In trying to get people to take greater responsibility for their pensions, the Government has decree...
In trying to get people to take greater responsibility for their pensions, the Government has decreed that costs must come down.
While acknowledging that stakeholder's 1% maximum annual administration charge will bite close to the commercial bone, ministers argue that the growth in new pensions taken out should offset this.
But the stark reality is that stakeholder will only be economic for providers that cut their administration costs from normal levels of 3-4 % of funds under management to below 1%.
For those who react too late, there could be a bloodbath that is unlikely to be confined to the pensions industry.
Stakeholder pensions are not only defining public expectations of what is a fair cost for financial products, they are a manifestation of forces at work that are far longer-term than any politician's vision.
A recent Institute of Actuaries report compares the current period with a 30-year cycle of stability lasting from 1870 to 1900.
It suggests we are roughly three years into a similar cycle, driven by globalisation, technological advances and the apparently growing ability of central banks to control inflation through monetary policy.
For savers, low investment returns caused by a long period of low inflation will give added impetus to the need for increased savings.
In 1983, someone who had invested £1,000 a year over the past 20 years could expect to have built up a fund of £247,000, equivalent to a pension of about £5,800 a year.
In 1998 the corresponding figures were £165,000 and £5,200. In 2018, the projected yearly pension is estimated at just £2,200.
In simple terms, a man currently aged 45 needs to save two-and-half times more than his 65 year-old predecessor to get the same pension.
In Australia, the introduction of stakeholder-type pensions in the early 1990s led to the creation of a small number of pensions transaction factories providing processing and back-office functionality on behalf of pension product providers.
Many commentators assumed something similar would happen in the UK, but it now seems likely that the information technology revolution of the last few years has created many more options.
Stakeholder providers faced with driving costs downs while raising service standards have three main options:
l the back-office super factory
l outsourcing the administration process
l creating their own internet-enabled infrastructure.
The super factory
The contracted-out back-office super factory to which companies can outsource administration offers obvious economies of scale, reduced up-front investment, simplified management and shared technology costs.
But there are fears that no super factory would be flexible enough to support the needs of any one customer, let alone ensure that proposed changes in the entire infrastructure would not tip off companies to their competitor's tactical directions. In many cases, common processes with partitioned or separate systems supporting specific client products would be necessary.
Another key area to consider is business process outsourcing (BPO), which delivers a super factory facility tailored to specific companies. BPO customers can enjoy the economies of scale and shared resource costs of the super factory, while taking advantage of individual product features and processes.
Go it alone
The internet revolution is making another option whereby providers create their own systems with the help of technology partners. Web-enabled customer care and customer self-administration promises increased customer satisfaction while slashing the cost of administration.
Legal & General is one of the growing number of companies going online. It has announced plans to spend £30m this year on internet capabilities and the use of web sites to promote sales of stakeholder pensions.
This sum matches the £30m spent over the last couple of years on business-to-business applications such as extranets for financial advisers. Other large insurers who have said they will enter the market include CGU, AXA Sun Life and Zurich Financial Services.
Scudder, Zurich's US fund management company, already does 47% of its business over the internet, but this is just the tip of the iceberg.
Zurich is investing over $1bn in expanding its internet presence and building a global e-business exchange.
"We will no longer have to manufacture a motor car insurance policy or a life insurance policy at over 100 different places around the world," says Rolf Hippi, chief executive of Zurich Financial Services.
New scale, new speeds
While few in our industry would argue against the fact that the new world model is creating a faster, more dynamic environment, there is evidence that the industry has been slow to respond.
In retailing, years of investment in IT-enabled supply chains and customer channels has led to a generation of internet-conscious entrepreneurs keen to find new ways to get loyalty in their brand. Marks & Spencer Financial Services has already launched its stakeholder-friendly pension that undercuts the government's 1% administration charge by 30%. Tesco Personal Finance has also teamed up with CGNU to offer stakeholder pensions, as well as life assurance, and will be marketing them under the Tesco name through the food retailer's website.
If you look at the web presence of many financial services companies, it is clear that their idea of being web-enabled only extends to customers being able to print off application forms.
To understand the full impact of the change facing
Warns on profits
Hargreave Hale seeking legal advice
Latest news and analysis
First mentioned in Cridland Report