Pension landscape

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UK Pension
Landscape
August 2015
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Coventry, CV5 7LH
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Table of Contents
I. Executive Summary .................................................... 4
Aim of the survey....................................................................................................................................................4
II. Market Structure and Background .............................. 6
Aims of this section.................................................................................................................................................6
Three tiers of pension provision............................................................................................................................6
Different ways to look at the market.....................................................................................................................6
Number of companies ............................................................................................................................................8
III. Market Environment .................................................. 9
Aims of this section.................................................................................................................................................9
An aging population, increasing the cost of State and private pensions.............................................................9
Poor investment returns put pressure on employers to close DB occupational schemes ................................9
An improving economy........................................................................................................................................10
Auto enrollment changes the workplace pension landscape .............................................................................10
Pension liberalisation transforms the defined contribution pension landscape...............................................11
Increasing pension restrictions at the top end of the income scale ..................................................................12
Retail Distribution Review....................................................................................................................................12
IV. Pension Ownership................................................... 14
Aims of this section...............................................................................................................................................14
Workplace pension ownership transformed by auto-enrolment.......................................................................14
AE leads to rapid growth in DC pensions in the workplace .............................................................................15
Over 4 million members of privately arranged pensions schemes....................................................................16
Over 5 million personal pension holders make or receive contributions to their pensions ...........................16
Younger, lower grade employees benefit the most from AE............................................................................17
V. Pension Contributions .............................................. 18
Contributions often move erratically because of the importance of single premium business......................18
Three pension providers vie for market leadership............................................................................................19
VI. Future issues ............................................................ 21
What happens when AE contributions rise?.......................................................................................................21
Cash withdrawals start to build ............................................................................................................................21
Pension scams on the rise.....................................................................................................................................21
The end of pension tax relief for contributions?................................................................................................22
Abbreviations used in this report.............................. 23

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Executive Summary
Aim of the survey
The aim of this survey is to review the UK pension market landscape and outline some of the key
developments impacting on pension at this point in time.
UK Pension Market faces unprecedented changes….
The UK pension market is undergoing rapid change and transformation. At the start of the pension
process, the introduction of auto-enrolment is leading to a rapid take up of workplace pensions while, at
the end of the pension process, the liberalisation of defined contribution pensions is leading to radical
changes to how pension holders can take money from their pensions.
If these two developments were enough, the Government may be considering changing how pensions
are taxed, possibly moving from today’s Exempt-Exempt-Tax model to a Taxed-Exempt-Exempt model,
which could significantly increase the immediate cost of paying for pensions. Possibly a pointer to future
changes, the Government has already announced tax changes which will erode the tax exempt status of
pension contributions for higher rate tax payers.
 What we know
 The penetration of workplace pensions has risen from 47% of employees in 2011 to an expected
62% in 2015
 Between October 2012 and June 2105, Auto-enrolment had resulted in 5.2 million employees
taking out a workplace pension
 In the first two months of pension liberalisation, £1.8 billion was withdrawn from pension pots
 The 2015 Budget announced that the lifetime pension allowance on pension contributions would
fall from £1.25m to £1m from April 2016 and announced a tapered reduction in the annual
allowance for those with an income of over £150,000 (including pension contributions).
With a more democratic workplace pension market
Auto-enrolment is going someway to even out and make more democratic the ownership of workplace
pensions among UK employees. Traditionally, workplace pension ownership was skewed towards senior
managers, the public sector, those on the higher salaries and those with the greatest workplace
seniority. However, between 2011 (the year before AE was introduced) and 2014 (the year with the
latest data), the largest increase in workplace pension ownership has taken place amongst employees
aged 22-29, among private sector workers and among those earning £200-£300 per week. A large rise
has also been seen among employees in process, plant and machine operative occupations.
 What we know
 Between 2011-2014, the penetration of workplace pensions rose by 21 percent points among
employees aged 22-29 years of age
 Employees earning £200-£300 per week saw a net increase of 20 percentage points in their
ownership of workplace pensions
 Between 2011-2014, the penetration of workplace pensions rose by 16 percent points among
employees in process, plant and machine operative occupations

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 The penetration of workplace pensions among private sector workers rose by 17 percentage
points between 2011 and 2014
With DC pensions coming to dominate the market
The UK pension market was traditionally a market based around defined benefit (DB) occupational
pensions, supported by personal pensions, often owned by the self-employed. But rising longevity and
poor investment returns have put severe financial strains on employers offering final salary or career
average pensions. Many DB pension schemes have been shut completely or closed to new members.
Many employers, as a result, have shifted existing and/or new employees to defined contribution (DC)
workplace schemes and the introduction of auto-enrolment has accelerated this process. Today, most
adults in the UK owning a pension own a DC pension, which makes the liberalisation of DC pensions all
the more important for the future of pension provision in the UK.
 What we know
 In 2015, it is estimated that 45% of employees owned a DB occupational pension (compared
with 83% in 1997), while 25% owned a DC occupational pension (16% in 1997) and 30% (4% in
1997) owned a group personal or group stakeholder pension.
 At April 2014, there were 4.4 million members of privately-arranged (i.e. non-workplace)
personal pensions
 In 2014, DC pensions (personal and occupational) accounted for 64% of all pension contributions,
compared with 58% in 2011
Four potential dangers ahead
Given recent legislative changes, the UK pension market faces four large unknowns in the future.
 Will the rise in contribution rates on auto-enrolled pensions, which will be fully implemented by
2018, cause many of the auto-enrolled to opt out of their workplace pensions?
 Will pension liberalisation cause pension holders to withdraw too much from their pensions and
spend the proceeds unwisely, thereby reducing their retirement income? Alternatively, will they
withdraw too little and keep too much invested, thereby becoming asset rich but income poor?
Without adequate consumer protection and advice, how many pension holders could become
victims to pension scams or the possible mis-selling of investment products?
Will the changes to pension allowances make pension investment less attractive for high-end
earners potentially reducing large lump sum contributions into pension funds?

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Market Structure and Background
Aims of this section
This section will outline how pension provision is structured in the UK and assess how many companies
operate in the pension market.
Three tiers of pension provision
Pension provision in the UK is organized in three tiers:
 Tier 1: The Basic State Pension – this is compulsory for most workers
 Tier 2: The Second State Pension (previous called the State Earnings Related Pension Scheme -
SERPS) – this is an earnings related addition to the basic state pension.
 Tier 2.5: Auto enrolled pensions- a private-state partnership – which were created by the Pensions
Act 2008 and the Pensions Acts 2011 and are compulsory for employers if the employee does not
opt out of the State Second Pension
 Tier 3: Private sector pensions (workplace and personal pensions) – non-State pension provision
The focus of this report is the private pensions market and auto-enrolled pensions (i.e. Tier 2.5 and Tier
3.)
Different ways to look at the market
There are many different types of pension in the UK and these types can be segmented in many
difference ways. Pensions can be segmented by contract type or type of provider, i.e.
 Occupational pensions – the contract is
between the pension holder (an
employee) and the employer with the
employer owning the pension scheme
and responsible for arranging its
administrators etc.
 Personal pensions – the contract is
between the pension holder and a
pension company (e.g. an insurer like
Aviva), even if the pension was
arranged through an employer.
Pensions can he analysed from the point of where the pension is arranged, i.e.
 Privately arranged pensions – pensions arranged by individuals on their own initiative without
any employer involvement

Classification of the main pension types
DefinedContributions
Private
Personal
Workplace
OccupationalWorkplace
Standard personal
Stakeholder personal
SIPP
Group Personal Pension
Group Stakeholder
Group SIPP
Occupational DC
Occupational Defined Benefit

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 Workplace pension – pension arranged by or through employers, with the pension scheme run
by or sponsored by employers. This include personal pensions arranged on a group basis as well
as occupational schemes.
Schemes can also be segmented by how the pension benefits are determined, i.e.
 Defined benefit (DB) schemes - under a DB scheme what a pension holder gets on retirement is
defined (if not the amount then the basis for its calculation).
 Defined contribution (DC) schemes - under a DC pension what the pension holder contributes is
defined but not the benefits.
 Hybrid pensions - Hybrid pension schemes have elements of DB and DC depending on what type
of hybrid they are.
Up until April 2012, private pension schemes could contract-out of the second state pension. The
Pensions Act 2008 provides for the abolition of contracting-out of the State Second Pension for Defined
Contribution occupational and personal pension schemes from April 2012. It is still possible for Defined
Benefit schemes to remain contracted-out.
The key types of pension are as follows
 A standard personal pension – these constitute the bulk of the privately arranged pension market
where individual pension holders contribute into their own personal pension fund which is invested
to generate an income or cash sum when they retire. While the pension holder can have some input
into how their pension fund is invested this is mainly done by the pension provider.
 Stakeholder pension. A lower cost alternative to a standard personal pension, under which the
pension holders decides if and when they will contribute
 Self-invested personal pension (SIPP). A type of privately arranged pension under which the
pension holders can choose and manage how their pension fund is invested
 Defined benefit (DB) occupational schemes. A workplace pension scheme run by the employer. The
defined benefits are determined by a formula that links the benefits to the number of years worked
multiplied by the final or career average salary: e.g. 1/80th
of the career average salary for every
year worked. In addition, these schemes may allow the taking of a tax-free lump-sum cash amount
(e.g. 3/80ths for each year of service). These schemes works on a pooled fund basis, meaning all
contributions are paid into a common fund, which is invested to provide all retirement benefits.
 Defined Contribution occupational schemes. A workplace pension scheme run by the employer.
They have a specified rate of contributions, often based on a percentage of salary or total earnings,
with the rate of contributions either flat or altering by some criteria (e.g. employee’s age, length of
service, seniority level of earnings). Employers may make a base level of contribution for all
employees and may also match any employee’s additional contributions.

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 Group personal pension (GPP): A pension sponsored but not owned by the employer which involves
the employee having an individual contract with a pension provider (like a privately arranged
pension) but run on a group basis.
 Group self-invested personal pension (GSIPP): A pension which operates like a GPP but like a
personal SIPP allows the policy holder to choose where their pension fund is invested.
 Group stakeholder pension: A pension operates like a GPP but has features of a personal
stakeholder pension
Occupational pension schemes are managed and run in two separate ways:
 Self-administration. A self-administered scheme is an occupational pension scheme with units
invested in one or more managed schemes or unit trusts. The trustees of these types of schemes
will employ an in-house fund manager to make the day-to-day investment decisions.
 Insurance managed. An insurance managed scheme is one where investment of the pension
funds for a group of employees is managed by an insurance company: the pension scheme
trustees decide not to self-administer and instead use an external manager, e.g. an insurance
company to manage the investment. This is in the form of an investment contract in which the
insurance company offers participation in one or more pooled funds.
Number of companies
According to the ONS, there are just over 5,000 companies engaged in pension funding in the UK
(5,045). This covers funds, plans and/or programmes organised to provide retirement income benefits
exclusively for the sponsor's employees or members. This includes defined benefits and defined
contribution plans.
In addition, there are another 1,380 companies operating as fund management companies which
engage in portfolio and fund management activities on a fee or contract basis, for individuals,
businesses and others, including the management of mutual funds, the management of other
investment funds and the management of pension funds.

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Market Environment
This section will outline some of the key social, economic and political influences operating on the
pension landscape in the UK.
An aging population, increasing the cost of State and private pensions
As the UK population ages, so a
greater proportion of people are over
the State Pension Age. Increased
longevity means, on average,
pensions have to pay out greater
sums to each retiree. This has proved
particularly problematic for the
defined benefit pension sector, given
the relatively generous pension
payments given under a DB scheme.
This and low investment returns has
increased the number of
occupational DB pensions schemes in
deficit. Future population changes
will only exacerbate this problem.
Poor investment returns put pressure on employers to close DB occupational schemes
Equity markets and gilt
yields are the main drivers
of funding levels of
defined benefit
occupational pension
schemes.
An aging population,
increasing pension
payments, combined with
relatively low investment
returns is increasing the
financial pressure on
employers operating DB
occupational schemes.
According to the Pension Protection Fund (PPF), the aggregate deficit of the 6,057 schemes in the PPF
7800 index is estimated to be £223.1 billion at the end of June 2015, down from a deficit of £241.3
billion at the end of May 2015. However, the position has worsened from the previous year, when a
deficit of £76.8 billion was recorded at the end of June 2014. The number of schemes in deficit at the
end of June 2015 was 4,794, representing 79.1% of the total 6,057 defined benefit schemes. There were
4,808 schemes in deficit at the end of May 2015 (79.4%) and 4,078 schemes in deficit at the end of June
2014 (67.3%).
Source: ONS/IRN Research
18.3%
18.5%
19.3% 19.2%
18.1%
19.3%
19.8%
21.5%
16.0%
17.0%
18.0%
19.0%
20.0%
21.0%
22.0%
2000 2005 2010 2015 2020 2025 2030 2035
Percentage of the population of State Pension Age and over
Source: Pension Protection Fund/IRN Research
£135.3
-£291.7
£8.7
-£367.5
-£223.1
-£400
-£300
-£200
-£100
£0
£100
£200
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
£bn
Aggregate DB Pension Scheme Deficits

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The problems of paying out pension incomes to members of defined benefit schemes has led to a
growth in the bulk annuity market. A bulk annuity involves a pension schemes paying an insurer a
premium, with the insurer writing an annuity that pays the retirement income of a large chunk of a
scheme’s pensioners. In other words, the insurance company takes over responsibility for paying the
pensions to the members of the scheme as and when they become due, and in exchange it receives a
premium. Pension trustees are no longer responsible for paying income to a group of retirees and the
insurer gains financial assets and a premium.
An improving economy
The UK economy is improving and this is finally feeding through to real terms increases in wages and
salaries. This will improve the ability of employees and employers to pay for pensions. UK interest rates
could begin rising at the start of 2016 and this may cause a squeeze on incomes of employees with large
mortgages relative to their incomes and it may slow economic growth. On the other hand, it will tend to
boost the returns on gilts and equities easing the financial pressure on pension fund providers and
employers running occupational pension schemes.
Auto enrolment changes the workplace pension landscape
Auto-enrollment (AE) began in October 2012 and is radically changing the workplace pension landscape
leading to a significant rise in the percentage of employees with workplace pensions. Under AE, every
employer with at least one member of staff now has to enroll all employees meeting certain criteria into
a workplace pension scheme and contribute towards it.
Auto-enrolment is applicable to all employees, aged between 22 and the state pension age, who earn
more than a set amount (initially £8,105 per year and now £10,000) and who are not participating in a
workplace pension scheme. Eventually all employees will be covered under AE, which is being rolled out
over a six year period (2012-2018) at various staging dates, starting initially with the largest companies
and completing in 2018 when employers of all size will be required to enroll their staff in a workplace
pension.
While employers can offer their staff the option of joining a workplace scheme set up under AE,
employees do not have to join and they can leave an AE scheme whenever they wish and re-join at a
later date. Also employees who do not qualify to be enrolled automatically, have the right to join an
employer’s AE scheme by telling their employer that they would like to opt in to the scheme: under the
rules, employers must allow these employees to do so.
Under Auto-enrolment (AE), employers select a qualifying pension scheme for their employees and have
to make contributions to this scheme, with qualifying schemes including:
 A defined contribution (DC) scheme with a minimum contribution; or
 A defined benefit (DB) or hybrid scheme that meets certain conditions.
In practice most employers will be setting up DC schemes. Under AE, all DC pension schemes must
eventually contribute 8% of an employee’s qualifying earnings towards the employee’s pension, of
which at least 3% must come from the employer.

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Figure 2 Minimum contributions for DC schemes under auto-enrolment
* percentages based on the qualifying earnings, which is set at £5,564 (minimum) to £42,475
(maximum).
Source: The Pension Regulator
Also created by the Pensions Act 2008 was the National Employment Savings Trust (NEST). Employers
with an automatic enrolment duty will have to choose a pension scheme they can use for automatic
enrolment. They can use an existing scheme or set up a new one with a pension provider. In addition,
they can use NEST, which is a new, trust based Defined Contribution (DC) pension scheme. Other
separate trust-based arrangements, known as master trusts have also been set up to facilitate
automatic enrolment. Examples of these include NOW: Pensions and The People’s Pension.
Pension liberalisation transforms the defined contribution pension landscape
In the 2014 and 2015 Budgets, the Chancellor announced radical changes to the way that defined
contribution pensions operate in the UK. The new rules impact primarily on how a pension holders aged
55 and over can withdraw money from their DC pensions.
Under the new rules, from April 2015, DC pension holders aged 55 and above can access their pension
fund in full when they retire without the need to purchase an annuity. People retiring will be able to
take a lump sum of up to 25% of the value of the fund tax free but if more than 25% is withdrawn it will
be treated like income and subject to income tax at the person retiring’s marginal tax rate. However,
25% of each sum taken from a pension pot, not just the initial lump sum, is tax-free. Once a person
starts taking money from their DC pension the maximum annual amount of new money they can invest
in any pension covered by the new rules is £10,000.
Given the potential for pension holders to unwisely take too much from their pension pots and leave
themselves open to large tax bills or short of pension income in the future, a new advice service,
Pension Wise, has been set up to offer free and impartial face-to-face guidance on how to withdraw
money from a pension fund.
The new rules also change the status of a DC pension from simply a source of pension income into a
quasi-life insurance. Under the new rules, if the pension holder dies and is aged 75 or over, beneficiaries
will only have to pay their marginal tax rate when they draw the pension as income, as they would with
any pension. If the person who dies is under 75 there will be no tax to pay at all.
Many fear these changes could lead pension holders to withdraw too much money from their pension
pots in a lump sum and leave themselves short of pension income when they retire. There are also fears
that pension holder could be subject to fraud with fraudster encouraging pension holders to withdraw
cash from their pensions and invest in scams or poorly performing investments which come with
excessive charges and fees.
Transitional period Duration
Employer
minimum
contribution*
Total minimum
contribution*
1 Employer’s staging date to 30 September 2017 1% 2%
2 1 October 2017 to 30 September 2018 2% 5%
3 1 October 2018 onwards 3% 8%

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In 2015, future changes to pensions were announced. The Chancellor said that in the future, pensioners
are to be given the new flexibility to trade in their existing annuities for cash. Individuals will be able to
take the proceeds of the sale, taxed at their marginal rate, to use as they wish or to transfer to a
drawdown pension or buy another annuity.
Increasing pension restrictions at the top end of the income scale
Income tax relief is available on individual and employer contributions to
registered pension schemes up to an annual allowance. Furthermore,
employer contributions are not subject to either employer or employee
NICs. Relief is available on individual contributions worth up to 100% of
individuals’ earned income or £3,600, whichever is greater.
Although individuals get upfront relief on all their pension contributions,
they are subject to tax charge on any pension savings in excess of an
annual allowance plus any unused allowance from the previous three
years. The annual allowance for the present tax year (2015-16) is
£40,000.
There is also a lifetime pension allowance which governs how much
pension wealth can benefit from tax relief. The 2015 Budget announced
that the lifetime allowance would fall from £1.25m to £1m from April 2016. Any savings above the cap,
when a pension is taken, will be taxed at 55%. The lifetime allowance is set to rise with the consumer
price index from 2018 to keep pace with inflation.
Legislation in the Summer Finance Bill 2015 also introduced a tapered reduction in the annual allowance
from 6 April 2016, for those with an income of over £150,000 (including pension contributions). This
could mean that individuals with very high incomes may effectively only have a £10,000 annual pension
allowance.
The recent changes to taxation of pensions have made pension contributions less attractive to higher
end tax payers. As such, top executive remunerations will shift from pension contributions towards hard
cash in hand, with many predicting the end to the executive pension.
Retail Distribution Review
The Retail Distribution Review, which came into effect in December 2012, changes the way financial
advisors selling retail investment products (including pensions) have to operate. Commissions on
product sales have been replaced by fees which are only chargeable on the advice offered. Charges have
been made transparent and advisors have to decide if they are to be independent (e.g. offering advice
on the whole market) or restricted (e.g. offering advice on a restricted set of products or only advising
on products from a restricted set of product suppliers).
Following RDR, many high street banks, traditional channels via which pensions were sold, have exited
the market. This has increased the importance of sales via financial advisor networks. At the same time,
advisors have been encouraged by RDR to switch from independent to restricted advice. This in turn has
Annual
Allowance
Lifetime
Allowance
(£m)
2006-07 £215,000 £1.50
2007-08 £225,000 £1.60
2008-09 £235,000 £1.65
2009-10 £245,000 £1.75
2010-11 £255,000 £1.80
2011-12 £50,000 £1.80
2012-13 £50,000 £1.50
2013-14 £50,000 £1.50
2014-15 £40,000 £1.25
2015-16 £40,000 £1.25
Source: HMRC
Pension Allowances

13 | P A G E
forced many pension providers to invest in their own distribution networks or invest in advisor
networks.
The role of advisors in the pension market has also changed. Post-RDR they are less involved in
investment management – instead outsourcing this to discretionary investment managers – and instead
engage mainly in offering retirement planning and pension advice.

14 | P A G E
Pension Ownership
This section presents a brief overview of pension ownership in the UK.
Workplace pension ownership transformed by auto-enrolment
Up until 2012, the penetration of workplace pensions among employees was declining in the UK as
employers withdrew or closed expensive defined benefit pensions to new employees. The low point of
ownership was reached in 2012.
Note 2015 data are estimates
Source: ASHE/ONS/IRN Research
The introduction of auto-enrolment in October 2012
has radically changed the pension landscape. By Jun
2015, AE had drawn in an additional 5.2 million
employees into the workplace pension market. This
number will grow over 2015-16 with 141,000
employers expected to start AE. The total number of
employers still due to introduce AE is 1.8 million,
with the number of employers staging peaking
between July and September 2017.
The Employers’ Pension Provision survey (EPP) 2013
by the DWP found that only 9%-10% of employees
opted out of AE after being enrolled, indicating high
take up rates. Around 9 million employees are
expected to be auto-enrolled by the end of 2018.

15 | P A G E
AE leads to rapid growth in DC pensions in the workplace
Most of the employees who have been auto-
enrolled into company pensions have been
enrolled into DC pensions.
The latest figures for March 2015, show that
89% of auto-enrolled employees are enrolled
in DC pension schemes.
As a result, in 2014 for the first time less than
half of employees with a workplace pension
were enrolled into a defined benefits
scheme.
Note 2015 data are estimates
82.8%
78.1%
63.9%
60.2%
59.0%
49.2%
44.6%
1.4%
8.3%
21.0%
21.9%
23.3%
26.5%
30.1%
15.8%
13.6%
13.2%
15.1%
16.9%
23.1%
25.2%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%
1997
2000
2011
2012
2013
2014
2015
% of employees with a workplace pension
The types of workplace pension owned by employees with
workplace pensions
Occupational Defined Contribution Group Personal and Group Stakeholder Defined Benefit
First Time DB
pensions owned by
less than 50% of
employees with a
workplace pension

16 | P A G E
Over 4 million members of privately arranged pension schemes
Privately arranged pension schemes have just over
four million members, according to the latest data
from HMRC.
This represents 45% of all the members of personal
pension schemes (private and workplace combined).
This figure it should be noted is a membership figure
and not the number of individuals owning a private
pension: one individual may own more than one
personal pension, this being especially so for those
with privately arranged pensions.
Over 5 million personal pension holders make or receive contributions to their
pensions
The number of individuals making or receiving contributions into their personal pensions was declining
between 2007/8 to 2011/12 but it rose slightly in 2012/13, possibly reflecting the growth of group
personal DC pensions because of auto-enrolment and improved economic conditions.
3,056 3,071.50
3,050 2,720.00
2,975 2,427.50
3,157 2,273.00
3,337 5,283.00
Note: the above data covers individuals owning workplace and private personal pensions
Source: HMRC/IRN Research
6,980
7,810
7,180 6,900
6,110
7,160
7,630
6,390
6,040
5,680
5,310 5,470
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
(000)individuals
No of individuals making or receiving contribution to personal pensions
Members
(000)
% of
total
Privately arranged personal pensions
Personal pensions and SIPPS 3,530 37%
Stakeholder personal pensions 840 9%
All 4,370 45%
Workplace personal pensions *
GPP and Group SIPPS 4,430 46%
Group Stakeholder 870 9%
All 5,300 55%
Total 9,670 100%
* employer sponsored
Source: HMRC/IRN Research
Year ending April 2014

17 | P A G E
Younger, lower grade employees benefit the most from AE

18 | P A G E
Pension Contributions
Contributions often move erratically because of the importance of single premium
business
There has been a large fall in contributions in Q1 2015 compared with Q1 2014 and this seems to be
related to changes in lump sum pension contributions, which often cause contributions to move
erratically from year to year. Lump sum payments come in many forms but three are the most
important
Note: Contributions = Premiums earned on contracts with UK and overseas policyholders. Net of
reinsurance ceded (reinsurance accepted in the UK and overseas, less rebates and refunds in the UK and
overseas).
* private personal plus workplace personal
** There is an element of double counting in the figures as the data on insurance managed funds are
reported both by insurance companies and self-administered pension funds
£38,316 £38,943 £38,888 £42,582
£33,404 £29,214
£6,943 £7,868
£52,504 £47,626 £44,944
£48,957
£55,044 £67,044
£18,886 £14,165
£128,586 £132,184 £127,567
£140,192 £135,780 £137,057
£37,676 £33,274
£0
£20,000
£40,000
£60,000
£80,000
£100,000
£120,000
£140,000
£160,000
2009 2010 2011 2012 2013 2014 Q1: 2014 Q1: 2015
£m
Breakdown of pension contributions by type of pension, 2009-15
Personal pensions Occupational: Insurance managed Occupational: Self-managed*
29.8% 29.5% 30.5% 30.4%
24.6% 21.3% 18.4% 23.6%
40.2% 42.8% 41.2% 43.1%
42.0%
35.9% 38.4%
35.0%
29.6% 26.9% 27.2% 25.7%
32.4%
42.2% 42.3% 40.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011 2012 2013 2014 Q1: 2014 Q1: 2015
Personal DB occupational DC occupational Hybrid

19 | P A G E
Form 1 represent lump sum payments often made by wealthy individuals who receive most of their
income as annual bonus payments or by business owners who receive annual dividend payments.
According to the ONS, total bonus payments received across the whole economy during the period May
2013 to April 2014 were £40.5 billion – an increase of 4.9% compared with a year earlier. Across the
economy as a whole, bonuses increased to 6.0% of total pay in the year to April 2014. This is the highest
level seen since before the economic downturn, when bonuses made up 7.1% of total pay in the year to
April 2008. Figures for 2015 are not yet available but bonus payments may have fallen back slightly in
the year compared with 2014.
Form 2 are lump sum payments reflecting carry forward, Carry forward allows individuals to contribute
more than the annual pension tax allowance without incurring tax charges. Through carry forward,
contributions that exceed the annual allowance in one tax year can use up unused annual allowance
from the three previous tax years. It is often used to sweep up contributions tax relief that savers have
not chosen to, or been unable to, use in recent tax years. Again, this is often used by wealthy individuals
whose bonuses/profits can move erratically for year to year.
Form 3 represent one-off payments into occupational DC pension funds by employers who are trying to
reduce their fund’s financial deficit. These often occur in the first quarter of a given year, after
employers have reviewed the status of their funds at the end of the previous year. According to the
ONS these one-off payments were relatively high in the first quarters 2012 (£8 billion), 2013 (£8 billion)
and 2014 (£5 billion) but have fallen back in Q1 2015 (around £3 billion).
The reduction in contributions in Q1 2015 compared with Q1 2014 may also reflect the reduction in
lifetime and annual tax allowances on pensions, which are making pension contributions less attractive
for higher-end tax payers.
* personal pension and insurance managed only
Three pension providers vie for market leadership
Three pension providers – Standard Life, Aviva and Legal & General – compete for leadership of the
pension market, each with their UK pension premiums representing around 8% if all pension
82.1% 82.9% 82.0% 82.1% 83.4% 84.2% 84.3% 83.8%
17.9% 17.1% 18.0% 17.9% 16.6% 15.8% 15.7% 16.2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2009 2010 2011 2012 2013 2014 Q1: 2014 Q1: 2015
Breakdown of prension contributions*, 2009-2015
Single premiums Regular premiums

20 | P A G E
contributions received by UK pension companies. Aviva moved into a market leading position only in
2015 following its acquisition of Friends Life in that year.
Note shares based on UK pension premiums received and total premiums.
* including HSBC Life taken over in 2014
** Friends Life, acquired in 2015
Source: IRN Research based on company information or estimates where company information is missing
8%
8%
6% Aviva
4%
3%
3%
3%
2%
1%
1%
1%
1%
1%
1%
1%
1%
1%
2% FL**
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
Standard Life
Legal & General
Aviva plc
Lloyds Banking Group
Prudential
Aegon NV
FIL
Pension Insurance Corporation (PIC)
Guardian Assurance
Blackrock
Swiss Re*
Rothesay Life
Axa Wealth Limited
Mobius Life
Just Retirement
Canada Life
Liverpool Victoria Financial Services
% of total premiums
The leading pension companies by premiums, 2014
8%

21 | P A G E
Future issues
What happens when AE contributions rise?
A key feature of AE is the increase in minimum contributions to 8% by October 2018. This will increase
contribution costs for both employer and employees and it could result in an increase of AE opt outs by
employees. Some in the pension’s industry have argued for the introduction of auto-escalation, whereby
employers increase member contributions annually by a set increment, most commonly 1%, thereby
easing the transition to higher contribution rates.
If the increase in contributions does result in greater opt outs above the current rate of 9%-10%, it could
limit the potential impact of AE in increasingly pension coverage in the future.
Cash withdrawals start to build
Data from the Association of British Insurers shows that more than £1.8 billion was withdrawn in almost
a quarter of a million payments from DC pension in first two months of pension liberalization, i.e. May
and June 2015. In particular,
 £1billion in 65,000 cash withdrawals were taken from pension pots under the new lump sum tax
rules (i.e. Uncrystallised Funds Pension Lump Sums). The average pot taken was £15,500.
 £800m worth in payments was taken from pension pots as income drawdown policies in
170,000 withdrawals.
The ABI data also shows that people with smaller pots tend to be cashing them out while those with
larger pots tend to be buying regular income products.
However, not all pension holders have been able to take cash from their pensions. Many have faced
high exit fees if they want to access their fund early. The problem lies in the fact that the pension funds
of many pension holders were set up many years ago and were structured to pay out in 15 or 20 years’
time, and were not designed to pay out early. To handle the unexpected withdrawals from the funds,
providers are asking for large exit fees.
With cash withdraws rising, traditional annuity holders are responding by introducing a new range of
flexible annuities, designed to meet the needs of pension holders to withdraw cash and yet still generate
a retirement income.
Pension scams on the rise
According to The Pensions Regulator there is an alarming gap in public knowledge as to the potential for
scams involving making cash withdrawals from pensions under the new pension liberation rules. Pension
scams can occur when people with a pension are targeted by organisations who claim they can help
them cash in their pension early. Typically, ‘pension loans’ or ‘cash incentives’ are offered, along with
misleading information, to entice savers to request a transfer out of their workplace pension. This can
result in them losing a substantial part of their pension fund and facing a large tax bill.
Fortunately, the TPR’s latest ‘perceptions report’ shows that informed parties are much more award of
scams than the general public. The latest report (published in July 2015), shows that only 3% of relevant
audiences (including lay trustees, in-house administrators, pension scheme managers and third party

22 | P A G E
administrators) had never heard of pension scams. Around three quarters (76%) had heard of pension
scams but not experienced them, while a fifth (20%) have had direct experience of them.
Data released by the City of London police in July 2015 and reported in the Financial Times, revealed
that pension scam losses increased 235% in May 2015 to £4.7m from £1.4m in April. There were 3,704
reports of pension liberation fraud in the two years to May 2015, with combined losses of around £25m
and average losses of around £15,000.
The end of pension tax relief for contributions?
The Government published a consultation Strengthening the incentive to save: a consultation on
pensions tax relief Ideas with the 2015 Summer Budget. It set out ideas for changing how pensions are
taxed. The current system is an Exempt-Exempt-Taxed (EET) system, i.e.
 Exempt. Pension contributions by individuals and employers are exempt from income tax, and
employer contributions are also exempt from National Insurance contributions (NICs) (although
total contributions are subject to both an annual allowance and a lifetime allowance).
 Exempt. No personal tax is charged on investment growth from pension contributions while in
accumulation, subject to the lifetime allowance.
 Taxed. Pensions in payment are taxed as income, but individuals are able to take up to 25% of
their pension fund as a tax-free lump sum on retirement
The Government has moved to reduce the first level of tax exemption by reducing the lifetime and
annual pension allowances and has reduced the taxation element for most pension holders. As such the
current pension regime has moved closer to a Taxed-Exempt-Exempt (TEE) system as used for ISAs for
example. Under a full TEE system, pension contributions would be paid out of post taxed income but
withdrawals from the pension fund would be tax free. Under a TEE system, the Government may
provide a contribution top up to prevent individuals withdrawing cash from the pension and using the
pension fund like a pension ISA account.
One concern with a move to a TEE system is that ending tax exemption will greatly increase the cost of
contributions for employers and employees and this could cut the level of contributions.
Another problem is that such a move could result in two separate tax regimes, one for DC and one for
DB schemes.

23 | P A G E
Abbreviations used in this report
AE Auto-enrolment
ASHE Annual Survey of Hours and Earnings
DB Defined Benefits
DC Defined Contributions
DWP The Department for Work and Pensions
GPP Group Personal Pensions (including stakeholder pensions and group self-invested pensions)
GSIPP Group self-invested personal pension
GPS Group personal and stakeholder pension
HMRC Her Majesty’s Revenue and Customs
NEST National Employment Savings Trust
ONS Office for National Statistics

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