Do consumers benefit from risk-based pricing?

hilary-saltThe question arose during a talk by John Raven of Oxera and whacked me right between the eyes. This is a big question in the development of workplace pensions. I was at a conference on annuity but I was thinking workplace pensions.

It had till now seemed obvious that the blunt instrument of a mono-price was a ruse to level up prices and that careful underwriting of propositions made sure the price was “fair”.

But this is not what is happening in workplace pensions. It seems that NEST and NOW and People’s Pensions and now Legal & General (who are moving into that space) are offering an awful lot for not very much.

Frankly, you have to work hard to get better underwritten terms from the insurers who adopt a “risk-based” approach – Standard Life, Aviva , Scottish Life, Scottish Widows, Aegon , Friends , Zurich and the large investment houses.

I wonder whether the position of the mono-price insurers is sustainable, I wonder whether the risk-based approach can work for the mass workplace pension market. There are of course insurers (for now just L&G) who will have a foot in both camps.

The idea behind a single price for everyone is distinctly mutual. It assumes that some more attractive propositions will cross-subsidise the less attractive. I mentioned this to David Pitt-Watson as an example of an insurer nodding towards collective DC – albeit with a GPP, a series of individual contracts. David did not buy the argument but I’m not taking it off the table.

In practice I am not sure that there is the appetite among some insurers to fully underwrite, We see tables in place for many classes insurers that segment propositions and drop them into pricing boxes. Rather than have an infinite number of prices, a half-way house might have four or five pricing bands some of which would be competitive (on price) with the mono-price , some not.

The mono-price in workplace pensions is now 0.50%. You can dance around the pin about the NEST and NOW charging structure but that is what you are paying across the piece.

The challenge for everyone will be to move the debate on from price whether mono or risk-based. A risk-based price above 0.50% needs to be explained (to comply) and that is a bet on employers focussing on value and on there being information/guidance/advice in the system that gives employers the chance to do this.

The only way I can see the information being delivered to the mass of SMEs and micros is via the internet , via self-service and decision making which does not rely on manual interventions.

If the pensions industry can find a way to get employers to make these decisions on pensions (as they do on many other things) then we are in business. The price issue will become secondary to the value issue and over time , the insistence on a highly risk-based approach will give way to a more mutual system.

I may be wrong, the idea put up by John Raven, that a risk-based system delivers more may be right, but intuitively I sense we are moving to a more pooled approach to pricing.

For now, the consumer has the best of both worlds, if he can find a way to do this cheaply, he has the option of underwritten or blanket terms (from the same provider). It will be fascinating to revisit this question in the next year and I have diarised to reblog about this in August when we have more experience and ‘s “rate a pension” service has some data to show what the customer (the employer) is chosing!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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