Personal Accounts: The Future of Pension Provision

Overview 1
Catalyst 1
Summary 1
Executive Summary 2
Table of Contents 3
Table of figures 4
BACKGROUND TO PENSIONS REFORM IN THE UK 5
Individuals' saving obligations to obtain significant pension income face bigger burdens 5
Demographic trends are making pension savings a necessity 5
The basic state pension forms the foundation of pension provision 6
Government policy is aimed at supporting the poorest of pensioners 6
The UK's state pension is relatively meager in comparison to its European peers 6
Currently, individuals are less concerned by saving into a pension but more interested in clearing debt 8
Affordability coupled with short-term preferences act as further barriers to pension savings 8
People are not prepared to take on higher pension savings during a market downturn but instead turn to clearing debt 9
Consumers have a short-term outlook when making saving and investment decisions 9
The Government is reforming workplace pension provision from 2012 to make saving for retirement the norm 10
Automatic enrolment under the Pensions Act 2008 hopes to reform workplace pension provision 10
However, public-sector pension reform is a slow and controversial process and may not boost pension savings 10
Automatic enrolment is designed to overcome the inertia preventing many people from saving 11
Automatic enrolment is seen positively as a way of overcoming people's apathy towards pensions 12
Employees aged over 22 are eligible for automatic enrolment but policy should encourage people to start saving early 12
Policy must also place emphasis on financial education among young people to increase financial responsibility 13
PERSONAL ACCOUNTS: IMPLEMENTATION AND IMPLICATIONS 15
Personal accounts hope to engage people with making minimum contributions towards pension savings 15
Substantial cost implications for employers will detrimentally affect levels of contribution 16
For some, leveling down employers' contribution through the Personal Accounts scheme will make pension provision worse 16
Employers may be tempted to minimize costs of Personal Accounts through lower employee salaries 17
However, a contributions ceiling has been set to prevent the weakening of existing pensions provision 17
Personal accounts should still ensure that it pays to save against the impact of means-testing 17
The investment strategy must focus on achieving good retirement income for members 18
The default fund must reflect the characteristics of members in the personal accounts scheme 18
Retirement incomes of personal accounts members should be at the forefront of Trustees' minds when choosing an Investment objective 19
Personal accounts do not represent an end to private pension schemes 20
The effectiveness of Personal Accounts is uncertain 20
Providers can win new business in the market with low-cost SIPPs 20
Low-cost and vanilla SIPPs will meet the needs of the 'recessionary consumer' 21
New SIPP powers to hold protected rights will increase flexibility and investment choice for consumers 21
Providers can seize opportunities to educate consumers where the government has failed 22
Providers and advisors should support people to exercise personal responsibility 23
Providers and key industry players must help people to separate the concepts of building up a pension fund and receiving pension income 23
Individuals are increasingly on their own in planning for retirement and need to understand the risks that they will shoulder 24
For the private pensions industry, targeted marketing rather than new product development, must be the focus 26
APPENDIX 27
Definitions 27
Single premium policy 27
Regular premium 27
Wrap accounts 27
Product definitions 27
Life-based savings products 27
Life Assurance 27
Single premium life 28
With-profit bond 28
Unit-linked bond 28
Income and growth bonds 28
Guaranteed equity bonds 28
Distribution bonds 28
Purchased life annuities 29
Other bonds 29
ISAs 29
Further reading 29
Ask the analyst 29
Datamonitor consulting 29
Disclaimer 29
List of Figures
Figure 1: Pressure on the working age population is increasing as more people begin to retire 5
Figure 2: The basic state pension forms the foundation of pension provision 7
Figure 3: Affordability is the main challenge for individuals preventing them from saving into a pension 8
Figure 4: The UK Pensions Reform is a slow moving process 11
Figure 5: Ten million people are assumed to participate in the personal accounts scheme in 2012 15
Figure 6: The future pensions market is one of helping individuals exercise personal responsibility 22
Figure 7: Individuals will face 5 key risks that employers have previously shouldered with their final salary schemes 26