Table of Contents

CHAPTER 1 EXECUTIVE SUMMARY

3

Market context

3

Product Focus

3

Customer focus

4

Distribution channels

4

Competitor dynamics

5

CHAPTER 2 INTRODUCTION

14

CHAPTER 3 MARKET CONTEXT

15

Introduction

15

Key findings

15

Individuals in the UK draw their retirement incomes from a wide range of sources

16

The UK state pension provision is one of the least generous systems in Europe

16

The UK has a high level of private retirement saving

16

Retirement income drawn from pensions is the key source of retirement income

17

Non-pension income is also a key source of private retirement income in the UK

18

This report focuses on retirement income drawn from defined contribution schemes

19

The retirement income market is dominated by fixed annuities

20

Increased longevity and low interest rates are the key drivers putting pressure on the UK retirement income market

21

The UK Government is faced with a set of problems over retirement income

22

The Government has responded to these problems with a range of regulations which will affect the retirement income market

23

A-Day will drive the retirement income market in a number of ways

23

The European Age Discrimination Directive 2006

25

International Accounting Standards (IAS) and The Pensions Act are driving a move towards individual contract pensions

26

The recommendations of the Pensions Commission will boost the need for private pension saving

26

CHAPTER 4 PRODUCT FOCUS

27

Introduction

27

Key findings

27

The UK at-retirement market has become less diverse in the last five years

28

Fixed interest annuities continue to dominate the retirement income market in terms of contracts sold

28

Fixed rate annuities have become more dominant in terms of premiums

29

Contract sizes in the UK retirement income market have increased

30

Innovation in retirement income products will centre around flexibility

32

New problems have led to some increase in variety in the retirement income market

32

A new generation of more flexible retirement income vehicles is expected to be launched following A-Day

33

Distributors are demanding improved administration and ongoing fees from providers in the at-retirement market

33

Financial strength is an absolute necessity for retirement income products

33

Price is key in the annuity market

33

Breadth of fund choice is important in income drawdown

34

Additional features that add expense are often unattractive

34

Poor administration is the key complaint of IFAs

34

IFAs would like to build up their ongoing fees

35

Annuities dominate the at-retirement market

35

Fixed-rate annuities are the simplest form of annuity

37

Index-linked annuities protect against inflation

37

Investment-linked annuities are expected to be an area of growth

37

Single-life annuities are the cheapest death benefit option

37

The extra costs of guaranteed annuities has limited their appeal

37

Open annuities offer a potential solution to the problem of cross- subsidization

38

Poor annuity rates have killed the purchased life annuity market

38

Advantages of annuities

39

Disadvantages of annuities

39

Pension annuity pricing

40

The growth of the impaired annuities is the most important development in the annuity market in recent years

40

The impact of A-Day on the annuity market will be fairly limited

41

"Money back" annuities have marketing potential

41

Short-term annuities will have little impact

41

Income drawdown will be revitalized by A-Day

42

Advantages of drawdown/ ASP

43

Disadvantages of drawdown/ ASP

44

Income drawdown is an expensive product

44

Drawdown products are set to play a bigger role following A-Day

45

Increased flexibility has increased the attractiveness of drawdown

45

Alternatively secured pensions will merge into income drawdown

45

Integrated drawdown SIPPs will become a major product

46

The potential for drip-feed drawdown is an example of the new innovation which will enter the income drawdown market

46

The retirement income market is expected to show increased growth to 2009

47

Annuities will see lower overall growth

47

Income drawdown will be supported by ASP and grow rapidly

48

Variable annuities will bounce back from the current low levels

48

Data

49

CHAPTER 5 CUSTOMER FOCUS

53

Introduction

53

Key findings

53

The core customer group for retirement income products is growing in size and wealth

54

In the longer term the number of people in retirement and those in work will shift dramatically

54

The number of people aged 50-74 is expected to increase by 5% between 2004-2009

54

Women become increasingly dominant in the retirement market as age increases

55

The 'baby-boomer' generation is nearing retirement but will have a limited effect on the retirement income market

56

The 56-65 age group contains more wealthy individuals than any other segment, and is growing rapidly

56

Property plays a key role in in the wealth of those over 55 with property ownership estimated at £1,542bn

57

The over 65s population is becoming more active

58

Knowledge and interest in financial plannging for retirement remains limited

58

State and company pension schemes remain the dominant sources of retirement income in the UK

59

Only 10% of the UK population is currently saving for retirement through non-pension investments

64

Data

66

CHAPTER 6 DISTRIBUTION CHANNELS

69

Introduction

69

Key findings

69

Regulatory change is unlikely to overturn the dominance of IFAs in the retirement income distribution market

70

A-Day will further boost the IFA channel

70

The impact of multi-tie on the annuity market will be limited

70

Depolarization will put some downward pressure on charges and fees

71

IFAs will continue to be crucial in pension annuity distribution

71

IFAs will continue to dominate the income drawdown market

74

CHAPTER 7 COMPETITIVE DYNAMICS

77

Introduction

77

Key findings

77

The retirement income market is set to become less concentrated, particularly at the top end

78

The annuity market has come to be dominated by large players

78

There have a been a number of innovative approaches to the retirement income for wealthy customers market in recent years

78

A-Day is set to encourage new competitors to enter the market, especially from specialist pension companies

79

The largest insurers dominate the retirement income market

80

Prudential has a wide ranging and well respected retirement income product offering

81

Prudential's lifestyle focus sees it targeting only the over 45s

81

Prudential is less dependent on IFA distribution than many of its competitors

82

Norwich Union is focusing on offering a clear proposition to consumers

82

Norwich Union is considering offering a "money back"' option on annuities

83

Standard Life has used its strong IFA relationships to position itself well in both the annuity and the SIPP/ drawdown market

83

Standard Life focuses its annuity offering on two products

83

Standard life is likely to be a major player in the SIPP/ income drawdown market

84

Scale and a targeted approach has made GE Life a successful competitor in the UK retirement income market

85

GE Life is closely associated with enhanced annuities in the UK retirement income market

85

GE Life also has a strong drawdown product

86

The complexity of GE Life's products means that a team of broker consultants is key in promoting the company's products to IFAs

86

GE Life has focused its marketing on the key service issue

86

Data

87

CHAPTER 8 APPENDIX

88

Forecasting methodology

88

Datamonitor uses a qualitative forecasting methodology for Life and Pensions

88

Definitions

89

Asociation of British Insurers definitions of products

89

Pension annuities

89

Income drawdown

89

Association of British Insurers definitions of distribution channels

90

Independent Financial Advisers (IFAs)

90

Direct sales forces

90

Tied agents

90

Multi-tied agents

90

Bancassurance

90

Direct marketing

91

Telesales

91

Other

91

Other definitions

91

Additional Voluntary Contributions (AVCs)

91

Annuity

91

CAGR

92

Concurrency

92

Defined contribution pension scheme

92

Defined benefits pension scheme

92

Free Standing Additional Voluntary Contributions (FSAVCs).

93

High net worth (HNW)

93

Phased retirement/drawdown products

93

Mass affluent

93

Mass market

93

SIPP

93

Small Self Administered Schemes (SSAS)

94

Variable annuities

94

Vest

94

Further reading

94

Life and pensions reports and briefings

94

The IFA Service Briefings

95

SPP writing team

96

List of Tables

Table 1: Retirement Income products new business premiums, 2000- h1 2005

49

Table 2: Retirement Income products new contracts, 2000- h1 2005

50

Table 3: At-retirement income products 2004-2009f

51

Table 4: Annuity rates for £100,000 pension pot 1986-2003

51

Table 5: Monthly annuity rates based on a pension pot of £100,000

52

Table 6: UK population by age and gender 2005-2009

55

Table 7: Wealthy individuals segmented by age band 2000-2004

57

Table 8: Of the savings and investment products that you are contributing to which, if any, are part of your retirement planning?

66

Table 9: Of the savings and investment products that you are contributing to which, if any, are part of your retirement planning?

67

Table 10: From which of these are you receiving any regular income in retirement?

67

Table 11: From which of these are you receiving any regular income in retirement?

68

Table 12: Distribution of pension annuities 2002-2005e £m APE

72

Table 13: Forecast distribution in the pension annuity market 2005e-2009f

73

Table 14: Distribution of Income Drawdown Products £m

74

Table 15: Forecast for Income Drawdown distribution 2005e-2009f

75

Table 16: From which product provider are you receiving the income from for your Personal Pension, Annuity, AVC or FSAVC?

87

List of Figures

Figure 1: UK consumers draw retirement income from a wide range of sources

17

Figure 2: 344,807 fixed annuity contracts were sold in the UK in 2004

20

Figure 3: A number of factors are putting pressure on the retirement income market

21

Figure 4: The retirement income market faces a large amount of regulatory change, 2004

23

Figure 5: 10 Key Features of A-Day legislation

24

Figure 6: Fixed annuities are the dominant retirement income product in terms of contracts sold, 2004

28

Figure 7: Fixed interest annuities have grown since 2000 at the expense of other retirement income products, 2004

30

Figure 8: Customers buying income drawdown schemes had the largest pension pots, 2004

31

Figure 9: Additional features can significantly reduce annuity incomes: monthly annuity rates based on a pension pot of £100,000

36

Figure 10: Phased income drawdown products will meet the requirements of those wanting a more flexible move into retirement

43

Figure 11: Income drawdown is set to grow quickly to 2009

47

Figure 12: UK population by age and gender 2004

56

Figure 13: The state pension is the biggest source of income for retired individuals

59

Figure 14: Company pensions are the most common form of pension income for retired people

61

Figure 15: Income from non-pensions savings and investments is an important element of retirement income - especially for the wealthy

62

Figure 16: State pensions are a key source of income, particularly for less wealthy retirees

63

Figure 17: ISAs are the savings and investment (non-pension) product that savers are most likely to use for retirement planning

64

Figure 18: Prudential are the key suppliers of retirement income products in the UK market, 2005

80

Figure 19: "Quasi-Delphi" forecasting technique

88