6 April 2001 is drawing near and a state of pre-stakeholder fever is currently gripping the UK finan...
6 April 2001 is drawing near and a state of pre-stakeholder fever is currently gripping the UK financial services market. Pension providers, notably the life offices, are busily rolling out new products, GPPs as well as stakeholder, designed to meet the requirements (low charges, transparency, simplicity, flexibility) of the new age.
The initial reaction of some of the leading providers to the Government's consultation papers may have been there was no possibility of offering stakeholder with a maximum annual charge of just 1%, but all that has now changed as they prepare to grapple for future market share.
And the reason for their change in attitude? The large life offices in particular have realised they can survive, and possibly even prosper, in the new stakeholder world provided they change their ways. Hence their grasp of modern technology, notably call centres and the internet, to increase efficiency and reduce costs in scheme administration and communicating with employees and members.
If there aren't sufficient margins to cover the costs of individual face to face advice, then an alternative has to be found. Worksite marketing enables a single professional presenter to put the case for private pension provision to an audience numbering from a mere handful to 100 or more. It is also possible to give individual employees and members the background knowledge, the information and the guidance they need to make key decisions (on when to start, how much to invest, in which funds) themselves.
Currently the life offices are the leading players on the small-to medium-sized company pension stage. Pre-stakeholder the key products used for the main workforce have been the GPP and, to a lesser extent, the defined contribution (DC) occupational scheme. However, their domination of this sector of the market is now under serious threat. The challenge comes from the major specialist fund management houses.
Ruling the roost
Already they rule the institutional pension fund roost where, on the recommendation of actuarial and employee benefit consulting firms, they manage scheme assets for plcs, local authorities and other parts of the public sector.
Now they have set their sights on those businesses with 100 or more employees that are so often the corporate clients of IFAs. The specialist fund managers do not intend to promote any particular type of pension arrangement. Depending on the particular situation and the independent advice given, it may be stakeholder, GPP or occupational scheme.
But the emphasis will be on DC. Some of these investment houses have a vital advantage. They are able to draw on 10-plus years of front line experience of running DC pension schemes in North America.
With funding for retirement, as in so many other areas, it is a case of where the US leads the UK tends to follow. While we British are now showing signs of making the move from defined benefit (DB) to DC, our American cousins have already been there and done it. According to Vanguard, DC total fund assets in the US have now climbed above those for DC.
There is no doubt that the phenomenal success of the US 401(k) plan, which the UK Government used as one of its main models for stakeholder, has powered the transition. Cerulli Associates estimates that 401(k)s accounted for 70% of all DC assets at the end of 1999, and this percentage is forecast to rise by a further 5% by 2003. If stakeholder could match this rate of achievement, the aspirations of Westminster and Whitehall would be more than fulfiled!
The specialist fund management houses reign supreme over all parts of the North American pension world and on both sides of the DB/DC divide. The launch of 401(k) saw the life offices, thanks largely to their established distribution channels, dominate the market. But since then they have steadily lost out to the fund managers which now hold the lion's share. The banks too have seen their position eroded, albeit at a much slower rate.
There are three main reasons for the fund managers' success. First is their investment experience and expertise. And, in the DC environment these qualities are of crucial importance to the workforce. The results, in performance achievement terms, have direct relevance to the members whose retirement futures are on the line. With DB, on the other hand, any investment disappointments may merely leave the employer to increase its funding rate so that it can meet its future pension promises.
The other two reasons are more surprising. In North America, the specialist fund management houses have outscored their life office and bank opponents in their administrative efficiency and in the quality of their communications with scheme members. As late arrivals on the scene, they were free from the logistical burdens of having to administer old blocks of business on outmoded systems. They were also able to take full advantage of the latest technological developments from the start.
Will the fund managers repeat their US pension success on this side of the pond? I think the answer has to be yes, and for those same three reasons: their investment management methodology and skills, administrative efficiency and prowess as communicators.
Investment management is their core business and such specialism, and the global research facilities, asset allocation procedures and stock picking skills that go with it, brings results in terms of consistent above average performance. The large UK pension funds realise this and so do IFAs, most of the unit trust, Oeic and Isa money they place for individual clients finds it way to the specialist fund managers. Even the life assurance establishment recognises how the land lies. That is why some of them are trying to reposit
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