The Scottish Widows UK Pensions Report. A major assessment of pensions savings behaviour June 2010

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1 The Scottish Widows UK Pensions Report A major assessment of pensions savings behaviour June 2010

2 Foreword The recent recession and continuing financial uncertainty have led many people to undertake a fundamental reassessment of their finances. The national review of public spending and worries about debt have been reflected in homes around the UK, particularly where there have been concerns about job insecurity and financial hardship. This led to a sharp rise in the household savings ratio in 2009, driven by debt reduction as well as by increased savings. But what has been the effect on our retirement planning? In this, our sixth Scottish Widows UK Pensions Report, we reveal that there has been a significant decline in preparedness for retirement in the last year. The Scottish Widows Pensions Index, which measures the percentage of those who could and should be providing for their own retirement who are currently doing enough, has fallen back below 50% after three successive rises. The Scottish Widows Average Savings Ratio, measuring the savings of those who are not expecting their main retirement income to come from a defined benefit pension scheme, has remained stable, but this reflects a growing gap between those who are putting aside large amounts and those who are doing little or nothing. Particular concerns are that there is a rapid deterioration in the position of women over 50 and an apparent reduction in confidence in employers defined benefit pension schemes. We will explore these and other issues, and what can be done about them, in more detail in further reports over the coming months. The Scottish Widows UK Pensions Report is widely regarded as one of the most authoritative surveys of consumers preparation for retirement. The range of questions asked and large sample size of over 5,000 UK adults combine to produce robust analysis of changes in attitudes and behaviours over time. This provides a solid foundation for Scottish Widows, policymakers and other interested groups to consider what more can be done to help all consumers prepare for a comfortable retirement. We hope that you find this edition of the Scottish Widows UK Pensions Report interesting and helpful. Ian Naismith Head of Pensions Market Development Scottish Widows

3 Contents Executive summary 2 Introduction The state of the nation s pensions savings 4 Part 1: 2010 Pensions Index and Savings Ratio key findings 5 Part 2: Are Britons prepared to work longer and save more? 10 Conclusions 13 Appendix 1: The Pensions Index and the Average Savings Ratio 14 1

4 Executive Summary The sixth annual Scottish Widows Pensions Report reveals just how much the nation s savers are having their finances stretched. This year they are saving and spending less not only in an attempt to pay off their debts, but also because real household incomes are falling. There is simply less money to go round. With the prospect of rising mortgage costs, alongside likely tax rises and yet more job losses, it is easy to paint a negative picture of the next 12 months. In spite of the short-term financial squeeze being placed on UK households, the need to address the long-term financial challenges brought about by increasing life expectancy remain as strong as ever. Yet faced with an ageing society and the prospect of having to fund retirement, perhaps lasting as long as 30 years, Britons continue to save insufficient amounts. Less than half of all UK people who could and should be saving just 48% are now saving adequately for retirement. Women continue to lag behind their male peers. It is particularly worrying to see that so few women over the age of 50 are properly preparing for retirement with nearly two-thirds in this group falling short of their needs. With the government proposing to extend working lives by raising the state pension age, we see that attitudes to working longer are beginning to shift, a sign that people are beginning to realise that saving alone will not help them to fund their retirement. But with the level of pensions adequacy falling sharply, it is clear that people s expectations about their retirement age are not changing rapidly enough to fill the likely retirement income gap. The research was carried out online by YouGov who interviewed a total of 5,046 UK adults over the age of 19 between 22 April and 28 April

5 The Scottish Widows Pensions Index The Pensions Index focuses on those who can reasonably be expected to save for their retirement those between the age of 30 and state pension age who earn more than 10,000 per year and relates retirement income needs to the current working age income of respondents. Typically, we assume that people will need around 60 70% of their pre-retirement income once they are in retirement. Only 48% of the current generation of savers are making enough provision for their retirement. This is down sharply from 54% in In total 21% are saving nothing in This compared to 19% in The number of women saving nothing stands at 25% this year while for men the figure is 19%. There are 3 factors driving this shift. These are falling confidence in final salary schemes, increasing pessimism among the over 50s and the impact of the recession. However, having access to a pension of any type is likely to be the best defence against the danger of developing a retirement savings gap. We find that the number of people relying on a final salary (defined benefit) scheme has decreased from last year and worryingly we find that confidence in final salary pensions has slumped. While 49% were confident in their scheme last year, this is now just 42%. The Scottish Widows Average Savings Ratio This measures average savings (as a percentage of the individual s annual earnings) and focuses on those who are not relying on a final salary for their retirement income. The baseline Scottish Widows Average Savings Ratio stands at 9.2% in This is slightly below the 9.3% figure recorded in Those with annual household incomes between 10,001 30,000 saved just 7.7% of income; this compared to 11.1% of those with household incomes over 50,000. There was also a clear gender divide with men saving on average 9.5% of their income compared to 8.7% for women. Married people or those in a civil partnership are likely to save more of their income 9.9% in total. This compared to 9.3% among those who are simply cohabiting and 8.4% for single people. People with young families (children under 5) contributed only 8.2% on average. Scotland topped the survey as the nation s best savers contributing on average 11.4%. The South West and South East of England, and Yorkshire, also saved over 10% of their incomes on average. 41% of Britons claim that they are now saving less as a result of the recession, while one-third think that the economic downturn will impact on their pension to a great extent. Nearly half of women over the age of 50 (45%) are saving less as a result of the downturn. Nonetheless, having access to some kind of pension remains critical to increasing savings: 13% of those with access to a pension are saving nothing, while the figure for those without a pension increased to 56%. 3

6 Introduction: The state of the nation s pensions savings The Scottish Widows Pensions Report is now entering its sixth year. In many ways, this year is unique. The financial pressure being created by the economic downturn is being felt everywhere. During recessions households typically save more or pay down debt driven by the precautionary motive (i.e. the fear that they might lose their job and need a pot of cash set aside to pay the bills should the worst happen). As a result of which, last year witnessed the UK s official household savings ratio peak at 8.4% in the third quarter of However, with the ratio falling back towards 7.0% in the final quarter of 2009, and the Scottish Widows Pensions Index showing a major drop on 2009, there is now considerable evidence to suggest that the recessionary impact on savings behaviour is already running out of steam. Our findings reveal that average household income in 2010 is 35,100, down slightly on the 35,200 recorded in Using the government s preferred measure of inflation, the Consumer Price Index (CPI), which stood at 3.7% in April , this represents a fall in real household incomes of almost 1,200 per year. Combined with increasing taxes (VAT up 2.5% in January) and high fuel costs, incomes are being squeezed. It is not surprisingly then that the Scottish Widows Pensions Index has recorded a major fall in In addition to the financial pressures within UK households, the government is also having to rethink whether the levels of welfare entitlement seen previously are going to remain sustainable for much longer. The problems experienced in Greece during the spring, which have seen the country forced to introduce swingeing cuts to public spending, are already proving to be a precursor for what is now happening elsewhere. The UK is not immune from these challenges. With the UK government borrowing 155bn during , we are now faced with some very tough decisions about how best to restructure the nation s finances. The outcome of those decisions could mean that 2010 represents a significant year for the future landscape of Britain s pension system. We have already seen attempts by the government to withdraw fiscal incentives for very high earners making large annual contributions into their pension pots. The government could seek to reduce further the tax incentives enjoyed by higher income groups, while possible reforms to the generosity of public sector pensions could result in the 6 million 4 public sector workers being faced with the prospect of reduced occupational benefits. The need to consider the views of the general public in shaping how that debate plays out will be critical in ensuring the greatest possible degree of public consensus. 4

7 Part 1: 2010 Pensions Index and Savings Ratio key findings In sharp contrast with the upward trend in recent years, 2010 shows a marked deterioration in the UK s level of pensions preparedness. The percentage who are on track for a comfortable retirement has now fallen back to levels not seen since The Scottish Widows Pensions Index The Pensions Index focuses only on those who could and should be saving for their retirement. We define those people as working, being between the age of 30 and state pension age (65 for men, 60 for women until April 2010) and earning 10,000 per year or more. For each group we estimated how much they need in retirement as a percentage of their current working age income, and concluded that for all earnings levels a contribution rate of 12% of earnings should be sufficient to provide an acceptable living standard. Those expecting to receive their main retirement income from a final salary pension scheme are also treated as preparing adequately. (See Appendix 1.) Scottish Widows Pensions Index % 18% 21% 13% Scottish Widows Pensions Index 2009 Not Saving Seriously Under Somewhat Under Saving Adequately Trends in the Pensions Index (% who are prepared for retirement) % 19% 17% 10% Not Saving Seriously Under Somewhat Under Saving Adequately Against what is undoubtedly a gloomy outlook, it should not come as a surprise to see the 2010 Scottish Widows Pensions Index fall. However, what is surprising is the severity with which we have seen the Index fall after three successive rises it ranks as the second lowest annual score since the Index was first published in Overall, we find that only 48% of the current generation of savers are making enough provision for their retirement. This is down sharply from 54% in Fewer Britons only 40% of those aged 50 and over think that they are currently doing enough to plan for their retirement. 5

8 Of those who could and should be saving for their retirement, we find that in total 21% are saving nothing in This compared to 19% in The number of women saving nothing stands at 25% this year while for men the figure is 19%. 13% of those with a pension are saving nothing, while the figure for those without a pension increased to 56%. This year 89% of people who enjoyed access to a final salary scheme were on track for an adequate retirement income, this is up 3% from 86% in While the preparedness of pension savers has held up in 2010, many of our other well-prepared groups have seen a major decline. This includes married people (down 9% on 2009); outright homeowners (down 9%); public sector workers (down 9%); and those earning over 50,000 per year (down 8%). Again, this underscores the importance of government and industry attempts to widen access to private pension savings, especially when one considers that only 4% of those who do not have a pension are currently on track for an adequate retirement. Factors driving the fall in the Index We identified three key drivers in 2010: 1. Less confidence in final salary schemes The fall in the Index seems to be explained primarily by a decline in confidence in final salary schemes particularly among older workers. This year we see the number of workers who are relying on a final salary scheme as their main source of retirement income falling from 35% last year to 30% now. Among those people of working age who currently enjoy access to a final salary pension, we see that confidence has slumped. While 49% were confident in their scheme last year, just 42% were confident. After years of negative media coverage about the poor health of final salary schemes, there is also considerable concern about the size of final salary pension fund shortfalls. This was cited by 1-in-5 respondents in final salary pensions. 2. A more pessimistic outlook among the over 50s It is older workers particularly women over 50 who are most likely to have had their confidence shaken by the recent economic and financial turmoil. The recession has affected sentiment among the older population to a much greater extent that the younger population. Whereas one-third of those aged feel worse off now compared with a year ago, the figure increases to over half of those aged over 50. This figure is highest among women aged over 50. Pessimism about long-term finances (by age and gender) % 11% 13% 6% 11% 16% 10 18% 19% 24% 24% 26% 31% 0 Male Male Male Female Female Female Pessimistic very pessimistic 6

9 3. The ongoing impact of the economic downturn Some 41% of Britons claim that they are now saving less as a result of the recession while one-third of those with a pension think that the economic downturn will impact on their pension to a great extent. 59% think that there will be some impact. Only 1-in-8 people think that there will be no impact at all. This feeling that the recession has negatively affected retirement plans is greatest among those who are closing in on their retirement date and have less time to do anything about it. Saving less in the recession by age and gender Gender or generation: where is the big pensions divide? The traditional gender pensions gap remains a feature of the pensions system though this year s findings once more reveal that the gap is as much between generations as it is between the sexes younger women have more and more in common with their male peers than they do with older generations of women. Pensions preparedness among younger women is almost identical to that of younger men: 46% of women aged are on track for a comfortable retirement compared with 48% of men in that age group. 30% 38% 39% 43% 43% 45% Meanwhile the difference between older women and older men remains stark. 60% of men over the age of 50 are adequately preparing for their retirement. This falls to just 38% of women of the same age. For that generation of women there is clearly going to be a greater degree of dependency on others in retirement whether it be dependency on their spouse or the state pension Men Women Older people have seen their savings behaviour curtailed more than young people. Nearly half of women over the age of 50 (45%) are saving less as a result of the downturn. This is consistent with a major drop in pension preparedness among this group as measured in the Pensions Index. The dramatic narrowing of the gap at younger ages and widening at older ages suggests that women in mid-career are increasingly taking control of their own retirement planning, but those who are approaching retirement may have lost confidence in the system and be giving up. 7

10 Scottish Widows Pensions Index by age and gender % 45% 61% 52% The Scottish Widows Average Savings Ratio The Scottish Widows Average Savings Ratio tracks annually the average savings level of those in the Index group not relying on final salary pension schemes. Each year we measure the overall average against our benchmark of 12%. This figure is based on someone aged between 30 and state pension age earning over 10,000 per year and compares with the auto-enrolment benchmark of 8% of band earnings, which assumes that people start saving earlier at age 22. Both models result in similar outcomes by way of the likely retirement income. Age Men Age 51+ Women The baseline Scottish Widows Average Savings Ratio stands at 9.2% in This is slightly below the 9.3% figure recorded in 2009; the high watermark for the UK s savings level since we started the tracker in The UK Average Savings Ratio % 46% 60% 38% Age Men Age 51+ Women UK Savings Ratio (% of income saved by gender) Base Male Female 8

11 Alongside gender, there are a number of other factors that appear to affect savings behaviour: The impact of household income over personal income Personal income is less likely to be a major factor when compared with overall household income. People earning personal incomes between 10,000 30,000 per year saved on average 9% of that income, compared to 9.4% for those with annual personal incomes over 50,000. There is a much bigger gap when looking at the wider household picture. Those with annual household incomes between 10,000 30,000 saved just 7.7% of income; this compared to 11.1% of those with household incomes over 50,000. The Scots emerge as the UK s best savers People in the South West and South East of England, as well as those in Yorkshire, all save in excess of 10% of their income on average. However, we found that Scotland topped the Savings Ratio in 2010 there the average amount saved equalled 11.4% of income. At the other end of the scale, those in the North East only average 6.5% of their income saved. Young people lag behind People in their early 40s and those above 50 are the most prolific savers. The savings ratio peaks at 11.5% of those aged years old. Married people and those with grown up children do particularly well People who are married are likely to save more of their income 9.9% in total. This compared to 9.3% among those who are simply cohabiting and 8.4% for single people. Those with children aren t necessarily likely to be saving less of their income, though those with young children are. We found that people with young families (children aged under 5 years) are likely to save around 8.2% of their income. This compared with 10.3% of income among those parents whose children are aged over 18. Homeownership Homeowners those who own their home outright are among the most impressive saver groups contributing around 13.3% of their incomes to savings each year. Homeowners are one of the few groups to be saving more than the magic 12% target. Access to a pension and saver type Those with a pension will also save much greater amounts. Someone with one or more pension will save on average 11.5% of their income, compared to just 3.7% among those with no pension at all. This confirms that ownership of a pension is perhaps one of the biggest single spurs encouraging people to save. How people save makes a huge impact. Regular savers saved on average 13.5% of their salary compared to just 8.1% among those who save from time to time. 9

12 Part 2: Are Britons prepared to work longer and save more? That the government should now seek to squeeze its budget seems natural given that the recession has already squeezed household incomes. Our findings show that average household incomes have fallen in real terms by around 1,200 since 2009 which has in turn prompted households to cut their spending largely on what might be considered discretionary spending items such as buying clothes or eating out as well as cutting how much they save too. In total, 41% claim to be saving less due to the economic downturn. This has been reflected in this year s Pensions Index. After last year s improvement in the Pensions Index it seems that the ability of UK households to save for the long-term is now running out of steam. People are saving less... 6% People are spending less... 33% 5% 3% I am spending less I am spending more 59% No impact on my spending Don t know Worries over the mortgage interest rates and the job market may add to these woes in % 10% I am saving less I am saving more 41% No impact on my saving Don t know The Monetary Policy Committee of the Bank of England, in its inflation report in May 2010, predicted a rise in base rates before the end of Meanwhile, concerns over a potential double dip recession have not been allayed either, with predictions of future job losses totalling some 300,000 in the public sector alone 6. Britons are clearly facing strong economic headwinds. But all the negativity arising from the current financial crisis has prompted some positive outcomes. People are generally less inclined than in previous years to think that pensions saving as something they can put off. The age at which people think they should start to save for retirement is just over 29 years. This is still some way from the 22 years envisaged as the starting age for saving under automatic enrolment. Equally, the age at which people expect to retire has now increased slightly. In previous years, people s retirement age expectations have been doggedly fixed. Now, the first time we see a subtle shift in attitudes. 10

13 Working longer... People are slowly starting to accept that they will need to be more flexible in how they approach retirement. This is particularly true of younger workers who are likely to have less fixed notions of what their retirement will look like those aged were more likely to be open to staging their retirement from full-time to part-time before retiring as opposed to an immediate transition from full-time to retirement. The age at which people would like to retire, taking their financial situation into account, is 62. This figure has increased from 61 years as reported in The maximum age at which people would not be willing to work any longer is 67. Again, this has increased on the 66 years which was reported in 2009 and is moving closer to government s proposed retirement age of 68. There has been further upward movement in the age at which people thought that they can realistically look to retire. This now stands at 65 years. Among those in the pre-retirement age group (over 50s) this is slightly higher still at 66. As well as working longer, people also envisage a more flexible retirement with 71% who would prefer to stage their retirement. However, amongst those who said they would like to stage their retirement, the average age at which this phasing, from part-time to full-time, would begin is just 57 years, illustrating that people see this as a means of funding early retirement rather than addressing the costs of longer life expectancy. People would envisage that this phasing process would end (i.e. the age at which they would enter full retirement) at the age of 64. Interestingly, this is one year is below people s realistic retirement age. Saving more People thought that they could realistically look to save another 61 per month for long-term savings. Within this there were some huge variations. Those earning over 50,000 per year said they could save as much as 228 in addition every month compared to just 44 per month for those earning less than 10,000 per year. In spite of this, 60% thought it unlikely that they would save more in the coming 12 months. This rose to 72% of those of low household incomes (earning less than 10,000 per year). Even among higher earners, 49% said it was unlikely. Where people did say they might save more it was things like the prospect of a pay rise or the expectation that they will have paid off their current debts that were likely to drive greater savings. For at least 28% (more than 1-in-4) of Britons debt seems to be an obstacle to save in the current climate. Given that people feel they could save more, why do they choose not to? Amongst those who said they were unlikely to save more for the long-term at some point in the next 12 months, obstacles reflected the current financial strains facing households with 68% citing affordability. This was a particular concern among women and younger people (18 29). Surprisingly, there were relatively few people just 1-in-9 below the age of 50 were put off saving by the uncertain job market and the economic outlook. Reforms to the savings landscape designed to improve access to pension funds before retirement or create so-called lifetime savings products would appear low down on most savers agenda. However, one of the most obvious things government could do to encourage more savings would be a move away from means testing. What would get people to start saving in to a pension? 0% 10% 20% 30% 10% If I could access part of my pension before retirement 16% 15% 29% If there was greater flexibility in terms of how I could access my pension in retirement If it was easier to move between savings accounts, ISAs and pension 26% None of these 24% Don t know A change in the Government means-testing rules ensuring state benefits are not reduced for those with pension savings Base: Non-retired without a pension 11

14 Is retirement a strong enough motive to save? We asked people in 2009 How likely is it that you will save more for the long-term this year? Among those who are likely to save more for retirement over the next 12 months, only 25% are motivated largely by the prospect of saving for their retirement. So overall, we see a trend in which the majority of people do not intend to increase their retirement savings during 2010, largely through lack of income or due to other financial commitments such as paying off debts. Where people do intend to save more, pension planning is a priority for only a small minority and these tend to be people who are already making adequate provision for retirement. For example: 34% 10% 8% 29% 19% Very likely Fairly likely Not very likely Not at all likely Don t know 27% of men cite wanting to save more for retirement compared to 22% of women. 36% of the over 50s want to save more for retirement, which correlates with 38% of empty nesters, (those with grown up children). This falls to 14% of 18 29s. Looking at people who are already saving more than 100 per month for retirement, 34% cited wanting to save more as a reason. Compared to 17% of those currently saving nothing. In short, opportunities to build pensions savings behaviour among the broader population look limited during 2010, and possibly beyond, unless there is some kind of intervention. However, there does appear to be definite scope to build greater retirement provision among those who have already acquired the savings habit. Will people act on their good intentions? With 31% saying that they are very or fairly likely to save more for the long-term in the coming 12 months it is worth noting that similar numbers of people had the same intention 12 months ago. We reported then that there appeared to be an aspiration gap between what people would like to save, and what they eventually end up saving. Has this gap grown since 2009? In 2010 we asked people In the past 12 months did you end up saving more for the long-term than in the previous 12 months? 24% 20% 6% 4% 15% 32% Yes previously I was saving nothing Yes I m now saving more No saving the same as before No saving less than before Not applicable I didn t/don t save for the long-term Can t recall Last year 27% said it was likely that they would end up saving more during the coming year. However, the desire to build up pensions savings has been somewhat constrained given the increasing pressures on household budgets. This resulted in only 18% of people actually saving more during the last 12 months. This means that during the course of 2010, 9% of respondents failed to act on their aspirations in More worryingly, we saw an even greater number of people 20% who found themselves saving less. It is not surprising therefore that the overall pension preparedness index has fallen during

15 Conclusions With the major slump in this year s Pensions Index it is clear that Britons appear to be embracing only one half of the Turner reforms namely the decision to possibly put off retirement and work longer, rather than the need to save more now. As we reported in 2009, there is natural rate of saving in which about half of people appear to be saving enough for retirement in any one year. For half of the population, the message to save more is not being heeded. The decision to work longer at retirement age in order to fill a savings shortfall amassed during our working lives might not be possible for all. Working longer should not therefore be seen as a substitute for saving more. People will need to save greater proportion of their monthly income whatever happens. It is clear that greater incentives, and early intervention for younger savers, will be necessary to achieve that. Current plans for reducing the budget deficit will prove significant in this respect given the government s traditional role in encouraging people to save. However, if reforms to pensions were forthcoming, the public would not be supportive of changes which impact negatively on those already in retirement. Any pensions pain will have to be felt by future generations of retirees. This process must start by ending the perceived inequality between public and private sector workers. Furthermore, with the coalition government intent on encouraging a private sector led recovery, as well as an economy based more on savings and investment rather than debt, it is important to uphold the principle of tax relief on pensions. This is the biggest single attraction when encouraging people to save for retirement through private pensions. Other broader reforms such as reducing the effect of means testing must also play a role if the government is to create a renaissance in private pension savings. With the public finances in poor health it is clear that we need to ask fundamental questions about the size and shape of our government. That will see the government retrenching in certain service areas, which will have implications across public spending including on pensions. Generally speaking there is very little support for making cuts in any aspect of spending on pensions. Supporting pensioners is seen as being as central to the role of government, on a par with providing health and education. 13

16 Appendix 1: The Pensions Index and the Average Savings Ratio Calculation of the Pensions Index The Scottish Widows Pensions Index is a snapshot of how well employed and self-employed people in the UK are currently preparing financially for retirement. It is based on those who are of an age between 30 and state pension age and an income level 10,000 or more a year where they could reasonably be expected to be saving for their old age. The target retirement income is one that will leave most people feeling they are in an acceptable financial position, but which is likely to involve a sacrifice in living standard compared with when they were working. The level of retirement income which consumers are likely to feel is acceptable will depend largely on their income while working. However, the proportion required is likely to be higher for lower earners than for those who are relatively well-off, and that is reflected in our assumptions. We have set the replacement rate at about 90% of pre-retirement income for those earning 10,000 a year, reducing to 40% for those earning 50,000 a year. We have built in what individuals might expect to receive in state pensions, taking into account recent and planned changes. We have assumed that individuals will receive the Basic State Pension in full, and 70% of the maximum State Second Pension based on their earnings. For private pensions, we have assumed an investment return before retirement (net of charges) of 2.5% a year above earnings inflation, and have based the cost of buying a pension annuity at retirement on the assumptions developed by the actuarial profession for statutory money purchase illustrations (SMPI). Combining all these assumptions, a contribution of 12% of gross earnings paid continuously from age 30 to age 65 provides around the target income level for most people. As in previous years, we have assumed that anyone saving 12% or more of personal income for retirement is adequately provided for. Those with defined-benefit pensions need to be considered separately, because there is no direct relationship between contribution levels for individuals and the pension provided. Good defined-benefit pension remain the gold standard of pension provision, and in calculating the Index we have assumed that all those who expect to receive most retirement income from a defined-benefit pension are adequately provided for. The Scottish Widows Pensions Index therefore tracks the percentage of those aged between 30 and 64 (30 and 59 for women) and earning 10,000 or more a year who are either relying mainly on a defined-benefit pension or saving at least 12% of earnings for their retirement (including any pension contribution by their employer). The Scottish Widows Average Savings Ratio is the average percentage of earnings being saved for retirement by those in the Index group, but excluding those relying mainly on a defined-benefit pension. 14

17 Savings that are included While pension arrangements remain the most common and most tax-efficient method of saving for retirement, many people use alternative savings vehicles such as ISAs, perhaps with a view towards moving funds into pension closer to retirement. In calculating the Pensions Index and the Average Savings Ratio, we have taken account of all savings specifically intended to contribute towards retirement income. These comprise company and employee contributions to employer-sponsored pensions, individual contributions to personal and stakeholder pensions and non-pension savings. We have not included non-financial assets such as residential property. Groups that are tracked While we are able to track preparation for retirement against many different criteria, there are three key differentiators that we monitor every year: Gender: Women have always lagged behind men in pension provision, and we measure whether the gap is growing or shrinking. Age: We divide the index between those aged 30 to 50, who are generally some distance from retirement, and those aged 51 to 64, who are approaching retirement. Earnings: We monitor three bands to see the effect of earnings level on retirement preparation 10,000 29,999, 30,000 49,999 and 50,000 and over. 15

18 Footnotes 1 ONS, household savings, 30 March ONS CPI figures, 18 May HM Treasury Budget 2010, 22 June 2010, page ONS Public Sector Employment Q Bank of England Inflation Report May Sunday Times, 23 May 2010 Since 2005, all the Scottish Widows UK Pensions report have been carried out by YouGov. In 2005, they interviewed 5886 people over the age of 18 between 28 January and end March In 2006, YouGov interviewed 5806 people over the age of 18 between 16 and 22 March In 2007, YouGov interviewed 5414 people over the age of 18 between 7 and 26 February In 2008, YouGov interviewed 6381 people over the age of 18 between 6 and 12 March In 2009, YouGov interviewed 5007 people over the age of 18 between 6 and 9 April

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20 As part of the Lloyds Banking Group, Scottish Widows is proud to be an Official Provider of the London 2012 Olympic and Paralympic Games. Scottish Widows plc. Registered in Scotland No Registered Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF. Telephone: Scottish Widows plc is authorised and regulated by the Financial Services Authority. Our FSA Register number is /10