Relief On Pension Contributions Should Be Scrapped"

"The Rule Forcing People With A Personal Or Stakeholder Pension To Buy An Annuity Before They Are 75 Is Sensible And Should Be Retained"

Table 28: Tax Relief on Contributions and the Forced Purchase of Annuities (% of respondents), 2004

BACKING FOR FINANCIAL EDUCATION AT SCHOOL

"I Think Schools And Colleges Should Teach Young People About Pensions And Other Aspects Of Personal Finance"

Table 29: Teaching Young People About Pensions and Personal Finance (% of respondents), 2004

LACK OF ENGAGEMENT WITH PENSIONS

KEY POINTS

11. Company Profiles

INTRODUCTION

Table 30: Comparative Ratios of Selected Leading Pensions Providers (% and £), 2001/2002/2003

AVIVA PLC

Corporate Strategy

Advertising and Distribution

Profitability

Table 31: Financial Results for Aviva PLC (£m, £000, % and £), Years Ending 31st December 2001-2003

Future Company Developments

AXA UK PLC

Corporate Strategy

Advertising and Distribution

Profitability

Table 32: Financial Results for AXA UK PLC (£m, £000, % and £), Years Ending 31st December 2000-2002

Future Company Developments

THE EQUITABLE LIFE ASSURANCE SOCIETY

Corporate Strategy

Advertising and Distribution

Profitability

Table 33: Financial Results for The Equitable Life Assurance Society (£m, £000, % and £), Years Ending 31st December 2000-2002

Future Company Developments

FRIENDS PROVIDENT PLC

Corporate Strategy

Advertising and Distribution

Profitability

Table 34: Financial Results for Friends Provident PLC (£m, £000, % and £), Years Ending 31st December 2001 and 2002

Future Company Developments

HBOS PLC

Corporate Strategy

Advertising and Distribution

Profitability

Table 35: Financial Results for HBOS PLC (£m, £000, % and £), Years Ending 31st December 2001-2003

Future Company Developments

LEGAL & GENERAL GROUP PLC

Corporate Strategy

Advertising and Distribution

Profitability

Table 36: Financial Results for Legal & General Group PLC (£m, £000, % and £), Years Ending 31st December 2001-2003

Future Company Developments

LIFE ASSURANCE HOLDING CORPORATION LTD

Corporate Strategy

Advertising and Distribution

Profitability

Table 37: Financial Results for Life Assurance Holding Corporation Ltd (£m, £000, % and £), Years Ending 31st December 1999-2001

Future Company Developments

LINCOLN NATIONAL (UK) PLC

Corporate Strategy

Advertising and Distribution

Profitability

Table 38: Financial Results for Lincoln National (UK) PLC (£m, £000, % and £), Years Ending 31st December 2001-2003

Future Company Developments

LLOYDS TSB GROUP PLC

Corporate Strategy

Advertising and Distribution

Profitability

Table 39: Financial Results for Lloyds TSB Group PLC (£m, £000, % and £), Years Ending 31st December 2001-2003

Future Company Developments

MARKS & SPENCER FINANCIAL SERVICES

Corporate Strategy

Advertising and Distribution

Profitability

Table 40: Financial Results for Marks & Spencer Financial Services (£m, £000, % and £), Years Ending 31st March 2001-2003

Future Company Developments

PRUDENTIAL PLC

Corporate Strategy

Advertising and Distribution

Profitability

Table 41: Financial Results for Prudential PLC (£m, £000, % and £), Years Ending 31st December 2001-2003

Future Company Developments

SCOTTISH EQUITABLE PLC

Corporate Strategy

Advertising and Distribution

Profitability

Table 42: Financial Results for Scottish Equitable PLC (£m, £000, % and £), Years Ending 31st December 2001-2003

Future Company Developments

THE STANDARD LIFE ASSURANCE COMPANY

Corporate Strategy

Advertising and Distribution

Profitability

Table 43: Financial Results for The Standard Life Assurance Company (£m, £000 % and £), Years Ending 15th November 2001-2003

Future Company Developments

ZURICH FINANCIAL SERVICES (UKISA) Ltd

Corporate Strategy

Advertising and Distribution

Profitability

Table 44: Financial Results for Zurich Financial Services (UKISA) Ltd (£m, £000, % and £), Years Ending 31st December 2000-2002

Future Company Developments

KEY POINTS

12. The Future

PENSIONS BILL — BIG CHANGES, LITTLE IMPACT?