Web cuts cost of stakeholder plans
The UK stakeholder pensions due out this month have had annual charges capped at 1% and, as a means of meeting this, administrators are opting for the internet as a means of cutting costs. Asset managers and those intending to supply stakeholder pensions complain there is a dearth of those able to supply quality administration packages – perhaps understandably given so tight a restriction and the belief that take-up of stakeholder will be restricted until made compulsory. But this hasn’t stopped some from setting up new systems and tailoring existing DC systems. Common to most of those that have decided to enter the market is the use of technology and the internet.
The launch of stakeholder is an administrative nightmare for institutional managers. Not only are they dealing with hundreds of thousands of accounts, but the general public is becoming more financially aware and demanding. Consequently the restrictions on stakeholder are already beginning to bite. The UK’s Britannic is withdrawing from door-to-door selling and cutting 2,000 jobs, while in February rival life assurer Prudential announced it would phase out its UK direct-sales force by 2002, saying the move to the internet and telephone has made direct sales uneconomic.
So Prudential has instead decided to adopt the administration system PMS6000 designed by Watson Wyatt Sytems, an independent software house, the product of a management buy-out in 1998 from consultants Watson Wyatt. PMS6000 is a fully automated system, developing, selling and administering pensions. It is this automation that is the key to cutting manual intervention and keeping costs below 1%. Says Finlay Ross, CEO of Watson Wyatt Systems, “The trick with stakeholder is to try and move the processing out of the back office and get the employer and individual to do as much as possible.”
PMS6000, caters for almost any type of pension and the front end is completely adaptable – be it for the internet or an intranet. Ross gives the example of a small company wanting to set up a stakeholder scheme for its employees.
Technically speaking, the company can register over the internet at
a large insurance company, input bank details and proceed with investment decisions and so on. So anonymous is the system that the first the insurance company will know of the company’s new scheme is the arrival of bank details.
Schroder Pensions became another option for stakeholder providers when last September it announced the launch of a web-based administration and servicing system. Gary Smith, director of product development and marketing, says the
1% target is achievable over time but the key is making administration more efficient.
“There is a growing demand for access via the internet and clearly this will help in maintaining the costs and making the whole process more efficient if individuals can access the system directly,” he says.
One of the most important functions for members is immediate access to relevant information – either through the internet or over the phone. If it’s the former, as is often the case, Smith says the delivery needs careful consideration. “The important thing is ensuring that what you’ve got is not essentially a glossy website and a back office system that’s unattached so that all you’re doing is a glorified email system which, again, is not fooling anybody.”
Although use of the internet will help cut costs, the 1% cap has curbed the number of operators offering or intending to offer stakeholder administration. The investment associated with establishing a comprehensive, hi-tech system is considerable. Potential returns from stakeholder are negligible and the attitude of many DC administrators is largely that, if you’re in the business, you should really be in stakeholder whether you like it or not. It’s due to the miserly returns from administering stakeholder pensions that many providers are approaching the problem with what Alan Walker at IT consultants Cap Gemini Ernst & Young calls a “string and sellotape approach”.
Some fund administration outfits have been criticised recently for doing just this and converting existing DC systems rather than starting from scratch. At the centre of this is not the belief that there are significant differences between DC and stakeholder. Instead, it’s simply that many insurance companies have archaic, disjointed and inefficient systems. Historically, relatively high and complex charging structures have subsidised this inefficiency but this is changing and Smith says those with older IT systems will struggle to achieve charges below 1%.
“Many have got IT systems that are creaking quite dramatically as it is,” says Smith. “If you’re talking about web-enabling that whole system so that people can directly access that system, I think many will wonder whether that system can cope or whether they will have to start again because they have taken a pretty archaic system and pushed it as far as they can. A lot of them have got to ask themselves whether they want to
continue doing that or whether they want to cut their losses and get out.”
One of the groups with a new system is Scottish Life, which established an underlying platform for third party administration in 1993. With the development into the so-called DC Solutions, it is widely recognised as being one of the best systems on offer. According to Mike Reid, the newly appointed chief executive at Scottish Life Administration Services, the notion of stakeholder pensions is relatively straightforward and some of the old administrative systems are almost too complicated and cumbersome.
“The importance of stakeholder pensions is that you’re going to see improved IT solutions across the whole DC range,” he says.
The idea of DC Solutions is to minimise manual intervention while maximising automation and Scottish Life, having targeted fund managers unwilling to administrate the stakeholders themselves, already counts fund managers Philips & Drew, Invesco and Chase as subscribers to DC Solutions. And, of course Abbey National, which owns Scottish Life, is using the system as well. According to Reid, one of the advantages of starting from scratch is that it is easier to adapt to the internet and to e-enabling – it is also possible to go realtime on to the underlying platform.
Schroders, which bought the administrator Liberty last year, is another group claiming to have built from scratch. Its approach has a workflow system that keeps a record of transactions and any changes to the pension scheme. “The advantage is that we haven’t had all the legacy problems and building up of archaic systems,” says Smith. Schroders is about to take the system online and later this year individuals and employers will be able to look up fund values and unit prices and to make transactions online.
Financial group Invesco launched a DC product last October and a corporate stakeholder is being added soon. Invesco’s system is fully automated and online, with the exception of online transactions, something that’s coming shortly. “A few months after stakeholder is up and running everything will be online,” says David Butcher, managing director of Invesco’s DC business.
“When stakeholder came along with the 1% cap it simply made the electronic delivery of everything that much more important,” he says. There remains great emphasis, however, on the more traditional ways of reporting – for those with an aversion to the internet. “As a pensions provider you’ve got to be able to give customers what they want but clearly the use of the internet is increasing and it’s going to be essential for stakeholder.”
It appears that access to information (typically via the internet), the presentation, the marketing and the administration behind the stakeholder is almost as important as the investment and the strategy behind the pension itself. Says Butcher: “As product choice and choice of investment continues to grow the need to communicate with people and to explain what’s involved and what the choices are and how they should make choices increase exponentially… As more choice becomes available the need to educate people and to explain to people what to do increases at an even faster rate than the rate of expansion of choice.”
Most are rich in praise for Scottish Life’s system. Butcher believes it is the best system available (hence the decision to appoint it to run administration and record-keeping for both DC and stakeholder.) Everything to do with communication and reporting to the employer and individual is done in-house and Invesco, in conjunction with Scottish Life, has set up the internet capability for both employers and individuals.
Individuals have access to information about the funds they are invested in, contributions, value of investments, update daily etc. In a few months, individuals will be able to invest online.
Finally, there are the sytems integrators. Last June IT and management consultancy Cap Gemini Ernst & Young launched Silver Bullet, an e-commerce solution or systems integrator for products like the stakeholder pension.
Silver Bullet is aimed at the sub-1% world and, like Finlay Ross at Watson Wyatt Systems, vice president of financial services Alan Walker says the best way to cut costs is to involve the customers and distributors and encourage them to do as much work themselves in servicing the product themselves.
Cap Gemini pieces together what is most appropriate for the particular client. This may mean an existing system belonging to a pensions provider that just needs tweaking a little bit. Silver Bullets’ first sale, for example, was to Britannic Assurance’s stakeholder system and as part of the overall package will use Watson Wyatt Sytems’ PMS 6000 at the core of the system.
There are other outfits setting up or providing administrative products for stakeholder. These include the Marlborough Sterling Group and its Lamda system, aimed at supporting stakeholder, and HISL, a management buy-out spin-off from AT&T. CTC has also set up a system that is now used by Royal Sun Alliance.
Most of these involve e-enabling or use of the internet. But for those unfamiliar with, or even scared of, the internet, there is some solace. Says Walker: “Technology is an enabler, it’s part of the jigsaw but really you have a much broader strategic question which is all about how do you best work with your customers to satisfy their needs in a way that benefits both you and they.” The days of the call centre are not over yet.