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| MAPS : Pension Extenders: July 2002 |
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This report covers: pension extenders, basic pension, pension products, state pension, state earnings-related pension scheme, stakeholder pensions, group personal pensions,
companies covered include: ISA, Britannic Group, Canada Life, CGNU, Cornhill, Insurance, The Equitable Life, Assurance Company, GE Life, Northern Rock, NPI, Prudential, Scottish Widows, Standard Life, Virgin Money Personal Finance,
EXECUTIVE SUMMARY
| Executive Summary |
| RETIREMENT FUNDS TOO SMALL |
| For the purposes of this report, Key Note defines a pension extender as a way people devise to make their pension go further, including equity-release plans and Individual Savings Accounts (ISAs). The typical Briton now has a retirement fund of only £30,000. The Government's minimum income guarantee will be sorely needed by millions of pensioners, to improve their quality of life in retirement beyond the subsistence level of the basic state pension. |
| In fact, from 2003, the combination of state pension, minimum income guarantee, and pension credits for savings will mean that single pensioners will have at least £100 a week, and couples at least £154. In most cases, this is enough to cover basic living expenses. The knowledge that there is a safety net may lead adults with small and moderate incomes — there are nearly |
| 13.4 million taxpayers with annual incomes under £15,000 — not to bother about extra pension saving at all, and to use pension extenders to augment state provision. |
| This possibility leads a growing number of voices to call for pension contributions to be made compulsory. They include around 60% of MPs, Virgin Money and, in his personal capacity, Sir Howard Davies, Chairman of the Financial Services Authority (FSA). |
| DISMAL CONDITIONS FOR PENSION SALES |
| The fall in the stock market, bad publicity for pension mis-selling, and the public's confidence that the Government will retain an income safety net, combine with opposition to compulsory annuities to form dismal conditions for companies trying to sell pensions. These factors will create a major new market in coming years for financial products to help retirees make the most of their limited pension savings. Women, who are chronically |
| under-pensioned compared with men, form a strong market for pension extenders. The severe reduction in final-salary occupational pensions will also augment demand for pension extenders. |
| NOT AS WELL OFF AS WE LIKE TO THINK |
| The statistics often quoted by the Government on average earnings are not an accurate reflection of reality. Only 27.6 million out of the 60.2 million people of all ages resident in the UK have an income large enough to pay income tax. For those who are taxpayers, almost two-thirds have before-tax incomes under £20,000, and only 4.6% of taxpayers earn £50,000 or more before tax. |
| These statistics show that only a minority of the population have incomes large enough from which to save adequate amounts to sustain them in a long retirement. Women are very poorly placed to save substantial amounts for pensions: fewer than 600,000 in the whole of the UK have earnings of £35,000 a year or more. |
| FALSE EXPECTATIONS A BARRIER TO SAVING |
| Key Note commissioned NOP to conduct a survey into pension provision and attitudes towards retirement. The survey was carried out among 936 people aged 45 and over across Great Britain during April 2002. Interviewers asked 12 questions, devised by Key Note, about work and retirement income. The research suggests that people are rather vague about their retirement incomes, but are not too concerned, either. Other surveys carried out on behalf of Key Note have also recorded that people are unsure how much they need to save to build up a pension fund sufficient for their future needs. The survey for this report hints that false expectations of retirement income may be widely held, and if so form a barrier to greater saving in preparation for old age. |
| The survey also indicates that the equity-release market could more than treble, and that there is virtually no support for putting the qualifying age for the state pension up to 70. |
| EQUITY RELEASE NEEDS STRONG PROPERTY MARKET |
| People aged 65 and over in the UK own property worth around £460bn, but in 2001, they withdrew less than 0.2% of this in equity release. Companies that already have a substantial presence in the market include NPI, GE Life, Northern Rock, Norwich Union and Scottish Widows. There is a large potential market for equity-release products to supplement retirement incomes, provided that pensioners' children are not hostile to the concept, charges are transparent and fair, and there is a guarantee against negative equity. However, a lively equity-release market depends on an appreciating property market, and there are many signs that property price inflation will soon moderate. |
| BASIC STEPS TO EXTEND PENSIONS |
| Methods of extending pensions include the following: |
| individuals saving up to the annual maximum in tax-exempt ISAs |
| unions pressing employers to contribute more to pensions for their workers |
| the retired using their voting power at the ballot box to press the Government to raise the basic state pension (as well as the minimum income guarantee) in line with earnings rather than prices |
| retirees shopping around for the best annuity rates |
| retirees making use of impaired-life annuities where appropriate |
| pensioners taking a part-time job |
| everyone economising on expenditure — people of working age so they can save more, and the retired so that they can eke their pension out. |
| AUSTERE BUDGETS |
| The Chancellor is relying on taxation and National Insurance revenues rising from £391bn in 2001/2002 to £520bn in 2006/2007. The main reason for these inflows not to materialise would be a slowing economy. Going to the financial markets to borrow large sums of money would push interest rates up, another way of applying brakes to the economy. Budgets during the remainder of the current Government's term are almost certain to be austere. |
| 1996/1997 was the last year in which pension funds could reclaim tax credits on UK dividends. The removal of tax credits led to an immediate £2.75bn `raid' on pension funds, a raid that now continues every year. Pension funds are failing to grow at a rate to match contributors' expectations. |
| In a prolonged bear market, steady saving in cash could be a better option for the risk-averse than relying on the stock market to create an overflowing pension pot. However, in 2002, the proportion of national income going into savings is expected to be less than 4%. Each year, the British should be saving £27bn more than at present, according to the Association of British Insurers (ABI). The annual savings gap amounts to £700 for each of the approximate 38.6 million people in the UK aged between 16 and 64. The British are not enthusiastic about the prospect of working beyond 70, but pension shortfalls are likely to make this increasingly necessary, unless pensioners can translate their numbers into political power that sways government policy. |
| CAUTION IS THE WATCHWORD |
| Caution is the watchword for UK-based companies seeking to provide pensions and pension-extending financial services for the elderly. The reasons for this include: |
| the extensive legislation to regulate financial services |
| the power of the FSA to enforce compliance |
| the caution shown by customers since the furore over pensions mis-selling |
| mistrust in pension schemes generally, now that employers are abandoning final-salary schemes, even for current employees. |
| Once broken, trust takes a long time to rebuild. Meanwhile, companies are reluctant to launch innovative products into a nervous market. |
| Confidence in pensions would improve if: |
| the Government reintroduced tax relief on dividends paid into pension funds |
| the UK decided against joining the euro, with its huge unfunded pensions liabilities |
| the stock market rose steadily (but not dizzily) for the next 5 years. |
| The Chancellor can accomplish the first task, can influence the second, but has little power over the third. |
TABLE OF CONTENTS
| Executive Summary 1 |
| RETIREMENT FUNDS TOO SMALL 1 |
| DISMAL CONDITIONS FOR PENSION SALES 1 |
| NOT AS WELL OFF AS WE LIKE TO THINK 1 |
| FALSE EXPECTATIONS A BARRIER TO SAVING 2 |
| EQUITY RELEASE NEEDS STRONG PROPERTY MARKET 2 |
| BASIC STEPS TO EXTEND PENSIONS 2 |
| AUSTERE BUDGETS 3 |
| CAUTION IS THE WATCHWORD 3 |
| 1. Introduction 13 |
| THE TOPIC 13 |
| OBJECTIVES 13 |
| METHODOLOGY 13 |
| Problems In The Research Process 13 |
| DEFINITION 14 |
| 2. Strategic Overview 15 |
| MARKET DYNAMICS 15 |
| Typical Retirement Fund is £30,000 15 |
| Double Blow for Women 15 |
| Table 1: Pension Provision in Great Britain by Employment Status, Gender and Age (%), 1999/2000 16 |
| Figure 1: Pension Provision in Great Britain by Employment Status, Gender and Age (%), 1999/2000 18 |
| Executives Win Out Over Workers 19 |
| ADVERTISING REVIEW 19 |
| Slight Recovery in Pensions 19 |
| Equity Release Grows 20 |
| THE CONSUMER 20 |
| Low Incomes a Barrier to Retirement Savings 20 |
| Table 2: Projected Income Distribution in the UK by Income Range (000 and %), 2001/2002 21 |
| Table 3: Projected Income Distribution in the UK — Percentages of Taxpayers at or Below Specified Income Levels, 2001/2002 22 |
| Figure 2: Projected Income Distribution in the UK — Percentages of Taxpayers at or Below Specified Income Levels, 2001/2002 23 |
| Table 4: Estimated UK Adult Population by Individual Net Wealth (000), 1999 24 |
| Consumer Research 24 |
| 2000 — Public Lacked Understanding About Pensions 24 |
| 2002 — Not Too Sure But Not Too Bothered 24 |
| 3. Marketing Trends 26 |
| ADVERTISING EXPENDITURE 26 |
| Pension Products 26 |
| By Company 26 |
| Table 5: Main Media Advertising Expenditure on Major Pension Products (£000 and %), Year Ending March 2000 26 |
| Table 6: Main Media Advertising Expenditure on Major Pension Products (£000 and %), Year Ending December 2001 28 |
| By Type of Product 29 |
| Table 7: Main Media Advertising Expenditure on Pensions by Type of Product (£000 and %), Years Ending March 2000 and December 2001 30 |
| Figure 3: Main Media Advertising Expenditure on Pensions by Type of Product (£000 and %), Years Ending March 2000 and December 2001 31 |
| Equity-Release Products 31 |
| Table 8: Main Media Advertising Expenditure on Major Equity-Release Products (£000 and %), Year Ending December 2001 32 |
| FINANCIAL COMPANIES DOMINATE DIRECT MAIL 32 |
| Table 9: Direct Mail Spend as a Percentage of Total Expenditure on Advertising in the UK (£m and %), 1989-2001 33 |
| Figure 4: Direct Mail Spend as a Percentage of Total Expenditure on Advertising in the UK (£m), 1989-2001 34 |
| 4. The State Pension — Will It Be Enough? 35 |
| THE BASIC PENSION 35 |
| Table 10: Pension Spending in the UK Compared With All Social Security and All Central Government Expenditure by Value at Current Prices (£m and %), 1997/1998-2003/2004 35 |
| Table 11: Spending on State Retirement Pensions in Great Britain at Constant 1998/1999 Prices (£m), 1978/1979, 1988/1989 and 1998/1999-2002/2003 36 |
| THE STATE EARNINGS-RELATED PENSION SCHEME 37 |
| NEW STATE SECOND PENSION 38 |
| 5. Stakeholder and Other Personal Pensions 39 |
| THE UNPENSIONED 39 |
| TAXATION BLOW 39 |
| Table 12: Selected Income-Tax Credits and Repayments (£m), 1994/1995-1999/2000 40 |
| STAKEHOLDER PENSIONS 41 |
| The First 9 Months 41 |
| Predominance Among Men 42 |
| Table 13: Possible Retirement Income Generated by Placing £81 a Month in a Stakeholder Pension by Starting Age (£), 2002 43 |
| Figure 5: Possible Retirement Income Generated by Placing £81 a Month in a Stakeholder Pension by Starting Age (£), 2002 43 |
| OTHER PERSONAL PENSIONS 44 |
| 6. Occupational Pensions 45 |
| FINAL-SALARY SCHEMES 45 |
| Table 14: Pension-Fund Surpluses (number, £m and %), 1993-4/1995-6 to 1997-8/1999-00 46 |
| GROUP PERSONAL PENSIONS 47 |
| 7. Making the Most of Annuities 48 |
| CAPTIVE CLIENTELE 48 |
| Standard Annuities 48 |
| Investment-Linked Annuities 48 |
| ANNUITY RATES COLLAPSE 49 |
| Table 15: Top Annuity Rates by Age and Sex (£ per year per £100,000), August 2000 and April 2002 49 |
| ADDING CHOICE: INVESTMENT ANNUITIES 51 |
| OPEN ANNUITIES 51 |
| THE DRAWDOWN OPTION 52 |
| ANNUITIES FOR LONG-TERM CARE 52 |
| HIGHER INCOME FOR IMPAIRED LIFE 53 |
| 8. Income from Savings and Investments 54 |
| AN ISA ANSWER 54 |
| DEFLATION DANGERS 54 |
| 9. Income from Property 56 |
| EQUITY RELEASE 56 |
| NEW SCHEMES 58 |
| MORE MARKET LEADERS 58 |
| PROPERTY PRICE DEPENDENCE 59 |
| On Continuing Low Interest Rates 59 |
| On Tight Planning Controls 59 |
| IS THE PARTY ENDING? 61 |
| 10. Income From Work 62 |
| A RETURN TO LIFELONG WORK? 62 |
| JOBS MAY BE CASUAL AND LOW PAID 62 |
| 11. An International Perspective 64 |
| MORE PENSIONERS, FEWER WORKERS 64 |
| Table 16: Percentage of Population Aged 65 and Over in Leading OECD Countries (000 and %), 1999 64 |
| Table 17: Ratio of Pensioners to the Working Population by Selected Country (%), 1980, 1990, 2000 and 2030 65 |
| Figure 6: Ratio of Pensioners to the Working Population by Selected Country (%), 1980, 1990, 2000 and 2030 66 |
| FLEXIBLE US 66 |
| DOUBLE DIPPING IN AUSTRALIA 67 |
| PRIVATE IN CHILE 67 |
| ANNUITIES IN EUROPE 67 |
| INTERNATIONAL INFLUENCES 67 |
| 12. PEST Analysis 69 |
| POLITICAL FACTORS 69 |
| Pensioners Have Growing Political Power 69 |
| Individual Pension Accounts 69 |
| Economic FACTORS 70 |
| SOCIAL FACTORS 70 |
| Surge in Over-80s 70 |
| Table 18: Actual and Forecast UK Population by Age Group (% and 000), 1961, 1981, 2001 and 2021 71 |
| Growing Number of Households 71 |
| Table 19: Number of UK Households (million), 1961, 1981 and 2001 71 |
| Table 20: Number of Households by Composition (000), 1990-1992, 1996 and 2003 72 |
| TECHNOLOGICAL FACTORS 73 |
| Help for Independent Financial Advisers 73 |
| Limited Role for E-Commerce 73 |
| 13. Consumer Dynamics 75 |
| OVERVIEW 75 |
| Change from 1997 to 2000 75 |
| Table 21: Overall Levels of Agreement to Statements About Pensions (% of respondents), 1997 and 2000 75 |
| Table 22: Ranking of Agreement to Statements About Pensions, 1997 and 2000 77 |
| 2000 — High Earners Worried About Adequacy of State Pension 78 |
| 2001 — Lukewarm Interest in Stakeholder Pensions 78 |
| 2002 — Vague But Not Too Worried 78 |
| Table 23: Overview of Results (% of respondents), 2002 79 |
| ENTITLEMENT TO OCCUPATIONAL PENSIONS 80 |
| Table 24: Entitlement to Occupational Pensions (% of respondents), 2002 81 |
| ENTITLEMENT TO PERSONAL PENSIONS 83 |
| Table 25: Entitlement to a Personal Pension (% of respondents), 2002 83 |
| IMPORTANCE OF THE STATE PENSION 85 |
| The Basic State Pension is the Only Pension I Receive or Will Receive When I Retire 85 |
| I Receive, or Will Receive, a State Earnings-Related Pension Upon My Retirement 85 |
| Table 26: The Importance of the State Pension (% of respondents), 2002 86 |
| LEVEL OF RELIANCE OF STATE PENSION 88 |
| The Basic State Pension Accounts For, or Will Account for, Less Than a Quarter of My Income 88 |
| Table 27: Reliance on the State Pension (% of respondents), 2002 89 |
| The Basic State Pension Accounts For, or Will Account For, More Than Half of My Income 91 |
| WHO WILL BE HARD UP? 91 |
| Table 28: Concern Over Being Hard-Up in the Future (% of respondents), 2002 92 |
| TOWARDS MORE FLEXIBLE RETIREMENT AGES? 94 |
| Table 29: Towards More Flexible Retirement Ages? (% of respondents), 2002 95 |
| HOUSING EQUITY — THE UNTAPPED RESOURCE 97 |
| I Have Already Raised Money on the Value of My Home to Supplement My Income in Retirement 97 |
| I Have Not Yet Raised Money on the Value of My Home to Supplement My Income, But I May Do So in the Future 97 |
| Table 30: Attitudes Towards Equity Release (% of respondents), 2002 99 |
| 14. Company Profiles 101 |
| UNHAPPY CLASH OF CAUTION AND MISTRUST 101 |
| BRITANNIC GROUP PLC 102 |
| Corporate Strategy 102 |
| Advertising and Distribution 102 |
| Profitability 102 |
| Table 31: Financial Results and Ratios for Britannic Group PLC (£m, % and £), Years Ending 31st December 1999-2001 103 |
| Future Developments 104 |
| CANADA LIFE LTD 104 |
| Corporate Strategy 104 |
| Advertising and Distribution 104 |
| Profitability 104 |
| Table 32: Financial Results and Ratios for Canada Life Ltd (£m, % and £), Years Ending 31st December 1998-2000 105 |
| Future Developments 105 |
| CGNU PLC (Aviva PLC) 106 |
| Corporate Strategy 106 |
| Advertising and Distribution 106 |
| Profitability 106 |
| Table 33: Financial Results and Ratios for CGNU PLC (£m, % and £), Years Ending 31st December 1999-2001 107 |
| Future Developments 107 |
| CORNHILL INSURANCE PLC 108 |
| Corporate Strategy 108 |
| Advertising and Distribution 108 |
| Profitability 108 |
| Table 34: Financial Results and Ratios for Cornhill Insurance PLC (£m, % and £), Years Ending 31st December 1998-2000 109 |
| Future Developments 109 |
| THE EQUITABLE LIFE ASSURANCE SOCIETY 110 |
| Corporate Strategy 110 |
| Advertising and Distribution 110 |
| Profitability 110 |
| Table 35: Financial Results and Ratios for The Equitable Life Assurance Society (£m, % and £), Years Ending 31st December 1998-2000 110 |
| Future Developments 112 |
| GE LIFE LTD 112 |
| Corporate Strategy 112 |
| Advertising and Distribution 112 |
| Profitability 112 |
| Table 36: Financial Results and Ratios for GE Life Ltd (£m, % and £), Years Ending 31st December 1999-2001 113 |
| Future Developments 114 |
| NORTHERN ROCK PLC 114 |
| Corporate Strategy 114 |
| Advertising and Distribution 114 |
| Profitability 114 |
| Table 37: Financial Results and Ratios for Northern Rock PLC (£m, % and £), Years Ending 31st December 1998-2000 115 |
| Future Developments 115 |
| NPI Ltd 116 |
| Corporate Strategy 116 |
| Advertising and Distribution 116 |
| Profitability 116 |
| Table 38: Financial Results and Ratios for NPI Ltd (£m, % and £), Years Ending 31st December 1999-2001 117 |
| Future Developments 117 |
| PRUDENTIAL PLC 118 |
| Corporate Strategy 118 |
| Advertising and Distribution 118 |
| Profitability 118 |
| Table 39: Financial Results and Ratios for Prudential PLC (£m, % and £), Years Ending 31st December 1998-2000 119 |
| Future Developments 119 |
| SCOTTISH WIDOWS PLC 120 |
| Corporate Strategy 120 |
| Advertising and Distribution 120 |
| Profitability 120 |
| Table 40: Financial Results and Ratios for Scottish Widows PLC (£m, % and £), Years Ending 31st December 2000 and 2001 120 |
| Future Developments 121 |
| STANDARD LIFE 121 |
| Corporate Strategy 121 |
| Advertising and Distribution 122 |
| Profitability 122 |
| Future Developments 122 |
| VIRGIN MONEY PERSONAL FINANCE 122 |
| Corporate Strategy 122 |
| Advertising and Distribution 123 |
| Profitability 123 |
| Table 41: Financial Results and Ratios for Virgin Direct Personal Finance Ltd (£m, % and £), Years Ending 30th September 1998 and 1999 and 31st December 2000 124 |
| Future Developments 124 |
| 15. The Future 125 |
| AUSTERE BUDGETS TO COME 125 |
| Table 42: Saving Levels in Great Britain by Type of Household (%), 1998 and 2000 125 |
| Figure 7: Saving Levels in Great Britain by Type of Household (%), 1998 and 2000 127 |
| GROWTH IN OVER 60S 128 |
| Table 43: UK Projected Population by Age Group (000), Mid-Year 2002-2010 128 |
| FEWER WOMEN TO FACE PENSION POVERTY? 129 |
| ANNUITIES TO BECOME MORE FLEXIBLE 129 |
| GOODBYE TO CONSPICUOUS CONSUMPTION? 129 |
| HOW USEFUL IS FINANCIAL ADVICE? 130 |
| The Issue of the 'Valueless' Stock Options 131 |
| The Mystery of the Deflating Pension Funds 131 |
| PENSION EXTENDERS TO FILL SAVINGS GAP 132 |
| ACTION OR INACTION? 133 |
| 16. Glossary 135 |
| 17. Further Sources 137 |
| Associations 137 |
| Publications 138 |
| General Sources 139 |
| Bonnier Information Sources 140 |
| Government Sources 141 |
| Other Sources 142 |
Text © 2002 Key Note
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Last updated by Amanda Porteous September
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