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.
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.
- Give a straight red to active member discounts (henrytapper.com)
- “What’s expensive for a pension these days?” (henrytapper.com)
- Some of our insurers are missing (henrytapper.com)
- It’s a wrap trap – but who’s been caught? (henrytapper.com)
- Better-buying makes auto-enrolment work (henrytapper.com)
- Time to look at VAT on pension costs (henrytapper.com)
- Cometh the hour;- the Regulator gets its man (henrytapper.com)
- When pensions de-mutualise (henrytapper.com)
- So what’s a good DC pension – Mr Webb? (henrytapper.com)
- Beeb forces closure of offshore payroll loophole (henrytapper.com)