“Fit lean pension machines” – an uncomfortable prospect?

pension machineNow that life companies have digested the shock to their distribution systems of the ban on consultancy charging, they’ll be asking

“what’s that coming over the hill…?”

“Is it a monster?”.

Because the Life companies were here before in the late nineties.

Steve Webb knew what he was doing, announcing in May a deferred  consultation on a charging cap. It puts planning blight on the sale of high-charged products and gives the DWP time to do a deal.

Nevertheless, the announcement  is a clear a marker that for schemes to “qualify” as workplace pensions from 2014 onwards, they need to be fit, lean pension machines.

He’s got three reasons to drive excess puppyfat out of the market

  1. He knows the OFT are coming; the OFT are the Visigoths of Governmental quangos, they take no prisoners and noises off suggest they are finding UK pension providers about as flabby as a 5th cent Roman debauchee. (Aye Claudius).
  2. He needs a level playing field for “pot-follows member” which cannot allow pots to march up the charges hill. For public confidence in workplace pensions to be restored, we need a low dispersion of charges with a very small tail of schemes with charges above a baseline level.
  3. On a purely political level , he needs to head off the Pictish predator Gregg McClymont, who has publicly stated that unless the ABI and IMA get their acts together and out hidden costs, he’ll wave his tabard in their general direction come the revolution sorry next election.

That’s three good reasons to ignore the “special pleading” of the life companies. I’d be cynical to suggest that Webb is driven purely by expediency. He is clearly a conviction politician who knows what makes for good. Let’s hope that any other kind of conviction can be avoided.

But back to the deal..

“A fit lean pension machine” is one thing. But if life company CEO’s smell the whiff of a smouldering Bob Diamond in the air, they may well decide enough is enough. There are pastures greener in the Middle and Far East where charges and margins remain high. Why transact where the earth is scorched when shareholder value is around elsewhere. It’s not as if our great British Lifecos are run by Brits, the new CEO of Aviva is a Kiwi (for example).

So here’s Webb’s challenge. Fail to nail charges and you get flailed by the OFT, screw pot-follows-member, and give ammunition to the Labour Party; overdo the charges cap and you find yourself with a gap in the market signed “insurers woz ere”.

Judging the appetite of the flakier insurers to play on a pitch already tilted by Solvency II is tough. With the mastertrusts enjoying a Solvency II free ride and carrying no overweight from the legacy, many insurers are already struggling to win new business. It is hardly surprising that the ABI are getting agitato.

It is not in the long-term interest of our workplace pensions to lose major providers. At the very least we need them to pay attention to their existing books of good business. We need them too to down-charge the schemes which pay commission to absentee advisers , to take out inappropriate “active member discounts” and to offer upgrades from legacy products that will not limbo into qualification..

So look out for the odd olive-branch waved over the summer from Caxton House. If the ABI are doing their job, they will be feeding the DWP ideas that provide compromises that “future-proofs” Webb and themselves.

Likewise, the ABI have to be careful how they position this with the DWP and the country.

The insurers made it plain during the Boulding consultation of 2010, they did not want to play at the back end of auto-enrolment . Since then , many of them have built the apparatus to do just that. Was the 2010 position pure posturing and will the whingeing that will accompany the “fit lean pension machine” charge cap of 2014 be any different?

The spectre of the charges cap is creating a phoney war over the summer and if you are still with me after this melange of mixed metaphors, you can see why I predict six months of “planning blight”.

The strategies of course remain the same “STICK OR TWIST”. We move into day two of auto-enrolment with all to play for on a pitch increasingly likely to take spin.

 

About henry tapper

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