A view from the top
An unashamed commitment to commission and a respect for the intermediary channel are key to Aviva’s group pensions strategy says David Barral, the provider’s new UK life head. John Greenwood finds out more
Sitting at the top of Aviva’s massive tower block opposite the Gherkin in London’s Square Mile, David Barral, the incoming chief executive of the provider’s UK life business has every right to be feeling positive.
Having started out straight from school with Commercial Union more than 30 years ago, accepting the first job he applied for, he would be entitled to savour this latest career highlight. But his positive outlook appears to stem as much from a belief that he is taking over the reins at a company that already has a strategy that works. And that strategy is one Barral believes is proving critics of Aviva’s commission-paying business model wrong.
Aviva is often portrayed as one of the last men standing in the game of big commissions on group pensions, a model that has gone out of favour for much of the market. It is a model criticised by Ned Cazalet’s watershed 2006 Polly Put the Kettle On report, that highlighted the losses group pension providers were suffering as a result of paying high up-front commissions. With poor persistency and high levels of rebroking of schemes, providers could never profit from the business they were buying, the report argued.
While Cazalet’s report doubtless made all providers change the way they paid for business, particularly up-front commission, Barral believes Aviva’s commission-paying strategy has ultimately been proved right.
“The fundamentals are that, subject to working with the right IFAs, we will make just as much if not more, and in a lot of cases more, on a commission basis than on a fee basis. Although your retention has to be good,” he says. “Our profits have doubled in the last five years as a life business. Because of the financial strength we have got, our brand and scale, our margins and return on capital have all increased.”
Barral sees this having happened in part because other providers were ultimately forced to throw in the towel.
“It is not acceptable for people to say they have put their money where their employer said, and forget about it. If they take that view, they should stick it in cash”
“Obviously the other providers quite simply didn’t have the capital to be able to deploy against commission. Because the challenge is that you are funding it up front. We are very happy with our return on capital. It meets our group hurdle rate. And we believe it will only improve post-retail distribution. So we are very confident about it.”
Barral points out the combined effect of RDR, auto-enrolment and other providers walking away from the commission market make that retention issue easier to cope with.
“Will the money still be washing around the market post-RDR in the way it has over the last 10 or 15 years? We think not. Retention as a whole will be significantly enhanced. It will be far too difficult for advisers to shift a scheme post-RDR.”
This positive attitude to commission is something that Barral is keen to get across. We will continue to pay the commission on the increments and on everything else we can do, as far as the rules will allow us,” he says. “With the caveat that if the shape of the scheme changes fundamentally, it could change.”
Barral has been reported as predicting a near halving of IFA numbers as a result of the RDR, but his current estimates are nearer 20 or 25 per cent.
“We would describe the majority of those as being in what we would call the low end of the generalist IFA market. We think those advisers that are operating in the corporate environment are largely more sound and resilient anyway,” he says.
But he does see advisers needing to change. “There has already been a huge shift towards building up a recurring income stream, so many will be able to survive, certainly in the short term, if they don’t write a new piece of business.
“But advisers will have to be tight on their costs. They are going to have to be efficient and do business online, with slick automation. And they will only use people in their own businesses where they are actually adding value, rather than pushing paper. But I think a lot of them started that shift quite a long time ago.
“The winning position is getting your business in order and your costs in the right place, getting the commission on a recurring basis so you can wean yourself off that full up-front commission, so that you can effectively have money coming in the door that covers your business costs before the start of the year.
“And then the next challenge is how to win genuinely new business over and above that, and how to get increased penetration with existing schemes,” he says. “We have woken up to the value that is within the existing base. Take up is about 45 per cent and we think it will go up to between 70 and 80 per cent. That is a lot of new money coming in.”
Switching from rebroking existing schemes to genuine new business will not be as hard as advisers might think, he argues.
“There are about 25,000 employers in the 50 to 2,000 employee target market that do not have a scheme at all,” he points out.
Barral believes the expansion of services beyond pensions will be a growth area for those advisers not already doing so.
“Advisers might want to start thinking about how they can provide other services on top of pension schemes. So if you look at the way the market has gone it has moved away from just pensions towards thinking about broader savings products.
“We think there are opportunities for advisers to offer advice-rich solutions that go beyond pensions”
“The reason corporate business is so attractive to us is that we believe employees have a trust through their employer that does not necessarily exist elsewhere. We see this as a method of accessing consumers and doing that in partnership with advisers. This is a really attractive place to be, particularly as automatic enrolment means the whole subject is going to be on people’s minds so much more,” he says.
To this end, Aviva’s corporate wrap proposition will roll out from the beginning of next year with Isa and Sipp penciled in for Q1 of 2012. And this summer, voluntary benefits such as childcare and holiday will be added to the recent total reward statement flexibility launched earlier this year.
“We see the opportunity for advisers to broaden into full consultancy,” says Barral, pointing to healthcare and absence management as potential areas for growth for intermediaries. “We think there are opportunities for advisers to offer advice-rich solutions that go beyond pensions.”
Being a composite insurer operating in virtually all consumer insurance markets, that is perhaps not surprising.
“We think we are almost uniquely placed in terms of the sheer breadth of what we can bring to that party for those employers wanting a one-stop-shop solution. Why not do car insurance and contents as well? But it is important to note that we don’t think just having one provider approach is right. We are definitely building our system so that corporate advisers with their own systems can plug theirs into ours,” he says.
A cynic might suggest that it would be commercial suicide to do anything other than prioritise your relationship with the intermediaries who bring in three-quarters of your business. But Barral argues that Aviva is more committed to the adviser channel than other providers.
“We think this a key differentiator for us, to be honest. We have taken a very deliberate stance that we are offering ours, but you won’t have to take it. We want to get over that it is a partnership between us and the corporate advisers. It is working with them to try to create the best value, for us and the advisers themselves, by delivering what the employers and employees really need,” he says.
And does that extend to direct group pensions business?
“We have zero plans to go after employers direct,” says Barral. “The adviser market as a whole provides 75 per cent of our revenue. The corporate pensions space is an absolute priority for us. We have been investing in it for years. We have had this strategy for years, so there is no new strategy. We aim to help advisers through their transition, and work out how we can give them a proposition that suits the needs of employee and employer and allows them to demonstrate value-add above Nest,” he says.
For Barral that will be all about education. “It is not acceptable for people to say they have put their money where their employer said, and forget about it. If they take that view, they should stick it in cash. If you are going to invest in anything other than a deposit fund, you are taking a risk,” he says. Instead, a major employee education process is required, and that will be a key part of the role of the corporate adviser going forward, he argues.
And how will they be remunerated going forward?
“The research shows the numbers of employers prepared to pay a fee is pretty small. There may be a change in the future, but on a consultancy charging basis, we need to be set up for a range of things, whether it be percentage, partial fee/partial amc. But unlike in the individual market, businesses know you don’t get anything for nothing,” he says.
As a man who has spent more than three decades working with advisers and consultants that have thrived whatever the regulatory background, this is not a challenge Barral sees as being beyond them.
“Advisers are going to have to be confident about how they put that over. I have faith in that community being able to get that message across.”
All about David Barral
June 2011 Chief Executive Officer, Aviva UK Life
2009-May 2011 Chief Operating Officer, Aviva UK Life
2008-2009 Marketing Director, Aviva UK Life
2005-2008 Distribution Director, Norwich Union
1999-2005 Director of IFA Business, Norwich Union
1998-1999 Director of Client Services, Deutsche Morgan Grenfell
1995-1998 National Sales Manager, Prudential
1986-1995 Distribution Development Manager, Eagle Star
1984-1986 Manager, Andrew Yule Insurance
1982-1984 Claims Negotiator, Guardian Royal Exchange
1981-1982 Sales Associate, Abbey Life
1979-1981 New Business Life Clerk, Commercial Union
Education & Development
1994 Financial Planning Certificate
1992 Open University Certificate in Management
1979 Claremont High School, East Kilbride, 3 A Levels, 9 GCSE
Married to Annemarie for 26 years with three boys aged 22, 20 and 13. Enjoys golf, skiing, entertaining, wine, cars and trips to Naples, Florida. Supports Manchester Utd FC