New vigour among insurers
UK life companies are having to work hard to make headway in the pensions asset management market. Although there are some consistent stars, many are in the lower half of the short-and long-term performance leagues for pooled funds. Progressively lower rankings for some indicate the strength of competition from investment houses but also the introduction of new funds and the arrival of new market entrants.
Certainly this is a global market with a huge number of players, and the life companies are relative minnows compared with the major investment houses whose funds under management run into hundreds of billions. “As yet, few life companies have made any significant impact,” says one consultant. But some have been investing heavily to develop their capability, setting up separate asset management subsidiaries, strengthening their teams and introducing new systems and processes to improve performance and service.
Another investment consultant acknowledges this activity but remains sceptical about the potential for results. “They’ve been throwing money at their investment businesses,” he says, “but processes are no substitute for skills. They’re too analytical and not innovative enough. In my view they don’t measure up to the investment houses and banks.”
Commentators tend to agree on critical success factors. Performance is just one of them. “Performance isn’t everything,” says one life company manager, “but consultants do set great store by it.” Mike Wadsworth of Watson Wyatt agrees that performance comes into the reckoning but stresses the importance of the ability of investment strategies to deliver in future. “Ability to deliver on promises is vital; it’s ability to deliver consistently and by design – not by luck. How you get there is as important as where you get to.”
New ideas, lateral thinking and rapid responses to changing market conditions are crucial. So is effective use of resources, including all-important research. Relationships with investment consultants can be pivotal, but dealings with clients need to reflect individual preferences. “Life companies can be over-reliant on relationship managers,” comments a consultant. “They need to recognise that some clients want to talk directly to the fund manager from time to time.”
Clerical Medical looks like a life company that has been getting things right. It has a strong performance record and has won a number of industry awards, including three last year. It now manages all the assets of the Halifax group of which it is a constituent. Felix Caulfield, director, pension funds, acknowledges that Clerical Medical is a relatively small player but points to the company’s record against some stiff opposition. He is optimistic about life companies’ prospects: “Life companies are faring better in the pensions asset management market. Their old image as boring and conservative is really no longer deserved.”
Caulfield says that life companies tend to have a wide range of clients. This broad spread means some protection from ‘feast and famine’ and a more stable base from which to resource development. Clerical Medical manages both pooled and segregated funds. “Life companies used to be big players in pooled funds,” says Caulfield, “but their market share has reduced a lot. But we’ve bucked the trend by growing share; we’re now a significant player.”
Legal & General has done conspicuously well with its pooled index tracker funds which have attracted sizeable volumes of business. Chris Robinson, director at Legal & General Investment Management says “We’ve succeeded because we have the right product, we give the right service and we have the right people.” He too feels that life companies are improving their competitive strength and shaking off their old image. “Life company culture used to be a disadvantage against the big investment houses and banks, but that’s changing. There’s generally a new corporate motivation and commitment to the market, and new attitudes to risk.” In his view the relationships with trustees and the quality of reporting are major service factors. But good experience counts and, again, performance has to be planned: “It’s doing what you say you’re going to do.”
It appears that life companies have rather let their position in the pensions asset management market slip away from them. There have been few shining stars performance-wise, and their competitors have capitalised on changing market conditions. Criticisms of being laggards in a rapidly developing market, inflexibility and poor customer orientation could, in the main, be justly applied to all of their activities, at least until recently. Changing investment conditions, the cost of regulatory compliance and the need to invest in their businesses sapped their financial strength and prompted the run of M&A activity in recent years. Their retail businesses have had to be overhauled and the pace of change in retail markets – new products, new distribution channels and new competitors – shows no sign of letting up.
But the life company survivors are a leaner, fitter bunch better equipped to tackle the future. It would not be an exaggeration to say that some have reinvented themselves. The corporate culture within the sector has changed for the better. But, despite the new corporate vision and commitment, can life companies build the teams that can hack it with the big boys? “I don’t think they’re able to attract the best people,” comments a consultant. “That’s partly down to salaries but mainly to image. If you are good you want to be working for a specialist or a bank.” Maybe that will change if the life companies can improve their fortunes.
And their fortunes could be on the way up with the trend towards DC schemes. Life companies are acknowledged to be efficient vehicles for pension schemes, which is why some of the investment houses have been setting up their own life operations. DC schemes also point towards bundled pensions products, in which life companies have traditionally been competitive. Then there are the new stakeholder pensions, now just round the corner. “It will be interesting to see the impact of stakeholder pensions,” says Watson Wyatt’s Wadsworth. “Since these effectively straddle the border between retail and corporate products they might be an opportunity for life companies to make a mark.”
It is the life companies and banks that appear to be preparing for stakeholder with the most vigour, though maybe for the banks it is partly a defensive move to protect existing business switching to the new product. About 25 life companies have thrown their hats into the stakeholder ring. The big question is how many will be left in five or so years’ time?
The new market is very much an unknown quantity, from both a retail and corporate perspective. One commentator says that established DC appointments are unlikely to move to a stakeholder arrangement, but that for schemes making the transition from DB to DC it is an option. Legal & General’s Robinson also has some doubts. “It’s an option for DC schemes but given that it means a change to a new trust structure, will trustees be willing to make the move? But then stakeholder could change the nature of the market and create a demand for bundled products.”
There is a big question mark, then, over the market’s size. So is there over its profitability. The cap on charges and the possibility of handling many small – even tiny – schemes mean that margins are wafer thin. Profitability will emerge a long way down the track – some say it will take as long as ten years. Companies will need to write large volumes for the scale economies that will make stakeholder viable. How many players can this market sustain? Caulfield of Clerical Medical acknowledges the difficulties but says “We have invested a lot in stakeholder and are determined to make it work. We’re ready and we’re definitely in for the long haul.”
The generic nature of stakeholder products will focus more attention on investment gains. There is a view that the default investment option will become the benchmark against which stakeholder players are measured, putting pressure on companies to perform. This could force a trend to using external fund managers, the introduction of ‘guest’ funds or even allowing clients to choose their own fund manager.
Stakeholder pensions, then, are very much a two-edged sword. Failing to make a good score in the new arena is potentially as damaging as declining to pick up the gauntlet in the first place. But stakeholder could just be one of the roads to salvation for life companies in the tough pensions asset management market place, at least as far as UK operations are concerned. It may be that they will never achieve the scale of the market heavyweights, but as a group they could become a more significant force.