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Simplification and the Pensions Market for Wealthy Customers, 2005

Pensions Simplification, the new regulatory regime for UK pensions to be introduced in April 2006, will provide a major shake-up for the industry. Wealthy customers, with their complex financial needs, will be best positioned to take advantage of the liberated market that these changes will create. This represents a major opportunity for competitors at the top end of the UK pensions market.

Scope
Covers eight specialist pensions products aimed at wealthy UK customers: SIPPs, SSSAS, EPPs, AVCs and FSAVCs, Section 32 Transfers, UURBs and FURBs
Offers historic data from 2000 to 2004 and forecasts to 2009
Sizes and forecasts the market in terms of premiums (total market and those held by insurers) and assets

Highlights
£2.4bn of gross new business premiums were paid into specialist pensions products run by insurance companies in 2004 (out of a total market of £4.1bn). Executive Pension Plans were the most important specialist pensions product for insurers followed by Section 32 Transfers.

In theory at least, following Simplification there will be only one type of pension. 'New style' pensions will be demarcated more by their pricing, transparency, investment range and provider choice than by the product structure.

SIPPs will become a major player in the UK pensions market by 2009 with annual premiums of £4.6bn and total assets of £53bn. These products will gain large inflows of money from wealthy clients taking advantage of the Pensions Simplification regulations to invest in a broad range of assets with higher rate tax relief.

Reasons to Purchase
Pensions for wealthy clients will be one of the fastest growing and most profitable parts of the UK financial services market in the next five years
This report provides a vital guide as to how regulatory change will transform this market
This report provides the most reliable sizing and forecasting of the market available

CHAPTER 1 EXECUTIVE SUMMARY

The current specialist pensions market for the wealthy
The specialist pensions market following Simplification
Product focus: Specialist pension products

CHAPTER 2 INTRODUCTION

What is this report about?
Who is the target reader?
How to use this report

MARKET CONTEXT: THE CURRENT SPECIALIST PENSIONS MARKET FOR THE WEALTHY

Introduction
Key findings
The specialist pensions market is marked by complexity and a wide range of products
There are eight major types of specialist pension product in the UK
Complex rules have shaped the specialist pensions market
The specialist pensions market is a significant element of the UK pensions landscape
£4.1bn new business premiums were paid into the specialist pensions market in 2004
Insurers gain most specialist pension premiums from EPPs and Section 32 Transfers
The specialist pensions market holds around £145bn in assets
Tax incentives have been the most important factor in the development of the specialist pensions market
Tax incentives have made the UK the largest market for private pensions investment in Europe
The lack of other tax benefits has pushed investment into pensions
The UK has one of the lowest levels of state pension provision in Europe, driving wealthy individuals to look for private pension cover
The tax advantages associated with pensions are particularly attractive to wealthy customers
Wealthy customers’ more complex pension needs have driven the creation of a range of specialist pension products
The market for specialist pensions is made up of a small number of individuals with a large amount of assets
The market for specialist pensions is small in terms of individuals
HNW customers hold 39% of liquid assets in the UK.
HNWs are the section of the UK population that are showing strongest growth
Wealthy customers are financially aware and demanding
83% of eligible wealthy customers are contributing to a pension scheme
Wealthy customers do not see pensions as products to be bought or reviewed frequently
Wealthy customers are financially confident and aware
The specialist pensions market is preparing for a complete transformation on April 6 2006
The basic tenets of Pensions Simplification are indeed simple

Preparations for Simplification are already affecting the specialist pensions market

CHAPTER 3 THE FUTURE DECODED: THE SPECIALIST PENSIONS MARKET FOLLOWING SIMPLIFICATION

Introduction
Key findings
Quantitative forecasts: New Style SIPPs will dominate the new specialist pensions landscape after Simplification
Specialist pensions will be transformed by Simplification into “New Style” products
New Style SIPPs will become a major player in the UK pensions market by 2009 with annual premiums of £4.6bn and total assets of £53bn
Qualitative forecasts: There will be a surge in demand for pensions from wealthy customers following Simplification
Flexibility of investment, allocation, borrowing and benefits will shape the market for pensions for the wealthy after Simplification
Contributions: High lifetime allowances will attract the wealthy to invest in pensions
Allocation: Greater freedom to allocate and borrow within pension funds, particularly in residential property, will excite wealthy customers
Borrowing: The ability to borrow against pension funds will drive funding
Vesting: Vesting options will broaden greatly after Simplification
The Competitive market post-Simplification will be more transparent
Life companies will struggle to adapt to the unprotected specialist pensions market following Simplification
Downward pressure on prices will shape the market but profit potential will remain strong
Distribution: “complification” will continue to drive the need for in depth advice

CHAPTER 4 PRODUCT FOCUS: SPECIALIST PENSIONS

Key findings
Self Invested Personal Pensions (SIPPs): Flexible and fashionable
The structure of SIPPs is a wrapper into which a wide range of investments can be placed
SIPP Customers are generally wealthy, however the market is broadening
Competition - Insurance companies have lost control of the SIPP market
Datamonitor estimates the SIPP market to be worth £1.4bn in 2004
SIPPs are set to gain in the run up to Simplification
SIPPs will be the product of choice for wealthy individuals following Simplification
Group SIPPs and wrap platforms will drive New Style SIPP growth
Small Self-Administered Schemes (SSAS): Still SSASy after Simplification
SSASs are the pension product where the interests of the employer and the member can be most closely aligned
SSASs are aimed at those involved in the management of smaller firms
James Hay is the biggest player in the SSAS market
Datamonitor estimates that £400m was paid into SASSs in 2004
SSASs will face increased competition from SIPPs post-Simplification
Datamonitor forsees moderate growth in the SSAS market
Executive Pension Plans (EPPs): Extremely Poor Prospects
EPPs are occupational money purchase schemes
EPPs appeal primarily to Senior Managers and Controlling Directors
Insurers dominate the market for EPPs
The total market for EPPs was £1.2bn in 2004
EPPs will gain some new business in the run up to Simplification
EPP premiums will fall below £400m per annum after Simplification
AVCs and FSAVCs: No longer concurrent?
AVCs and FSAVCs allow the topping up of occupational pensions
AVCs and FSAVCs appeal to those concerned about their pension pots
The FSAVC market is dominated by insurers
The AVC market has been inconsistent in recent years while FSAVCs have been in decline
New Style AVCs will gain benefits post-Simplification, while FSAVCs will merge into the New Style personal pensions market
Section 32 Transfers: going out with a bang
Section 32 Transfers allow customers to ‘buy out’ their entitlement from occupational pension schemes
Customers holding Section 32 Transfers are looking for control and consolidation
The market for Section 32 Transfers has been fairly stable in recent years
Insurers hold all Section 32 Transfers
Push and pull factors are driving the market for Section 32 Tranfers prior to A Day
Section 32 Transfers premiums will peak in 2005
Unapproved Retirement Benefit Schemes: Unnecessary after Simplification
Unnaproved Schemes allow investment in pensions beyond the approved limits but with minimal tax advantages
FURBs are niche products for the most highly valued employees
The FURB market is dominated by specialist providers
There are no reliable figures for sizing the FURB market
FURBs will see some boost pre-Simplification
UURBs and FURBs will disappear after Simplification

CHAPTER 5 DATA

European Comparative Tables
High Net Worth and Mass Affluent Individuals
Product take up and preferences of wealthy customers
Specialist pensions - historic market figures
Specialist pensions - current and forecast market figures

CHAPTER 6 APPENDIX

Definitions
Research methodology
Consumer Data
Datamonitor’s Global Wealth Model
Datamonitor’s Life and Penisions Forecasting model
Supplementary data
Tax advantages of opening an EPP pre-Simplification for those in excess of the lifetime allowance
Details of SSAS investments pre-Simplification
Further reading
SPP writing team

LIST OF TABLES
Table 1: Proportion of salary replaced by 1st pillar pension, 2002
Table 2: James Hay holds a very large share of the SIPP market, 2005
Table 3: Key figures for SSAS providers, 2005
Table 4: Proportion of SSAS policies that were transferred into SIPPs, 2004
Table 5: Private pension assets (2nd and 3rd pillars) held in major European countries, 1998-2003e
Table 6: Private pensions per head of population, 2002
Table 7: HNW and Mass affluent individuals, 1999-2004
Table 8: HNW and Mass affluent individuals, 2004e-2009f
Table 9: Do you currently have contributions paid into any of the following pension schemes?
Table 10: Which of the following financial products do you think you might consider taking out, topping up or changing over the next five years?
Table 11: Which method would you prefer to use overall when arranging a financial product?
Table 12: To what extent do you agree or disagree with the following statements relating to your knowledge of financial services?
Table 13: Specialist pensions held by insurance companies new business single premiums 2000-2004
Table 14: Specialist pensions held by insurance companies new business regular premiums 2000-2004
Table 15: Specialist pensions total new business premiums held by insurance companies 2000-2004
Table 16: Specialist pensions new business premiums forecast, 2004-2009
Table 17: Specialist pensions assets under management forecast 2004e-2009f

LIST OF FIGURES
Figure 1: Insurers gained most specialist pensions new business premiums from EPPs, 2004 4
Figure 2: Wealthy individuals represent a high proportion of liquid assets in the UK market, 2002 5
Figure 3: James Hay is comfortably the largest competitor in the SIPP market, 2004 7
Figure 4: SIPPs have the highest new business premiums in the specialist pensions market, 2004e
Figure 5: Insurers gained most specialist pensions new business premiums from EPPs, 2004
Figure 6: Specialist pensions hold around £145bn in liquid assets, 2004
Figure 7: Private pension assets per head of working population, 2002
Figure 8: Wealthy customers account for only 12% of the UK adult population, 2003
Figure 9: Wealthy individuals represent a high proportion of liquid assets in the UK market, 2002
Figure 10: The wealthy population is set to continue to grow rapidly, particularly at the top end, 2005
Figure 11: A high proportion of eligible wealthy customers are making contributions into their pensions, 2003
Figure 12: Investments are the financial products HNW individuals are most likely to buy or change in the next five years, 2003
Figure 13: Financial awareness is high among HNW customers, 2003
Figure 14: New premiums paid into SIPPs will come to dominate the specialist pensions market, 2004- 2009f
Figure 15: SIPP assets will grow at the expense of many other specialist pensions post-Simplification
Figure 16: 52% of SIPP providers have average fund sizes in excess of £200,000
Figure 17: James Hay is comfortably the largest competitor in the SIPP market, 2004
Figure 18: The SIPP market is dominated by single premium payments, 2000-2004
Figure 19: The SIPP market is set to go through a period of explosive growth, 2004e-2009f
Figure 20: James Hay holds a very large share of the SSAS market, 2005
Figure 21: New SSAS premiums paid to insurers are declining rapidly
Figure 22: Datamonitor believes SSASs will have a future after Simplification
Figure 23: EPP sales revived in 2004
Figure 24: The EPP market will go into decline post-Simplification
Figure 25: New business premiums into FSAVCs fell 21% per annum 2000-2004
Figure 26: AVCs peaked in 2002
Figure 27: New premiums into FSAVCs will disappear post-Simplification
Figure 28: AVC premiums will recover somewhat after Simplification
Figure 29: Section 32 Transfer premiums paid to insurance companies have averaged around 600m 2000-2004
Figure 30: The market for Section 32 Transfers will end post-Simplification
Figure 31: Unapproved schemes can provide for excess pension benefits