ABERDEENSHIRE ANGLESEY ANGUS ANTRIM ARGYLLSHIRE ARMAGH AYRSHIRE BANFFSHIRE BEDFORDSHIRE BERKSHIRE BERWICKSHIRE BRECKNOCKSHIRE BUCKINGHAMSHIRE BUTESHIRE CAERNARFONSHIRE CAITHNESS CAMBRIDGESHIRE CARDIGANSHIRE CARMARTHENSHIRE CHESHIRE CLACKMANNANSHIRE CORNWALL CROMARTYSHIRE CUMBERLAND DENBIGHSHIRE DERBYSHIRE DEVON DORSET DOWNDUMFRIESSHIRE DUNBARTONSHIRE DURHAM EASTLOTHIAN ESSEX FERMANAGH FIFE FLINTSHIRE GLAMORGAN GLOUCESTERSHIRE HAMPSHIRE HEREFORDSHIRE HERTFORDSHIRE HUNTINGDONSHIRE INVERNESS-SHIRE KENT KINCARDINESHIRE KINROSS-SHIRE KIRKCUDBRIGHTSHIRE LANARKSHIRE LANCASHIRE LEICESTERSHIRE LINCOLNSHIRE HOW THE UK SAVES ESSENTIALS OF THE UK RETIREMENT SYSTEM
LONDONDERRY MERIONETHSHIRE MIDDLESEX MIDLOTHIAN MONMOUTHSHIRE MONTGOMERYSHIRE MORAYSHIRE NAIRNSHIRE NORFOLK NORTHAMPTONSHIRE NORTHUMBERLAND NOTTINGHAMSHIRE ORKNEY OXFORDSHIRE PEEBLESSHIRE PEMBROKESHIRE PERTHSHIRE RADNORSHIRE RENFREWSHIRE ROSS-SHIRE ROXBURGHSHIRE RUTLAND SELKIRKSHIRE SHETLAND SHROPSHIRE SOMERSET STAFFORDSHIRE STIRLINGSHIRE SUFFOLK SURREY SUSSEX SUTHERLAND TYRONE WARWICKSHIRE WESTLOTHIAN WESTMORLAND WIGTOWNSHIRE WILTSHIRE WORCESTERSHIRE YORKSHIRE The 92 historic counties listed are sourced from the Association of British Counties as at October 2019. Contents 4. Industry milestones infographic 6. The global retirement savings challenge
6. The challenge in a UK context
7. Subsequent reforms: 2008-2019
8. The system as at 2019
9. Pensions taxation page
10. The shape of the UK retirement savings market
10. The at-retirement market 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
UK Prime Ministers John Major Tony Blair Gordon Brown David Cameron (Conservative) David Theresa May Conservative Labour Labour and Nick Clegg (Lib Dem) Cameron Conservative (Coalition (Cameron–Clegg) 2010-15) Con. Boris Johnson
Secretaries of State with Peter Lilley Harriet Alistair Darling Andrew Smith John Hutton James Purnell Yvette Iain Duncan Smith Damian Esther Amber responsibility for pensions Conservative Harman Cooper Green McVey Rudd
Alan Johnson David Blunkett Peter Hain Stephen Crabb David Gauke Thérèse Coffey
Major events • Government announces that BSE, or 'mad cow disease', • UK government part-nationalises three leading banks following the global “credit crunch” can be transmitted to humans UK joins • Article 50 deadline for leaving the • US-led military • Death of Diana, Princess of Wales • Britain withdraws bulk of its remaining troops in Iraq European Union extended to October 31, 2019 campaign • Suicide bomb attacks on London's transport network Referendums in Scotland and Wales back the • • Good Friday Agreement on a political against Iraq creation of separate assemblies settlement for Northern Ireland • Large-scale public spending cuts aimed at reducing UK's budget de cit • International intervention in the conict in Libya War in Yugoslavia and Kosovo • • Irish Republican Army (IRA) announces formal end to its armed campaign • David Cameron proposes a referendum on whether September – 9/11 • London hosts the 2012 Summer Olympics and Paralympics • to leave the European Union Air strikes on targets in Afghanistan • Birth of Prince George of Cambridge, who is third in line to the throne • • Voters in a referendum in Scotland reject independence, by 55% to 45% UK voters in a referendum opt to quit the European Union. David Cameron resigns • Formal negotiations begin to end Britain's membership of the European Union •
Industry/regulatory Welfare Reform and Pensions Act • • Child Support, • Pensions Act introduces workplace pensions reform including • FCA introduces a ban on milestones introduces Stakeholder Pensions and Pensions and Social requirement for auto enrolment from 2012 differential charging and DC pension sharing on divorce Security Act replaces commissions in workplace • Pensions Act establishes a new Pensions Regulator and Pension Protection Fund SERPS with the State personal pension schemes Second Pension (S2P) • Employment Equality (Age) Regulations prohibit unjusti ed direct and indirect age discrimination • Pensions Act increases state pensions age for men and women • Finance Act simpli es tax regimes for pensions to 66 by 2020, and amends elements of 2008 Pensions Act Pension Credit Act replaces income support for people aged 60+ • Finance Act changes rules on annual contribution and lifetime balance • with a guaranteed minimum income allowances, annuities and income drawdown rules
Budget Statement introduces “Pensions Freedoms” from 2015, • Deadline for Master Trust authorisation • • Pensions Act, one of the most inuential pieces of primary allowing individuals to withdraw money from pension schemes as applications, March 2019 legislation for pensions, provides a stronger regulatory framework they please, and requires advice for DB to DC transfers for private pensions and increases the State Pension Age for Pension Schemes Act establishes a new regulatory regime for women from 60 to 65 between 2010 and 2020 • Master Trusts that includes an authorisation requirement
Percentages Mandatory minimum contribution rates to UK dened contribution schemes 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Member Employer Total 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 3.0 2.0 Percentages5.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 Contribution Rates to DC Source:United Office Kingdom for National Statistics, the Pensions Regulator, Vanguard estimates, 2019. 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Member Employer Total Number of active members of occupational pension schemes (millions) Weighted-average contribution rates to private sector occupational de ned contribution schemes 3.1 6.6 9.7 2.9 6.1 9.1 1. 8 2.9 4.7 1. 5 2.5 4.0 1. 0 3.2 4.2 1. 0 1. 8 2.8 3.0 2.2 5.2 5.0 3.2 8.1 5.0 3.2 8.2 5.1 3.3 8.4 5.1 3.3 8.4 5.2 3.4 8.6 5.2 3.4 8.6 5.3 3.5 8.8 Mandatory20 Minumum Contribution Rates to De ned Contribution Schemes* 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 3.0 2.0 5.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 Forecasts Source: Office for National Statistics, the Pensions Regulator, Vanguard estimates Millions
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: Office for National Statistics, Vanguard estimates, 2019. Public sector DB Private sector DB Private sector DC
Industry Growth Forecasts 200% 3,700 Total assets (LHS) Retirement income%
Pension assets as % of GDP (RHS) Retail DC% Workplace DC% Funded DB% (£, bn)
0 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: Willis Towers Watson Global Asset Study, IMF, Hymans Robertson, Spence Johnson, NMG, Vanguard estimates, 2019. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
UK Prime Ministers John Major Tony Blair Gordon Brown David Cameron (Conservative) David Theresa May Conservative Labour Labour and Nick Clegg (Lib Dem) Cameron Conservative (Coalition (Cameron–Clegg) 2010-15) Con. Boris Johnson
Secretaries of State with Peter Lilley Harriet Alistair Darling Andrew Smith John Hutton James Purnell Yvette Iain Duncan Smith Damian Esther Amber responsibility for pensions Conservative Harman Cooper Green McVey Rudd
Alan Johnson David Blunkett Peter Hain Stephen Crabb David Gauke Thérèse Coffey
Major events • Government announces that BSE, or 'mad cow disease', • UK government part-nationalises three leading banks following the global “credit crunch” can be transmitted to humans UK joins • Article 50 deadline for leaving the • US-led military • Death of Diana, Princess of Wales • Britain withdraws bulk of its remaining troops in Iraq European Union extended to October 31, 2019 campaign • Suicide bomb attacks on London's transport network Referendums in Scotland and Wales back the • • Good Friday Agreement on a political against Iraq creation of separate assemblies settlement for Northern Ireland • Large-scale public spending cuts aimed at reducing UK's budget de cit • International intervention in the conict in Libya War in Yugoslavia and Kosovo • • Irish Republican Army (IRA) announces formal end to its armed campaign • David Cameron proposes a referendum on whether September – 9/11 • London hosts the 2012 Summer Olympics and Paralympics • to leave the European Union Air strikes on targets in Afghanistan • Birth of Prince George of Cambridge, who is third in line to the throne • • Voters in a referendum in Scotland reject independence, by 55% to 45% UK voters in a referendum opt to quit the European Union. David Cameron resigns • Formal negotiations begin to end Britain's membership of the European Union •
Industry/regulatory Welfare Reform and Pensions Act • • Child Support, • Pensions Act introduces workplace pensions reform including • FCA introduces a ban on milestones introduces Stakeholder Pensions and Pensions and Social requirement for auto enrolment from 2012 differential charging and DC pension sharing on divorce Security Act replaces commissions in workplace • Pensions Act establishes a new Pensions Regulator and Pension Protection Fund SERPS with the State personal pension schemes Second Pension (S2P) • Employment Equality (Age) Regulations prohibit unjusti ed direct and indirect age discrimination • Pensions Act increases state pensions age for men and women • Finance Act simpli es tax regimes for pensions to 66 by 2020, and amends elements of 2008 Pensions Act Pension Credit Act replaces income support for people aged 60+ • Finance Act changes rules on annual contribution and lifetime balance • with a guaranteed minimum income allowances, annuities and income drawdown rules
Budget Statement introduces “Pensions Freedoms” from 2015, • Deadline for Master Trust authorisation • • Pensions Act, one of the most inuential pieces of primary allowing individuals to withdraw money from pension schemes as applications, March 2019 legislation for pensions, provides a stronger regulatory framework they please, and requires advice for DB to DC transfers for private pensions and increases the State Pension Age for Pension Schemes Act establishes a new regulatory regime for women from 60 to 65 between 2010 and 2020 • Master Trusts that includes an authorisation requirement
Percentages Mandatory minimum contribution rates to UK dened contribution schemes 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Member Employer Total 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 3.0 2.0 Percentages5.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 Contribution Rates to DC Source:United Office Kingdom for National Statistics, the Pensions Regulator, Vanguard estimates, 2019. 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Member Employer Total Number of active members of occupational pension schemes (millions) Weighted-average contribution rates to private sector occupational de ned contribution schemes 3.1 6.6 9.7 2.9 6.1 9.1 1. 8 2.9 4.7 1. 5 2.5 4.0 1. 0 3.2 4.2 1. 0 1. 8 2.8 3.0 2.2 5.2 5.0 3.2 8.1 5.0 3.2 8.2 5.1 3.3 8.4 5.1 3.3 8.4 5.2 3.4 8.6 5.2 3.4 8.6 5.3 3.5 8.8 Mandatory20 Minumum Contribution Rates to De ned Contribution Schemes* 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 1. 0 1. 0 2.0 3.0 2.0 5.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 5.0 3.0 8.0 Forecasts Source: Office for National Statistics, the Pensions Regulator, Vanguard estimates Millions
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: Office for National Statistics, Vanguard estimates, 2019. Public sector DB Private sector DB Private sector DC
Industry Growth Forecasts 200% 3,700 Total assets (LHS) Retirement income%
Pension assets as % of GDP (RHS) Retail DC% Workplace DC% Funded DB% (£, bn)
0 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: Willis Towers Watson Global Asset Study, IMF, Hymans Robertson, Spence Johnson, NMG, Vanguard estimates, 2019. Essentials of the UK pension system
To provide context for both domestic and This system has come under increasing pressure in international readers of our UK retirement research, recent decades: this publication summarises the structure of the • The basic State Pension, even though linked UK retirement system and its recent evolution. We to inflation, has become progressively less recommend that this piece should be considered generous relative to earnings; alongside publications such as How the UK Saves • A variety of earnings-linked additional benefits 2019: Member experience from the National have suffered from many revisions to their Employment Savings Trust to provide background underlying calculations, leading to complexity; around the UK pension and retirement system as a • Means-tested “minimum income” benefits have whole. proved an effective way of targeting pensioner poverty, despite their complexity. However, The global retirement savings challenge eligibility criteria have led to a reduction in the value of pensioners’ savings and have been seen Ageing populations, driven by declining birth rates as a disincentive to save; and longer life expectancy, are shifting the balance • Funding pressures, revisions to actuarial between those of working age and retirees. People assumptions and regulatory changes have are working longer, but not by enough to maintain made guaranteed pension incomes more costly. the balance between those who are net producers Employers have moved away from offering DB in of wealth and those who depend on the wealth favour of defined contribution (DC); produced by others. • Uptake of personal pensions has risen significantly. Bundled as “group personal Few workers can now expect the traditional pattern pensions” (GPPs), these have increasingly of 40 years of work for an established employer, been used by employers to step away from with income steadily increasing over time. New occupational provision, allowing employers to forms and patterns of work are emerging – for outsource pure DC provision. example, around five million UK workers are now in some form of self-employment. The parallel decline in worker participation in both occupational and personal plans may have been Meanwhile, the outlook for retirement security a consequence of these changes, or it may have is challenged by low expected investment returns contributed to them. Provision was concentrated alongside weaker economic and productivity among employees of larger firms and workers growth. on relatively high incomes – with many schemes including service or income eligibility rules – but, by The challenge in a UK context the turn of the millennium, it was in decline across all groups. The UK system has traditionally relied on a mix of taxpayer-financed, pay-as-you-go elements By the early 2000s, the situation was becoming and funded provision. The latter comprises a critical. The government brought forward measures blend of both workplace and personal provision to improve access to workplace pensions by across pension and non-pension saving. The main requiring employers to designate a pension for components of the system have historically been: employees. They sought to address complexity • The State Pension, comprising a basic flat- and cost through the introduction of “stakeholder rate element and, at times, earnings-related pensions”, a simple, price-capped personal or group supplementary elements; personal pension product. While expanding access, • Voluntary occupational pension schemes, these measures were largely unsuccessful in traditionally final-salary defined benefit (DB) expanding coverage. schemes covering a large but declining portion of the workforce, as illustrated in the industry milestones infographic on pages 4 and 5.
6 How the UK Saves In 2002, the government set up the independent Subsequent reforms: 2008-2019 Pensions Commission to consider the case for introducing compulsory retirement saving. In 2005, While implementing the Pensions Commission’s the Commission brought forward a comprehensive proposed reforms, two further changes were made: set of recommendations, which were largely • The government underpinned the value of adopted by the government and implemented the State Pension with the “triple lock”, which from 2010. The key features of this programme of ensures that State Pensions are indexed to the reforms were: better of prices, earnings or a minimum annual increase. First pillar To ensure that a simple State Pension would • The 2015 “freedom and choice” agenda retain its value and act as a stable foundation for abolished the previous regime which effectively supplementary saving, at a sustainable cost to imposed annuitisation on DC savers by age 75. taxpayers, the Commission recommended: This allowed them to instead gain access to their • Simplifications to the State Pension to make money in whatever form they preferred ten years it a flat-rate, near-universal benefit indexed to prior to their State Pension Age. earnings. • Changes to the age of eligibility for the State Pension to ensure the pension age would move Establishing Nest broadly in line with future increases in life expectancy, alongside an existing plan to align Nest is a trust-based, occupational pension male and female State Pension Age by 2025. scheme, set up by act of Parliament and run by a Thereafter the age of entitlement would increase non-departmental public body. As an occupational by one year in every ten, reaching 68 by 2045. trust, Nest is governed by a body of independent trustees, though it is also accountable to Second pillar Parliament through the Secretary of State for • Introduction of mandatory auto enrolment, Work and Pensions. Uniquely, Nest’s constitution requiring all employers regardless of size to places on it a public service obligation to provide enrol eligible workers into a qualifying workplace a qualifying plan to any employer and to accept pension. Employees would retain the right to any eligible worker that the employer enrols. As opt out but, where they did not exercise that a consequence, its growth has been significant, right, employers would be required to make a as can be seen from the statistics in Nest annual minimum contribution towards their employees’ reports and How the UK Saves publications from pensions. Vanguard and Nest Insight. The scheme will • Creation of the National Employment Savings ultimately be self-funded through member charges Trust (Nest) – a qualifying workplace pension but, until that point, it receives an interest-bearing scheme with a statutory obligation to accept loan from the government. any employer wishing to use it to meet its auto-enrolment obligations. Nest was designed to ensure that a high-quality, low-cost option was available to everyone irrespective of their commercial “value” to pension providers.
Essentials of the UK pension system 7 The system as at 2019 The full State Pension amount is currently £168.60 per week, equating to £8,767.20 per year, which Using the updated World Bank “five pillars” is approximately 35% of median earnings. Any conceptual framework, the core components of the individual can increase their entitlement by deferring UK’s retirement system are as follows1: their claim: an increase of 1% for every nine weeks deferred, plus any indexation during the deferral Zero pillar period, to a maximum of five years. In addition to the reformed State Pension, some situation-specific, means-tested benefits such as Eligibility for the State Pension was equalised for housing benefit and council-tax benefit remain men and women at age 65 in November 2018. available to pensioners. For individuals whose total State Pension Age for both men and women is income in retirement is below £167.25 per week increasing, and is due to reach 66 by October 2020. (£255.25 for couples), Pension Credit is available to The next proposed increase in the State Pension bring their income up to this level. Age, to 67 for both men and women, will take place between 2026-28. Finally, under current legislation, First pillar the State Pension Age is due to increase to 68 Since 2016, those reaching retirement do so under between 2044-46, however the government has the new flat-rate system. Eligibility is based on proposed a plan – currently under parliamentary retirees’ years of National Insurance contributions review – to bring this timetable forward to between or credits. To receive the full State Pension, a retiree 2037-39. must have accrued 35 qualifying years.
Worker eligibility and contribution levels
Worker eligibility is a function of age and income, as • Aged between 16 and 74 with pro-rated annual depicted in Figure 1, with the following main categories earnings between £6,136 and £10,000. of worker allowed for within the regulations (figures shown are for the 2019-2020 tax year): The employer must enrol the worker if asked to. It must also make the same contributions as though Eligible jobholder: Workers aged between 22 and the worker had been auto enrolled. State Pension Age, with pro-rated annual earnings of at least £10,000, must be enrolled automatically Workers without qualifying earnings or entitled in a qualifying workplace scheme. Where the worker workers: Aged between 16 and 74 with pro-rated chooses to stay enrolled, the employer must make annual earnings no higher than £6,136. Employers on their behalf a contribution totalling at least 8% of do not have to enrol these workers automatically, their earnings, subject to minimum and maximum but they do have to enrol them if they ask to join. earnings levels that are £6,136 and £50,000 Employers are not obliged to make contributions on respectively. At least 3% of this contribution must behalf of these workers, though they can choose to. come from the employer. Individual contributions are made on an exempt-exempt-taxed (EET) basis, Qualifying scheme rules meaning that the contributions made by individuals Qualifying workplace pension schemes must meet are partly offset by tax relief. As a result, in the the following conditions2: minimally compliant case, contribution rates will effectively be 3% employer, 4% employee and 1% • Use auto enrolment and offer a default fund so from the government as tax relief that no active choice is required by the saver to begin saving for retirement; Non-eligible jobholder or opt-in worker: These • Offer contributions consistent with the minimum workers fall into one of three categories; contribution rules; • Aged between 16 and 21 with pro-rated annual • Have annual management charges no higher than earnings of at least £10,000; 0.75% or equivalent; • Aged above State Pension Age with pro-rated • Comply with relevant regulatory criteria, annual earnings of at least £10,000; dependent upon scheme structure. or
1 Old Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform, World Bank, 2005 and subsequent enhancement The World Bank Pension Conceptual Framework, World Bank 2008. 2 The Pensions Regulator, Detailed Guidance for Employers vol. 4 3 Exempt-exempt-taxed (EET), a term describing the UK’s system of pensions tax relief, in which the three letters correspond to the three stages in the taxation of pension schemes. The first E relates to the contributions stage, the second E to the investments stage and the T to the taking benefits stage.
8 How the UK Saves Figure 1 uto-enrolment eligibility • Lifetime ISA (LISA) launched in 2017 to help people either saving to purchase a first home