the dam is breaking

It can’t be much fun at the ABI these days. The FSA are investigating mis-pricing of annuities, the OFT are studying the distribution insurers use for pensions and just about every consumerist from Gregg McClymont to the NAPF are calling for the ABI to come clean on what the funds we use to save for our retirement , really cost.

You would forgive Stephen Gay and his policy team, for not wanting to get out of bed!

I am travelling up on the train to London to meet their pension policy team at their request. I am pleased that I have this chance and that I have is a sign that things are really changing.

They have been reading these blogs, their CEO Otto Thorenson has been a member of the Pension Play Pen on linked in and it’s clear that the ABI executive are making a genuine effort to connect with a wider circle. I am travelling in the hope that I can urge the ABI to speed up the rate of change, especially on the disclosure of charges. I have mentioned on here my dissatisfaction with the time they say it will take to declare what people are really paying for different types of funds.

My suspicion is that it is not the methodology that will take time, nor the calculations, but the volition of the ABI’s members to tell it how it is.

You have to wonder why. The prize for insurers going forward is immense, the major share of a Tsunami of contributions from the mainstream of the British public.

They have only to lose a small slice of the revenues they currently enjoy on their “back books”. Indeed it is not really the insurers who are the losers; the losers will be the investment managers and their brokers who have created such a cosy sinecure for themselves through the murky world of portfolio transactions.

If the insurers were to operate at maximum efficiency, they could reduce their fund management costs by calling investment managers to account. I have evidence in front of me which shows that by simply executing trades better, fund managers can cut the cost of the dealing  “round trip” by 600%.

I suspect that the 14 insurers who have put their hands up and declared themselves ready to declare, know that it is absolutely in their commercial interest to drive inefficiencies out of the funds market.

But it is not that simple, it never is. Insurers are not simply in the pensions game, they have irons in other fires – wealth management especially. The vast majority of the revenues of those that provide them with distribution support depend on the funds industry which in its turn depends on the revenues of its various suppliers.

This is not simple. This is why it is hard for the ABI. The ABI are so conflicted that it is almost impossible for them to take a consumerist position.

And yet that is what they will have to do. The weight of money awaiting entry into the system through auto-enrolment makes it unthinkable that the current system will persist.

But if the dam is breached for pensions, the dam is breached for wealth management and the economics that support not just the funds industry, but its distributors the IFAs and those in the City depended on inflated revenues from broking and dare I say it, the shareholders of the insurers with big back books are all big losers if we move to full fund disclosure.

I am aware that I am not writing about things that people feel comfortable about. That I was offered a £2000 hospitality package only last week by an ABI member tells me that insurers are still living in an old paradigm. The new paradigm enunciated in my first paragraph must seem unbearable to many “lifers” of the insurance industry.

The dam has stood for many years and served its purpose. It has ensured that water flows into the correct channels and that what get passed down to the lowlands is just enough to keep everyone quiet. But the volume of water flowing into the dam is changing. There is a Tsunami of water heading for the dam.

Manage the sluices, ABI, take firm and radical action to ensure money flows through the system like water to its proper destination. Take action to make sure that the sluices that irrigated the city brokers and IFAs and all other beneficiaries of these hidden charges are managed well.

Otherwise the dam will break – the edifice that you have built and managed will be smashed and you will find yourselves holding the keys to gates that the waters of change have swept away.

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