“Stick or twist” for the lifecos.



This is the third of three Easter blogs that address the issue of how corporate pensions are designed and paid for. In the first Give a Straight Red to Active Member Discounts , I argued that the design and cost apportionment needs to be fair to both active and deferred members of workplace schemes.

In the second blog “What’s Expensive for a pension these days?” , I replied to feedback from a provider and argued that insurers need to adopt a collective approach to their pensions book if they are to compete to provide pensions to the 1.2m employers who have yet to certify their Qualifying Workplace Pension Scheme (QWPS).

In this third blog , I’ll try to introduce some harmony (having been quite disruptive enough). I’ll suggest a simple way forward that will allow pension providers an opportunity to prosper in the post RDR auto-enrolment world.
John Lawson of Aviva made a very keen comment yesterday…

What I am saying is that 0.9% is sustainable. It isn’t particularly profitable, but it is sustainable. Is 0.48% sustainable for transient workers? Only if you move to 100% self-service and take a marginal pricing view.

Taking a marginal pricing view doesn’t necessarily mean you will make a profit. In the long run, if you don’t make a profit, you will be out of business.

Unless the 0.48% provider can build its asset pile quicker than it is spending cash on its platform, and encourage its customers to self-serve…

You can sense the conflict in John’s writing. On the one hand he can see that a collective solution at a low price might work – but it depends on customers self-serving. On the other hand he senses his duty of care to his policyholders to keep his insurance company solvent.

His life company, like all the remaining lifecos still active in the mainstream pension market, can stick or twist.

Sticking means keeping the faith with the old distribution model and hoping that it will find a way to “comply or explain” with whatever stricture comes next.

  • Keeping the faith despite the  RDR and  the FSA’s “treating customers fairly” campaign.
  • Keeping the faith despite the threats of “naming and shaming” from the DWP over much that has been standard practice in the advisory market .
  • Keeping the faith with trail commissions set up on the eve of their abolition, active member discounts, “sexycash ETVs” and the mis-certification of poor legacy  schemes as QWPS.

And what does twist look like?

Twisting in the new post RDR world of auto-enrolment looks like NEST. It looks like a low AMC for everyone with a big bet that the ladders will cancel out the snakes.

Those kind of bets are tough to take, because if you are a lifeco in the UK and you just get the snakes, then you lose money and the more schemes you take on , the more money you lose and then you have to go to your shareholders for more money – which is John’s point .

When the DWP were consulting with the lifecos back in 2010, they asked them whether they wanted to play in the auto-enrolment market and they generally said “no”.

But open up the Times on Thursday last week and who has the lead advert? AEGON, who is banging the drum for Mastertrust , BLACKROCK.

Friends Life, Zurich, Standard Life, Legal & General, Aegon, Scottish Life, Scottish Widows  Aviva and BlackRock  are all actively promoting themselves as “AE ready” insurers.

Lined up on the other side of the road are the mastertrusts, at the front NEST with NOW and  the people’s pension side by side, not far behind other non-insured mastertrusts from Bluesky, SEI , Salvus, Supertrust and the Nations Pension. Not forgetting industry wide schemes from the Pension Trust and SHPS

These mastertrusts have all twisted, they have all adopted NEST’s public service “collective” mantra and will offer blanket terms whether their customers have high staff turnover or low average salaries or multiple payrolls.

And they are offering their wares directly to employers at deep discounts to the historic prices achieved by insurers through IFAs.

Much though the lifecos would like to stick with their traditional distribution model, they cannot do so and offer sustainable pricing that competes with the 0.30- 0.50% guaranteed terms of the mastertrusts.

It is hard for the insurers to twist because they think the dealer’s against them.

It’s galling for insurers that they must compete against the tax-payer subsidised NEST and it’s galling that they must reserve for SolvencyII while mastertrusts don’t.

It is galling for the insurers that they can’t argue they have superior governance, or product structure, or investment options or “at retirement options” because the mastertrusts have been given the high ground (while the insurers have given their ground to the IFAs).

Some insurers can’t even claim they know what their clients want. How can you twist if you can’t even see your own cards?.  A pensions manager at Aviva’s second largest UK client told me she had never met anyone from Aviva! All her dealings were through her IFA.

So where is harmony to be found?

Well John knows the answer ; it’s where a…

provider can build its asset pile quicker than it is spending cash on its platform, and encourage its customers to self-serve…

I can hear the grinding of John’s teeth. Over the past five years Aviva has spent £200m on platform developments which they have abandoned. This £200m write off is only 7% of the £3,200,000 they lost last year from American write offs but it’s still  substantial.

But the bad news is out of the way, the shareholders have taken the pain and now it’s time to move on. John can console himself that his previous employer did little better with “corporate wrap”.

The Lifecos have had their spending spree- they cannot all go off and spend another £200m on platforms. They’ve now got to find a way to get several billion pounds onto what they’ve got.

To do that you are going to need to start competing for business against NEST and NOW and yes – one of their own who will be offering a GPP to everyone at 0.48%.

You know the answer John, it’s 100% self-service and it’s marginal pricing. It’s about giving up on yesterday’s practices. You cannot stick and twist at the same time.

100% self-service means a direct to market strategy unless we start seeing on-line search engines doing a “go compare” on a B2B basis (surely not).

Marginal pricing means taking a collective view. A collective view that across the 1.2m opportunities out there, there are as many ladders as snakes and that a general price broadly adjacent to 0.5% will be sufficient to keep you in play for a decent slice of the cake. Rather than loading transient workers with a 0.9% AMC, start thinking about “pot follows member”. Build your product so good that people want to spend their savings on retirement. Restore confidence in pensions by being a Force for Good!

Here’s the room called Harmony John. Open the door and you’ll find a number of people ready to shake your hand;- myself and David Pitt-Watson among them.

or hearts?

or hearts?

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in annuity, auto-enrolment, customer service, David Pitt-Watson, dc pensions, EU Solvency II, Financial Education, Henry Tapper blog, pension playpen, pensions, Personality, Popcorn Pensions, Retail Distribution Review, Retirement, social media and tagged , , , , , , , . Bookmark the permalink.

21 Responses to “Stick or twist” for the lifecos.

  1. John Moret says:

    Henry – an interesting post for April 1st. My difficulty is working out who’s fooling who? Many life companies aren’t really providing life assurance and covering other risks any more. Equally platforms come in many different shapes and sizes -and yet the majority are still struggling to break even -despite administering over £200bn of assets.. As for Nest and Now I’d suggest neither has yet proved that they’re there for the long term.
    Ultimately I think the debate comes back to price and reward -and customer engagement. HL are a good example of how understanding your customer and communicating effectively can provide a profitable model. The price and reward debate has rumbled on for the last 25 years and will continue no doubt for the next 25 – with fund managers continuing to obfuscate on the former and the reward becoming more of a lottery as growing numbers rely on DC outcomes.
    Where I agree is that self-service will be become increasingly important. I remain unconvinced that “pot follows member” will be the panacea that you imply. More worryingly there are still too many rogues in our industry who will look to take advantage of the gullible – pensions liberation and worse.
    I admire your mission – and hope the date won’t come back to haunt you!

    • henry tapper says:

      John – my argument may be wrong but I wasn’t joking!

      I remarked a few blogs back that any comment that had “interesting” in it’s opening sentence, would later turn into a rant- your proved the exception!

      i suspect we are talking about two seperate markets, the groups sipp/wrap market is proving to be high value but low volume, AE has turned that on its head. Profitable famine or an unprofitable feast?

  2. Pingback: “Stick or twist” for the lifecos. | futureproofmoney

  3. Scott says:

    Very Un Professional article Henry especially naming ‘HoF’

  4. Jamie says:

    “These mastertrusts have all twisted, they have all adopted NEST’s public service “collective” mantra and will offer blanket terms whether their customers have high staff turnover or low average salaries or multiple payrolls.”

    Not quite true, we have hard evidence that one (possibly more) Mastertrust provider has refused business. NEST are the only provider with a public service obligation…

  5. Agree Jamie, at the moment only Nest and NOW: have accepted all sectors and all business, and have the scale and capacity to continue to deliver for all amongst Master Trust providers.

    John – Nest and NOW: are already proven as models to be here for the future based on scale acquisition to date. Admittedly Nest have a significant tax payer funding issue to payback, but both will deliver a reducing cost model accorded by increasing scale.

  6. PJ Zoulias says:

    Jamie/Niall allude to the key point that I think these articles are missing – the inherent incompatability of a fixed cost base with a proportionate charging structure. This is another case where the market often wants everything and doesn’t aknowledge the incompatibility of its own desires.

    It’s easy to say “off course we’ll offer 0.xx%!”. What that translates to is “we will refuse business that does not look profitable at that level”. You cant just take these high level AMC figures and compare them as they are directly related to the specific context of the scheme circumstances. If it costs (making this up) £10pa at the margin per member to service them and deferred members with small pots don’t provide this amount through the low AMC then someone HAS to subsidise – the shareholder, or active members. When youre making 2% banded contributions with a high turnover, low paid workforce, you’re not a great value proposition – particularly if you need commission support. In particular comparing a commission-included AMC to a NEST AMC is nonsense. One must also consider the immense impact of assumptions in AMC cost-pot impact projections. I can assure you, I wouldn’t care one hoot that Birkshire Hathaway charged an arm-and-a-leg if I’d invested in them 20 years ago.

    It’s worth noting that providers have also – without government support – had to invest substantial amounts up front in order to cover the gap the payrol providers left in managing this legislation. Providers are not charitable groups. I imagine any company can be criticised for some aspect of its business model if you scream loudly enough. Why am I paying £100 for a microsoft download with a 2p distribution cost? Why do supermarkets pay farmers so little for milk? Why do bread prices go up with wheat prices but not down? Why are First Actuarials charge out rates so high? I can go to the Money Advice Service or Citizens Advice Bureau for free! 🙂

    So..I say pick a consistent, coherent position!

    Are you in favour of a flat x% AMC? If so I assume you’re in favour of pricing member cross-subsidy and in favour of refusing to help a substantial number of clients.

    Are you in favour of the dutch pricing model? Then I assume you love with-profits funds? I assume you’re happy to see your income clawed back to support the generations below you? Not a fan of Libertarian principles (of course state should control where how and when I invest my money!)

    Do you dislike the thought of leavers subsidising those left behind (despite the fact they are free to move their money) but cuncurrently don’t mind actives subsidising leavers (who don’t have that choice?). Do you prefer an across the board, but higher level of charging all round?

    Should pricing structures be loaded at the front (fixed fee, contribution charges) or at the end (exit fees, product lock ins?)? .

    You can’t simply demand the best of all worlds….that just isn’t a coherent position.

  7. pjzoulias says:

    PS: I’ve just done some modelling:

    My mortgage payback period if I didn’t pay the bank, lawyers, surveyors, estate agent any charges or interest:

    12 years

    My mortgage payback period if I pay charges:

    25 years


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