The recently launched stakeholder pensions in the UK look set to have a significant impact on the balance of power between asset managers and insurance companies. While the asset managers won substantial business with the growth of the defined contribution (DC) market, the different requirements demanded by stakeholder pensions are posing a major challenge.
“I see stakeholder as the new model for best practice DC,” says Sarah Aitken, head of DC and stakeholder at Merrill Lynch Investment Managers.
Administrative capability and effective customer communication will become key differentiators with stakeholder, which makes the competitive environment different for traditional DC and DB products. Insurance companies are experienced in these areas, but asset managers must develop these capabilities quickly.
As the DC market grew, many asset managers set up insurance subsidiaries to serve the institutional DC market, all agreeing that life subsidiaries offered greater product structuring capabilities as well as certain tax breaks. Although regulatory changes have meant that the tax benefits are less substantial than they once were, there is still more flexibility inherent in the insurance model.
“Today, as far as the UK is concerned, it is still the case that the insurance vehicle is regarded as preferred or at least most conventional in the marketplace,” says Justin Harrington, managing director of Schroder Pensions. A year ago, largely for this reason, Schroders completed the acquisition of Liberty Pensions to serve as its insurance company vehicle for delivering DC products. It also received approval for stakeholder late last year, the first fund management group to do so.
Started in 1997, Liberty always specialised in group personal pensions and has more than £3bn (E4.8bn) under management. Its main attraction for Schroders was the fact that it had in place a “very strong servicing platform,” says Harrington. “The investment in IT is the key differentiator for DC and stakeholder business,” he maintains. The company is so secure in its existing administrative capabilities that it is now looking at an internet-enabled delivery mechanism, which Harrington believes will be a critical development.
Harrington does not believe that insurance companies have an inherent advantage in stakeholder, and that asset managers will hold their own, just as they have done since entering the DC market. “The contract of insurance is just a legal wrapper for us,” he says. “Legal and regulatory changes have sought to break down the insurance monopoly, but it will be quite a while before other platforms become as acceptable.”
This is the reason that Invesco set up its insurance vehicle in October last year, one of the last asset managers to jump on the bandwagon. “For UK pooled pension funds, particularly DC but also DB, it is considered in the market that life company pooled fund products are more appropriate because of the way the fund can be structured – and because most do it,” says Rick White, managing director for Invesco’s DC business. “So rather than develop a range of products that would be out of the ordinary, we put in place funds that would be widely accepted in the marketplace.”
The flexibility is crucial to Invesco. It is offering an extensive multi-manager set-up. In addition to its own 18 active funds, it also offers funds from Barclays Global Investors, Deutsche Asset Management, Morley Fund Management, Schroders and Threadneedle Pensions. “We offer both complementary fund options and competing fund options,” says White.
Emma Douglas, co-head of DC pensions at Zurich Scudder Investment, also believes that flexibility is still a major advantage. She gives an example, “You have the opportunity to structure a fund to a specific benchmark that a client wants, say a GDP global equity fund. With a traditional asset management structure, you could be looking at a range of separate funds. But with life insurance, you can structure a fund of funds easily, without an OEIC (open end investment company) -style regulations. You can even wrap an OEIC, without going through any legal rigmarole. This is just great when you’re talking to larger clients.” Zurich Scudder has had its life subsidiary in place for more than five years, in order to offer DC pensions. But for the time being, the company has no plans to offer stakeholder. “Our funds can be guest funds on other platforms. Given that we are not administration experts, we believe that this is the best way to get into the market. We also think that there is plenty of opportunity for occupational DC products.”

Merrill Lynch boasts the longest established insurance subsidiary of any of the asset managers. With its acquisition of Mercury, it inherited an insurance company that was created at the end of the 1980s, specifically to look at the personal pensions market. Other asset managers did not follow on until the mid-1990s. “It took a while for the others to discover what we already knew – that insurance was the best way to approach the market,” says Aitken. “It was always for tax and flexibility reasons, which are still pretty compelling.”
Unlike Zurich Scudder, Merrill Lynch sees stakeholder as “strategically imperative – it is where the market is going,” maintains Aitken. Merrill Lynch’s solution to the need for top-class administration was to contract it out. “Because 12 months ago we recognised the importance of stakeholder, we searched across the market and took on AMP as our record keeper. We didn’t have anything ready to use but we did have the advantage of time, and it has taken us the 12 months to build it up.”
Aitken believes that stakeholder has dramatically changed the competitive layout over the past 12 months and may lay the ground for even more change to come. “The story of the 1990s was one of asset managers stealing the insurance companies’ clothes,” says Aitken. They created insurance subsidiaries to get into the DC market and in the end bested the insurers at their own game. As a product, DC hovered between institutional and retail. But stakeholder is different. Because it is contract based, it might be wholesale today but essentially it is an individual market.”
In Aitken’s view, 12 months ago, the market leaders were companies like Fidelity, Deutsche, or Schroders, while today, Legal and General, Prudential and Standard Life have the advantage.
Deutsche Asset Management also recognises that administration is a core issue. Deutsche’s solution was to take on Winterthur to provide its member administration, because of its experience in handling its own processing. “Asset managers with major presence in the UK pensions funds market and good retail businesses will be able to succeed with stakeholder, as long as their processing capability is up to scratch,” says Julia Land, fund director at Deutsche in London.
“Deutsche has had its insurance vehicle in place for three years, launched to offer DC and DB products for UK pension funds, and has gathered £4bn in investment assets. The strength of our stakeholder is in its reliability,” adds Land. “We are very reliable, tried and tested, both in the fund management that we deliver, where our focus is on consistency with low risk, and in the administrative services for members and sponsors. We have gone to a great deal of effort to think through the potential hassle areas for sponsors and members and to iron out problems in advance.”
Land believes that the balance has been shifting in favour of the asset managers for the last 15 years. But, she too, sees that stakeholder will help the insurers out. “It will help the insurers get back up the league table. But the pensions’ mis-selling scandal and the with-profits problems at Equitable still hang over the insurance industry. Product quality will still be important – even in a 1% world, price is not the whole story.”
Stephanie Schwartz-Driver is a freelance journalist

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