Radical changes are expected in the pensions market with stakeholder expected to drive down consumer...
Radical changes are expected in the pensions market with stakeholder expected to drive down consumers' costs
A push towards mass market products is causing a revolution in the the financial services industry, a change that is actively encouraged by the Government. The current situation is the culmination of a long period of tension within the industry between the interests of its three main stakeholders - the Government, the consumer and the industry.
The Government wants fair dealing but is also driven by the desire to minimise its own social commitment by encouraging self provision in an aging population. The consumer is seeking value for money and easy to understand products and the industry is looking for a profitable way to meet both these needs. This tension has never found a comfortable equilibrium and has led to an increasingly proactive government because encouragement alone is failing to achieve their goals.
Consequently, the Government has become an important, probably the most important, source of new product design and innovation in the industry. Personal pensions, Peps, Tessas and Isas are just some of the Government's initiatives and stakeholder pensions is unlikely to be the last.
Flexible pensionsThe detail of the stakeholder pension regime remains unclear but the broad intention is to ensure availability of a flexible, portable pension with low charges, almost certainly amounting to no more than 1% of funds under management. The industry has until now absorbed the impact of various Government initiatives and continued relatively untroubled but stakeholder pensions may be the catalyst for radical change.
Recent KPMG industry research showed significant sympathy for Government objectives but revealed doubts about whether the stakeholder pension regime will achieve these ends given the 1% charge limit allows little room for advice. Without advice it was feared that customer inertia will lead to the frustration of the Government's key objective of extending access.
The research showed the life industry felt it had lost the confidence of Government and thought the Government was unlikely to receive its representations on the issue of advice with an open mind. The demise of IFAs as we know them was also widely forecast with the concept of polarisation giving way to multi-tie arrangements.
There was a large degree of consensus that radical change in the industry will result from the introduction of stakeholder pensions and only five or six large players were expected to survive the resultant wave of industry consolidation. But the prize open to those winners was potentially great with KPMG modelling projecting a total potential stakeholder market of around £2.75bn in new regular premium if all the potential new clients in that sector took advantage.
The real imponderable is the degree of penetration that will be achieved, especially with minimal advice. A penetration of only 40% would lead to a larger market than the current one for personal pensions. These projections may be realistic if an effective marketing concept is achieved, however, the Government may have to take a significant role in the marketing process.
Without this stimulus the relatively low disposable income of the target group and competition from other more flexible savings products such as Isas may lead to a disappointing take up of stakeholder pensions, especially without individual advice and individual advocacy.
KPMG modelling further predicted significant 'cannibalisation' from other products particularly personal pensions. In some 80% of the current unit linked personal pensions there was a risk that policyholders could decide to pay premiums into a stakeholder product, or one that is similar, instead of continuing to invest in the current contract.
While the amount that can be invested into a stakeholder contract is limited, consumers were likely to find it illogical and unacceptable to pay more for their other pensions arrangements than they do for stakeholder. Consequently, stakeholder economics could spread to other pension and savings with product providers aggressively pricing them to retain their customers and attract new business.
The modelling also suggested that some 40% of existing unit linked personal pension funds were at risk of switching to a contract with a 1% fund charge, even after they have been in force for two years. The outcome was, in any case, sensitive to the level of stakeholder margin with all unit linked funds being competitive against a 1.25% margin.
As the stakeholder market develops, the lack of upfront charges and the ease of transferability should lead to much greater mobility of funds. There could even be a 're-pension' market operating in the same way as a remortgage market operates, encouraging consumers to switch their entire fund to another provider for the promise of lower costs or higher investment returns. The increasing role of employers and affinity groups raises the possibility of these switches happening en masse on the initiative of the sponsoring organisation.
Making a profit from the new business will be challenging. The model showed an average cost profile provider would take five years to cover its direct costs on a typical stakeholder contract and only after that time would any contribution be made to overheads, let alone profit.
The emergence of the 're-pensions' market would represent a serious threat to profitability unless huge improvements in efficiency can be achieved and the winners will be those who can consistently and profitably operate within these constraints. The really successful players will put themselves in a position to make a profit out of each and every premium, no matter how small, on the basis that it could be the last they receive from that client.
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