Title Page
Copyright
Contents
Acknowledgements 11
The Authors 12
Glossary of terms 13
Abbreviations 21
Summary 23
1. Project aims and research methodology 29
1.1. Objectives of the report 29
1.2. Methodology 30
1.3. Data limitations 30
1.4. Structure of the report 30
2. Introduction to defined contribution pensions 33
2.1. Summary 33
2.2. Introduction to private pensions 33
2.3. Types of private pensions 34
2.4. Joining mechanisms for private pensions 37
2.5. Overview of private pension stakeholder environment 38
2.5.1. Legal structure 39
2.5.2. Benefit type 40
2.5.3. Facilitation 40
2.5.4. Provider 40
2.5.5. Legislators 40
2.5.6. Regulators 41
2.5.7. Advisors 41
2.5.8. Ombudsman services 41
2.5.9. Individuals 41
3. Defined contribution membership - an overview of the current situation 43
3.1. Summary 43
3.2. Introduction 44
3.3. Private pension scheme membership in Great Britain 45
3.3.1. Forty-two per cent of those aged between 20 and state pension age in Great Britain were members of a private pension scheme in 2005/06 45
3.3.2. Most individuals with private pension scheme membership in Great Britain have employer-sponsored membership 46
3.4. Employer-sponsored private pension scheme membership 47
3.4.1. Approximately half of all employees (13 million people) were members of an employer-sponsored pension scheme in 2008 48
3.4.2. Almost all employer-sponsored DC pension scheme membership is found within the private sector 49
3.4.3. Most employer-sponsored DC membership is in contractbased rather than trust-based schemes 51
3.4.4. The majority of employer-sponsored stakeholder schemes have a small number of contributing employees 52
3.5. Membership segmentation analysis 52
3.5.1. Employees working for smaller companies are less likely to be members of an employer-sponsored pension scheme 52
3.5.2. Employees that are young and those aged over 60 are less likely to be members of an employer-sponsored pension scheme 54
3.5.3. Females are as likely as males to be members of an employer-sponsored pension scheme but part-time workers have lower rates of membership 55
3.5.4. Membership in employer-sponsored pension schemes also varies by industry 57
4. Defined contribtion membership - trends over time 61
4.1. Summary 61
4.2. Introduction 62
4.3. Trends in private pension scheme membership in Great Britain 62
4.3.1. There was a slight decline in the proportion of the population aged between 20 and state pension age in Great Britain with some form of private pension scheme membership between 1999/00 and 2005/06 62
4.3.2. The self-employed saw a more significant decline in membership rates than employees 63
4.4. Trends in employer-sponsored private pension scheme membership 65
4.4.1. Membership of occupational pension schemes is in decline, driven by the closure of DB pension schemes within the private sector 66
4.4.2. Within the private sector, growth in DC contract-based scheme membership since the late 1990s has partly compensated for the decline in DB membership 67
4.4.3. Employers see contract-based DC schemes as less costly and burdensome to tun than DC occupational schemes 69
4.4.4. Most employers who do not currently provide pensions will enml employees into the Personal Accounts scheme in 2012, rather than setting up their own scheme 70
4.5. Timeline of defined contribution events and trends 70
5. Contributions to defined contribution pensions 73
5.1. Summary 73
5.2. Introduction 74
5.3. Aggregate contributions to private pension schemes 74
5.3.1. Total contributions to private pension schemes have risen in real terms by 56 per cent since 1995 75
5.3.2. The net cost to the Government of tax and National Insurance relief on pension contributions was equal to £18.6 billion in 2007/08 77
5.4. Contribution rates to employer-sponsored pension schemes 80
5.4.1. Contribution rates to DC schemes are less than to DB schemes 80
5.4.2. Employer contribution rates to DC schemes have increased at a faster rate than employee contribution rates in recent years 82
5.4.3. There has been much commentary around the impact of the Pensions Act 2008 reforms on DC contribution rates 86
5.5. Design of contribution structures for employer - sponsored schemes 87
5.5.1. Employers are increasingly using 'matching' to contribute to employee pension schemes 87
5.5.2. 'Salary sacrifice' is an increasingly popular way of making contributions amongst employers 88
6. Defined contribution pension investments 91
6.1. Summary 91
6.2. Introduction 92
6.3. Investment choice 92
6.3.1. DC members now have a wide range of investment choices available to them 92
6.4. Use of default funds and life-styling 95
6.4.1. Despite the wide range of investment choices available, the use of default funds tends to dominate 95
6.4.2. Most DC pension schemes use a life-style option as their default 97
7. Defined contribution pension charges 99
7.1. Summary 99
7.2. Introduction 99
7.3. Types of defined contribution charges 100
7.3.1. Both explicit and implicit DC charges exist 100
7.4. Explicit charges 100
7.4.1. The introduction of stakeholder pensions has led to significant reductions in charges for contract-based DC schemes 100
7.4.2. Charges for occupational schemes may be lower than for contract-based schemes 101
7.5. Implicit charges 102
7.5.1. Implicit DC pension charges vary by asset class and degree of active management 102
7.6. Impact of 2012 pension reforms on defined contribution charges 102
7.6.1. The Personal Accounts scheme is intended to be a low cost pension scheme available to all employers 102
8. Defined contribution pension assets 103
8.1. Summary 103
8.2. Introduction 104
8.3. Aggregate defined contribution assets 104
8.3.1. Aggregate assets in UK private pension schemes were worth approximately £1.9 trillion at 2007 104
8.3.2. The recent financial downturn may have had a significant impact on DC asset values 106
8.4. Defined contribution assets with respect to broader household wealth 107
9. Decumulation in defined contribution 113
9.1. Summary 113
9.2. Introduction 114
9.3. Decumulation choice 114
9.3.1. There is a wide range of different types of life-time annuities available and annuity pricing is becoming increasingly sophisticated 114
9.3.2. A wide range of income drawdown products is now available 117
9.4. Use of the open market option 118
9.4.1. Only a third of those purchasing an annuity do so on the open market 118
9.5. Size and segmentation of the annuities market 119
9.5.1. The UK annuities market has increased in size by at least 50 per cent (in volume terms) since 2004 119
9.5.2. The majority of annuities are purchased with a fund size of less than £20,000 and by those aged under 65 120
9.5.3. Falling long-term interest rates and increasing longevity have impacted on annuity rates 122
10. Financial capability, behaviour and attitudes of defined contribution pension members 125
10.1. Summary 125
10.2. Introduction 126
10.3. Financial capability 126
10.3.1. Many people have limited financial capability and understanding of pensions 126
10.4. Behaviour 128
10.4.1. Poor pension decision making can be explained by informational/attitudinal, structural and behavioural factors 128
10.5. Attitudes 130
10.5.1. The recent financial crisis may have made people more sceptical about pension saving 130
11. References 133