In order to enjoy a comfortable retirement, individuals need to take responsibility for their future. Creating a pension should not be delayed as there may not be time to save enough to maintain a good standard of living. It is important that young people understand what is involved in taking out a pension when they start work - planning their pension gives them more security over their working life and beyond. This case study outlines why it is important to take out a pension and details the main types of pension which are available. It examines how Eagle Star has launched a radical new pension, specifically designed to meet consumer needs in today’s market place.
A European problem
The number of old people in Europe is greater than ever before. This has created certain financial difficulties in supporting this section of the population throughout their retirement. Until recently, there was a relatively large proportion of people of working age who could support the older generation. However, this is no longer the case. For example, the proportion of over-60s in Germany is currently 20%. By the year 2030, it will be over a third. A recent UK government report, ‘The Elderly of the Future’ revealed that, in 35 years time, assuming a pensionable age of 60, there will be just 100 people working to sustain benefits for 80 pensioners.
Throughout the Western world, a similar demographic trend is forcing governments to re-think pension strategies. The International Labour Organisation has warned that government spending on pensions and healthcare for the elderly will become the largest budget item for most industrialised countries during the next ten years. By 2055 in Europe, there could be 1 dependant to every 1.5 members of the working population. In this country, the Government is actively encouraging people to take greater control over their pension planning. As a result, the shift from state to private pensions will accelerate.
How much does retirement cost?
In order to appreciate the importance of pensions, it is helpful to consider what retired people need to buy with their pensions. A 65 year old man retiring today and requiring a yearly income of £10,000 for the rest of his life would need to have put aside around £130,000 as an annuity. You are most likely to have come across the term annuity when playing ‘Monopoly’ - a Community Chest card might read:
‘Annuity matures - Collect £100’
In the real world, we can earn annuities by paying regular sums over a number of years into a pool, or fund, run by an organisation like Eagle Star. When the annuity matures, a fixed yearly sum – an annuity - is received from Eagle Star. Of course, by the time today’s school leavers retire, today’s prices will no longer apply (25 years ago a new Ford Escort cost just £896!) It is hard to assess the cost of living in, say, 30 years time - but it is possible to work out what would be needed in today’s terms and then estimate what might be needed on retirement. There are some things, however, which may be more expensive for pensioners than young people e.g. fuel bills and perhaps money spent on leisure, recreation and holidays.
Types of pension
Pensions can be very complicated - there are many different types and individuals may have more than one. The main sources of pensions are:
These include the basic old age pension, the state earnings-related pension scheme (sometimes called SERPS) and for people who began their working life between 1961 and 1975, the graduated retirement pension.
State pensions depend largely on the amount and type of national insurance (NI) contributions that a person makes during their working life. To qualify for a full basic state pension, an individual needs to have contributed for nine tenths of their working life. This is usually 39 years for a woman and 44 years for a man. Pensions may be scaled back for people who have contributed less. People who take career breaks (in order to look after children) may qualify for home responsibility protection which reduces the number of years that contributions are required for.
These are pensions which people build up either on their own or with the help of their employer. Tax advantages are available on a large proportion of what is paid in. Typically, for every 75p paid in, the Government will make it up to £1.00 because tax is not currently paid on contributions. The main types of private pension are:
- Employer’s pensions. Many people are lucky enough to get pensions with their jobs. In some cases, the employer will pay all of the contributions and in others, the employee contributes as well. Benefits are usually based on either the amount of money paid in, or the time spent in the scheme, in relation to how much the individual is paid. In the latter case, the person will typically get a pension worth one sixtieth of their final pay for every year they have been in the scheme (up to a maximum of two thirds of their final pay).
- Personal pensions. If the employer does not run a pension scheme, the employee can take out a personal pension with an insurance company. Some employers will contribute towards this scheme. On retirement, the funds in money are used to buy an annuity which will provide a pension for life.
Many people also rely on the personal savings they have made. Some may even rely on selling their homes or their businesses.
Creating a new pension
In January 1997, Eagle Star, one of Britain’s leading life and general insurers launched the UK's first personal pension with a money-back guarantee. The Eagle Star Direct pension - believed to have the simplest and lowest charges on the market - signalled a major challenge to other firms offering pensions to the public directly over the phone (such as Virgin and Scottish Widows). In creating the new pension scheme, Ian Owen, the Managing Director of Eagle Star Life UK, recognised that Eagle Star had to position itself as being radically different from other life companies, if it was to stand out in the industry. The company therefore prepared the ground for its new products by openly and honestly acknowledging the industry’s failings, responding to consumer and media concerns and presenting itself as a genuinely fresh voice in the industry.
Eagle Star’s guarantee means that customers who wish to change their minds over the first two years, for whatever reason, will be reimbursed. All fees and charges will be refunded and the current market value of the pension will be transferred to another pension provider. Eagle Star decided to create this new product because: ‘The personal pensions market has for too long been haunted by the dual problem of unclear charges and a high drop-out rate in the early years. We are tackling these difficulties head on and putting the consumer firmly in charge. Our guarantee, together with the freedom to suspend contributions without penalty, means that early surrender problems should be a thing of the past.’
This radical move was designed to maximise consumer confidence in the product. In the early part of the 1990’s, there had been some criticism of private pension scheme selling. A number of customers felt they were being ‘left in the dark’ about the extent of their financial obligations, found that they were paying in more than they had expected and that the pensions they had bought did not always match their expectations. This led to a number of buyers dropping out of pension schemes after quite a short period of time. This was not good for the companies offering pensions, it was not good for the customers and it was not good for the industry. Eagle Star therefore carried out an extensive programme of market research, listening to customers to find out what benefits they were looking for.
- lower costs
- a money back guarantee
- investment choice
- protection if they lost their jobs
- expert advice.
Purchasing financial services over the phone has become increasing popular over the last few years. Telephone banking, insurance and pensions are now an established way of dealing with these products in the United Kingdom. Not only does this provide the customer with the convenience and comfort of carrying out transactions from their own homes, it also often offers considerable saving of cost and time. Organisations offering straightforward financial services over the telephone do not need nation-wide branches with thousands of counter staff. By cutting costs, the provider is able to offer the customer better quality and value for money.
Eagle Star’s charges are simple and transparent: a £2 monthly fee and 1% annual management charge without a financial penalty on customers that surrender their pension schemes.
Eagle Star promises investors that all charges, including any annual management fees will be returned if, for whatever reason, they switch to another pension provider in the first two years.
Pension funds operate by investing the premiums that they receive from the pension holders in a variety of shares and property and by lending money to the government. Eagle Star has an established record in re-investing money deposited with them. Some of the money is placed in secure fixed interest investments, (for example, with the UK government,) while other sums are invested in the UK and overseas companies with the potential for better returns.
Protection if jobs are lost
If a customer loses his or her job through illness or accident, he or she may find it impossible to keep up their pension contributions and retirement income may suffer. Eagle Star promises, at minimal cost, to maintain the payments for as long as the customer is out of work.
Some telephone-based operations do not offer their customers the choice of telephone based or face-to-face advice. Eagle Star believes that customers should be able to choose the circumstances in which they take advice, thus offering all its customers the option – without any obligation and at no extra cost – to deal directly by phone or to meet a fully qualified adviser face-to-face to discuss their needs and explain how the pension plan operates in practice. Eagle Star recognises that many consumers prefer to receive independent financial advice, rather than deal direct with a pensions company. For this reason, the company actively supports independent financial advisers (IFAs), who offer expert advice on pensions and other financial services from a wide range of companies. Eagle Star believes the consumer should be able to choose how they want to buy a pension, whether over the phone, face to face with an Eagle Star adviser, or through an IFA.
When Eagle Star launched its innovative new pension scheme, it needed to be aware of the main competition in the segment of the pension market that it had chosen to enter. At the time, Richard Branson’s Virgin Direct pension launch was generating extensive positive coverage in the consumer media. Eagle Star acknowledged publicly that Virgin had set a new benchmark for the industry and decided to leapfrog, rather than simply emulate, the new entrant to the market.
The unique feature of Eagle Star’s new pension product was the guarantee to refund all charges for any customer wanting to leave in the first two years. This tackled the problem of consumer distrust of the pension industry headon. Eagle Star’s product matched Virgin’s low costs and clear charging structure, but added a choice of investment funds and a no-penalty early surrender clause.
The launch slogan ‘Eagle Star we’re not virgins in the pension market’ was adopted. This played on the irony that a long-established insurer was challenging the fleet-footed newcomer, personified by Richard Branson who was then planning his round-the-world balloon adventure. Given the significance of the story, a press conference was held. The day before, a miniature hot air balloon, carrying the launch slogan, was sent as a ‘teaser’ to national and specialist publications.
Today, personal pensions provide individuals with security in a world of constant change and uncertainty. An increasing number of people are recognising the need to cover themselves financially after they have stopped working. In selecting a pension scheme, it is essential to identify a range of key benefits which meet individual needs and requirements. Increasingly, people are looking to financial services which are sold over the phone because of the associated advantages of cost and convenience. In addition, they want to feel that their pension scheme is reliable, well organised and that, if necessary, they can switch out of the scheme without incurring harsh penalties.
Eagle Star set out to listen to the customer and provide benefits which are market led. By gaining more customers, Eagle Star will be able to grow market share, particularly in pensions.
Eagle Star | Creating a redical new pension