Pensions represent one of the biggest sectors from which IFAs can source
new business. This is due to a combination of factors but the opp-
ortunities stem mainly from a problem of a shrinking tax base. The UK, like
other countries in Europe, has an ageing population and statistics suggest
the state will find it more difficult, and eventually impossible, to fund
the pay as you go system.
Demographic trends mean that contributions from a shrinking workforce will
have to fund the entitlements of a growing number of pensioners. This is
beginning to take effect at a time when IFAs have increasingly become the
preferred channel for new pension business. In 1999, IFAs accounted for
around three-quarters of new single individual pensions and over half of
new regular-premium pension policies sold.
The rise in new IFA business has been at the expense of company
representatives, reflecting consumer preference for greater levels of
independent advice, which in part may be a reaction to misselling. The
reduction in the number of pension company sales staff will also have
affected the balance of new premium income through the independent and
For those who do not have access to an occupational pension scheme, the
personal pension represents an effective method of retirement provision as
it offers generous tax breaks and a structured method for saving.
Pension provision, or the lack of, is likely to remain a key issue, both
for the Government and consumers, while representing considerable
opportunities for pension providers and their distributors.
Despite the importance of retirement planning, around 18 million adults in
the UK do not have a pension and are making no provision for their
retirement. They will be dependent on state benefits, which are already low
and set to fall. Reliance on the welfare state is likely to push those with
no retirement provision below the poverty line.
But the need for increased private pension provision has resulted in good
business. In 1999, new regular and single-premium long-term business
premiums for life and pensions totalled around £30.5bn. The majority of
this amount, some £27.8bn, was made up of single-premium business.
Mintel estimates that, in 1999, around 313,000 single-premium personal
pensions were sold. Premiums generated from these new policies totalled
around £4.46bn. Over one million new regular-premium personal pensions were
taken out in 1999, generating premiums of just under £1bn. The number of
new regular-premium personal pensions fell by around 7.8 per cent between
1998 and 1999.
Between 1994 and 1997, average regular personal pension premiums rose but,
as a result of a 23 per cent fall in average premiums between 1997 and
1999, premiums have fallen from £1,013 in 1994 to £940 in 1999. In
contrast, average premiums for single-premium policies have risen from
around £11,000 to £14,550 in 1999.
For the IFA, there is one particularly significant trend. Over the last
few years, there has been a notable shift in consumers' aversion to risk.
Linked policies have been increasing in popularity while the number of
non-linked (with-profits) policies has fallen off.
This suggests that consumers are becoming less risk-averse about their
pensions and are becoming more willing to invest the full pension fund and
hence future provision on the stockmarket.
The recent booming stockmarket performance and the potential lucrative
returns from equity investment are likely to be contributing to the
changing preference for higher risk, unit-linked personal pension policies.
Over the last four years, occupational and personal pension provision has
remained fairly steady at 50 per cent of adults. Over the longer term,
membership of occupational pension schemes and owners of personal pensions
has increased. In 1990, nearly three in 10 adults belonged to an
occupational pension scheme and this grew to nearly four in 10 by 1999.
Over the same period, the percentage of the population owning a personal
pension has increased from 11.1 per cent to 13.2 per cent. In 1995, some 15
per cent of the population owned a personal pension but this figure has
declined in recent years.
Since annuity rates are presently very low and income- drawdown options
are dependent on having a significant pension fund, there have been
suggestions that other tax-efficient products such as Isas might be more
appropriate for retirement saving.
While Isas do not receive any tax relief on investments, there is no tax
on any return, making them in essence a mirror image of personal pensions.
Many consumers are inheriting property and converting it into financial
assets. There is a greater emphasis on personal pension provision and the
baby-boomer generation is maturing into savers because many are worried
about providing for themselves in later life.
The main form of retirement provision, other than the state pension, is
the occupational pension scheme. Mintel research shows that one-fifth of
non-retired respondents have a personal pension. But some 30 per cent of
non-retirees claim to have no pension provision at all. These consumers may
well have to rely on the state for their retirement income. These consumers
also represent a key target market for personal pensions.
Pension ownership is concentrated among 25-54-year-olds in more affluent
socio-economic groups. Only 6 per cent of C2DE consumers have a personal
pension. Some 71 per cent of retirees rely on the state for their
For a significant number of retirees, the state pension will be
supplemented by income from an occupational pension or other investments.
Around half of retirees currently receive income from occupational pension
schemes. Some 13 per cent also receive income from other investments held.
Around 9 per cent of pensioners claim to receive an income from a personal
pension, although it is, in fact, a personal pension fund that has been
converted into an annuity.
Above all, not having sufficient retirement funds and not being able to
afford to retire are of major concern to a high proportion of adults. Some
40 per cent of respondents with a personal pension were concerned about
issues relating to the performance of their pension funds.
These respondents understand the relationship between investment
performance and the value of their retirement income. Six per cent of the
sample were worried about issues relating to annuities, rising to around 16
per cent of personal pension owners. This figure is very low, considering
the impact that low annuity rates are currently having on those coming into
Poor advice and pension misselling was of concern to 17 per cent of adults
and 21 per cent of respondents owning a personal pension. This shows that
the misselling scandals are still having an impact on the industry. These
concerns are likely to have been heightened by the Financial Services
Authority's advertising urging people to have their personal pensions
In terms of financial priorities, long-term saving is the priority for
only 19 per cent of adults. The proportion of adults seeing long-term
saving as an important financial aim has changed little over the last five
This low priority of long-term financial planning suggests that offering
consumers a broader range of pension products will do little to increase
consumer uptake of personal pensions.
Encouraging people to save for their retirement will remain the biggest
challenge for the Government and pension industry alike.
IFAs may find it profitable to concentrate sales and marketing on
retirement products and services which appeal to the safety-first
aspirations of an important sector of the marketplace.
Pensions represent one of the biggest sectors from which IFAs can source