The stakeholder revolution
Asset management and insurance providers in the UK are getting ready for the advent of stakeholder pensions, which will be introduced in April next year.
In a move by the government to increase the number of people contributing to a private pension plan, every UK-based employer – except those with employees who are all exempt from the new regulation – will have to offer a stakeholder pension scheme.
The original target market for stakeholder pension schemes was ‘moderate earners’ (from £10,000– 20,000 pa) with no access to an occupational pension scheme and for whom personal pensions were unsuitable. It now seems the new product could also benefit those with a higher income and also provide an alternative to additional voluntary contributions for members of occupational schemes.
Stakeholder pension schemes are low-cost, flexible retirement saving plans whose low charges and tax advantages aim to make pension planning more attractive for a wider range of people. They can be established under trust or based on a contract between the scheme member and a stakeholder manager, which can be an insurance company or an asset management house.
One of the most controversial points of the stakeholder proposition is the contributory limit on charges of 1% per annum, which is making possible stakeholder providers think twice about the profitability of the business. However, some houses have already showed their commitment to stakeholder, launching products ready to meet the stakeholder criteria.
In June HSBC Bank launched a stakeholder-ready personal pension plan. “The message is loud and clear,” says Harpal Karlcut, head of life, health and pensions at HSBC Bank. “People can no longer count on the state to look after them when they are old.” If it’s in their best interests, HSBC will make it easy for customers joining the new personal pension plan now to transfer into a stakeholder plan next year at no extra cost
Also well ahead of the government’s deadline for the introduction of stakeholder schemes, global asset management firm Invesco has just launched a defined contribution (DC) product designed for medium to large companies in the UK.
“What we are launching now is a comprehensive DC product which shows our commitment to offer a fully stakeholder-compliant product in April next year,” says David Butcher, managing director of Invesco’s DC business in London. “Unlike other managers we are actually coming out now saying we believe in the stakeholder market while other companies have yet not made a decision or are still deliberating,” he says.
Butcher believes that stakeholder will accelerate the move in pensions from defined benefit (DB) to DC schemes. Although this move is already under way, and around 20% of the assets of UK pension funds are based on DC arrangements, there is still a long way to go.
“I think that over the next two or three years this shift will pick up momentum,” says Butcher. “How long it will take will take for significant assets to move from DB to DC is very difficult to predict .” In the US, where they have been doing DC business for a long time, assets in DB schemes have been gradually shifted to DC over the past 15 years and today represent more than a half of occupational pension assets.“It may well take a similar time scale for this to happen in the UK, but stakeholder will definitively speed up the process,” Butcher says.
Stakeholder will also create new standards of service in pensions in areas such as data management, customer choice and access to information. In this sense, those offering the best service will get the largest market share.
“It’s going to be a relationship based on service and not on investment products,” Butcher says. Since DC products, and as a consequence stakeholder products, will tend to use a multi-manager approach to investment, there will be less and less scope for providers to differentiate themselves from competitors . “The investment product will become more of a commodity, and only those with the right technology and customer service will survive in the new environment,” he says.
“This is something which scares other managers in the market, but we are confident that our experience in other markets gives us many advantages over other managers , but we do recognise competition is going to be tough,” Butcher says.
Invesco has been offering DC products in the US for 12 years, developing the key elements of this system: administration, record keeping, aspects to do with member education and communication and, of course, internet applications.
The internet and e-commerce is the key issue in the DC and stakeholder arena, being able to deliver updated information on a 24-hour basis and keep costs down. “With the internet every company or individual members can access all the information they could possibly want,” Butcher says. “They will be able to check individual accounts and get details on how much they are contributing to their plans, which are the funds they are investing in and what the prices are. It’s a very simple-to-use menu, which provides the best service at a very low cost,” he says.
However, not all agree on the ability of e-commerce to keep costs down. A survey by Cap Gemini Ernst & Young highlights that insurers are not confident that e-commerce will deliver the cost savings required for stakeholder pensions. The survey shows how UK insurance companies are dramatically increasing their investment in e-commerce and forecast that 34% of their IT budget will be spent on this area in 2003. Current projections from UK companies is for a 31% reduction in costs by 2003, but the report concludes that this is unrealistic since there were no cost reductions realised in 1999.
“Insurers are clearly hoping that e-commerce will be their saviour in the 1% environment,” says Mark Winlow, vice president at Cap Gemini Ernst & Young insurance division. “But following the experience of financial services companies in the US and banking sectors, it is highly unlikely that these costs reductions will materialise through e-commerce alone,” he says.
He adds: “For e-commerce to provide UK insurers with real cost reductions a complete overhaul of existing business models is needed. E-commerce cannot simply be seen as a bolted-on solution. For example, if insurers are to provide stakeholder pensions within the government’s charging structure, the complete business system needs to be automated from front-end delivery to back office processing.”
So, for those players who already have developed the right technology capabilities the competition will be easier.
“We already have the technology and the functionality needed for facing this challenge,” says Invesco’s Butcher. “We believe the annual management charges of 1% will probably become a benchmark for all other pension products,” he says. Butcher finds the key for success in being prepared to view the long term. “In the US, we know from experience that it takes 10 years or more to make a profit with DC, and the only way to achieve that is by securing sufficient market share.”
Another main issue behind the stakeholder proposition is flexibility. Through its new DC product, Invesco will be offering a range of actively managed funds and also a series of tracker funds from Barclays Global Investors. “Trustees that want to have the ability to create for their members a selection of funds which might not include all the funds we are offering, or take the whole range,” says Butcher. “It’s all about customer choice. They will also be able to create their own ‘life style’ programme, taking into account their own objectives and the profile of their employees.”
Although HSBC and Invesco are some of the very few future stakeholder providers that have already launched products with the April deadline in mind, during the next few months more companies will be offering similar platforms. Because people taking on stakeholder plans will be free to switch providers, managers and insurers will have to struggle to find their place in the market.
“At no time in the history of pensions in the UK has a bold, radical marketing and customer service strategy been so important,” Butcher says. “Stakeholder is really going to be a revolution because potentially could change other financial products as well,” he says. If you can buy your own individual DC or stakeholder plan for 1% per annum, why shouldn’t you be able to buy an individual savings account or unit trust under the same conditions?
Whatever happens in the next few months , stakeholder is going to concentrated the minds of both individual workers and employers on looking at the ways that DC schemes can actually add value. IPE