Sector insight: Personal pensions

Sector insight: Personal pensions
Sector insight: Personal pensions

The UK pensions industry has been rocked by the recession, but a significant potential market remains to be tapped.

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The market turmoil of 2008 and subsequent recession have had a severe impact on the pensions market, as consumers' faith in financial products has been shaken, unemployment has risen and the value of funds has been hit.

Indeed, 2009 was the second year of declining values for new personal pensions and individual stakeholder premiums. Annual premium equivalent (APE), the standard industry measure, fell 20% last year for individual personal pensions and 35% for stakeholder pensions, according to Mintel.

In addition, a Financial Services Authority investigation into the quality of pension-switching advice caused the rate of transfers - normally a major source of new single-premium business - to slow. In 2009, 57% of new premiums were generated via transfers compared with 77% in 2006.

Nonetheless, this remains a huge market. At the end of 2008 there were about 16m individual personal pension policies and 1.8m individual stakeholder policies, according to the Association of British Insurers (ABI).

While there has been increased interest in long-term savings and investments, most people are dealing with more pressing financial concerns, such as paying off debts.

The main competition in this market comes from workplace pension schemes. For those avoiding pensions altogether, ISAs and investing in property are the main alternative forms of provision for retirement funding.

The rising cost of company pensions - especially final-salary schemes - has led to a decline in the quality and quantity of workplace provision. Recent figures from the Chartered Institute of Personnel and Development show that just 36% of those working in the private sector have a pension, compared with 90% in the public sector.

Direct sales are rare in this sector. Independent financial advisers are the route most people use to select personal pensions (73%), but they account for just 38% of new individual stakeholder pension sales. The majority of these (57%) are handled by tied agents.

Together, the top five providers - Aviva, Lloyds TSB, Legal & General, AXA and Aegon - account for 54% of total gross written premiums. Aviva was the biggest provider in 2008.

There is still considerable scope for the providers to encourage more people to set up personal pensions. Just one in 10 non-retired adults in the UK owns a personal pension product, according to Ipsos MORI. There is much greater personal pension ownership among over-35s than younger adults.

Ipsos MORI's research also suggests that significant sections of UK society are not facing up to the reality of what a retirement without pension provision will mean.

Less than half of those surveyed agreed that it is essential to save for retirement, but only 6% of all non-retired adults said they are certain the provision they have made will ensure a comfortable retirement. This rises to 8% for those with a pension, suggesting that even those who are saving are unsure.

Although the UK technically came out of the recession at the end of 2009 concerns about the economy will affect short-term prospects for the market. In the longer term, however, demand for personal pension products should rise as a result of increased longevity and reduced state and company pension provision.

New APE premiums are predicted to increase by 14% from 2009 to 2014, according to Mintel. The value of all individual personal and stakeholder pension premiums is expected to reach £1.47bn in 2014, compared with £1.29bn last year.


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