Simplification is the key - Centre for Policy Studies

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Table 1: Funded pension scheme assets, 2007, £ billion 32 Occupational pensions £1,505 77% Insurance company administered £440 Self-administered £1,065 Personal pensions £450 23% Insurance company administered £415 Self Invested Personal Pensions (SIPP) £35 Total invested in funded pensions £1,955 100% The composition of these assets has changed over recent years as fund managers have responded to short-term “noise” (global economic downturn, fund deficits and accounting and regulatory pressures) by de-risking their portfolios. As Table 2 shows, the direction of travel has been into bonds, from equities, as well as geographic diversification into overseas investments. Alternative asset classes (such as art and wine), remain almost invisible in pension funds, and property is almost entirely commercial, not least because residential property cannot be held directly within a SIPP. Table 2: UK pension funds’ asset allocation, £ billion 33 1996 2007 Equities 75% 56% UK 53% 26% International 22% 30% Bonds 14% 30% UK 11% 26% International 3% 4% Cash 6% 7% Property (commercial) 5% 7% 100% 100% The long-term consequences of this asset reallocation are, of course, unclear, but in the short term the UK’s pension funds have done less badly than they would have done had they maintained their historic (higher) allocation to UK equities. 1.8 Pensions wealth distribution The distribution of pensions assets is hugely skewed in favour of the wealthy, as Figure 3 illustrates. 32 33 PPI Pension Facts, Table 24, December 2008. The SIPP figure is from Money Management Survey, April 2007, and excluded some providers; therefore an under-estimate. UBS, Pension Fund Indicators. Later date suggests that 49% of DB scheme assets are now held in equities as funds switch into bonds (ACA Pensions Survey 2009, January 2010). 9
Figure 3: Distribution of household private pension wealth, 2006/08 34 Cumulative % private pension wealth 100 90 80 70 60 50 40 30 20 10 0 Line of perfect equality, representing equal wealth distribution 57% 40% 2% 0 10 20 30 40 50 60 70 80 90 100 Cumulative % households This chart shows that the poorest 40% of households own 2% of pension wealth, while the wealthiest 5% and 10% own 43% and 60% of pension wealth, respectively. One consequence of the credit crunch is that there are fewer people saving, but those who do so are saving more. Not surprisingly, they are the better off (with annual net household income of more than £20,000), 35 thereby increasing the polarisation of pensions wealth. The skewed distribution of private pension wealth can be seen by comparing the mean (average) and median of pension wealth for all adults. 36 The mean was £80,400, the median was just £4,900. This data includes adults without any pension wealth; if they are excluded, the mean rises to £141,500. In recent years the proportion of Britons on course to enjoy an adequate retirement income has been a consistent 50%, with minor fluctuations, with a consistent 25% not saving at all. 37 34 35 36 37 ONS, Wealth in Great Britain: Main Results from the Wealth and Assets Survey 2006/08, Figure 6.25, December 2009. Scottish Widows, UK Pensions Report 2009, June 2009. ONS, Wealth in Great Britain: Main Results from the Wealth and Assets Survey 2006/08, Table 6.9, December 2009. ONS, Social Trends 39, page 63, 2009. 10
Page 1 and 2: Simplification is the key Stimulati
Page 3 and 4: THE AUTHOR Michael Johnson trained
Page 5 and 6: A note concerning data Finding a co
Page 7 and 8: These proposals depend upon having
Page 9 and 10: SUMMARY The UK’s long-term savin
Page 11 and 12: any annuitisation requirement, prov
Page 13 and 14: Thus, had pension savings products
Page 16 and 17: INTRODUCTION There has been a flood
Page 18 and 19: PART ONE: THE LONG-TERM SAVINGS LAN
Page 20 and 21: Japan’s savings ratio was once th
Page 22 and 23: scheme contribution rates are lower
Page 26 and 27: 1.9 The international perspective A
Page 28 and 29: Table 4: ISA savers’ income distr
Page 30 and 31: Table 6: The complexity of the tax
Page 32 and 33: Figure 4: Income options upon retir
Page 34 and 35: savings by delivering a framework t
Page 36 and 37: Figure 7: When non-savers might sta
Page 38 and 39: There are other aspects to consider
Page 40 and 41: 3. THE EMPLOYERS’ PERSPECTIVE 3.1
Page 42 and 43: When employees with DC funds retire
Page 44 and 45: More specifically, employers are no
Page 46 and 47: Both businesses do have important c
Page 48 and 49: year. 91 Clearly, there are conside
Page 50 and 51: elderly and the wealthy, not least
Page 52 and 53: 5. THE TREASURY’S PERSPECTIVE 5.1
Page 54 and 55: Whilst the UK’s NRR for the mean
Page 56 and 57: Currently, reducing pensioner pover
Page 58 and 59: Table 13: Net cost of tax relief un
Page 60 and 61: TEE would be hugely attractive to p
Page 62 and 63: 5.6 Tax treatment: international pe
Page 64 and 65: PART II THE PROPOSALS AND THEIR IMP
Page 66 and 67: Proposal 6: post-retirement, amend
Page 68 and 69: 7. TAX SIMPLIFICATION: SOME OPTIONS
Page 70 and 71: 8. THE IMPLICATIONS FOR SAVERS Impl
Page 72 and 73: The higher rate taxpayers’ perspe
Page 74 and 75:
segregated from any employer-sponso
Page 76 and 77:
epresent a further step down the pa
Page 78 and 79:
10. THE IMPLICATIONS FOR THE PENSIO
Page 80 and 81:
Such principles would have to ensur
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Figure 13: The cost of pension savi
Page 84 and 85:
pool of underlying pension assets (
Page 86 and 87:
hardship” facility, whereby cash
Page 88 and 89:
occupational pension scheme benefit
Page 90 and 91:
CONCLUSION We would save more, for
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ACKNOWLEDGEMENTS This paper was cat
Page 94 and 95:
APPENDIX I Summary of proposals fro
Page 96 and 97:
APPENDIX II Value of assets in priv
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depending upon age at the time that
Page 100 and 101:
APPENDIX V PRE-RETIREMENT ACCESS TO
Page 102 and 103:
APPENDIX VII FINANCIAL PLANNING TOO
Page 104 and 105:
APPENDIX VIII THE MODEL 173 The
Page 106 and 107:
GLOSSARY Alternatively Secured Pens
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pensions and earnings, but excludes
Page 110 and 111:
those with earnings above £4,940 b
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in cash terms, i.e. fixed at £770
Page 114:
The UK savings industry is barely t
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