The funding challenge

1 July 2010 Corporate Adviser

While group risk premiums dipped in 2009, the recent Swiss Re Group Watch report on the sector, titled Turning the Corner expressed cautious optimism that modest growth could be anticipated. Delegates at last month’s Group Risk Adviser Forum agreed that there are some positive signs that the worst of the economic downturn is behind UK plc, but signaled significant hurdles for the sector to overcome in both the medium and long term.

The removal of the default retirement age, automatic enrolment and the Retail Distribution Review could all pose significant problems to group risk, said delegates at the event, held by Corporate Adviser in association with Aviva, in London in June.

Advisers said the biggest issue on the horizon for companies, whether they currently have pensions schemes in place or not is auto-enrolment.

The establishment of a million new pension schemes by 2016 is unlikely to lead to rich pickings - companies having to enrol staff into existing schemes could end up moving funding away from other employee benefits to pay for it.

So is auto-enrolment and Nest viewed as net positive or a net negative in terms of leading to an uptake in group risk sales?

Rebekah Haymes, risk and flexible benefits director at BDO, said it is still too early to tell. “It is very apparent that a huge amount of education needs to be done. There are still many companies out there who are out of touch with what these changes will mean or even what Nest is.”

Jamie Barnes, senior director - development of partner and service offering at Enrich, agreed: “Even if employers have heard of it, they have their heads in the sand. Engaging companies with the changes is challenging.”

Meanwhile, Fletcher is in the glass half full camp. “I think there could be more flexible benefits offered, but the problem remains - how are employers going to fund these and pensions?” he said.

However, Jamie Winter of Towers Watson expressed extreme concern that auto-enrolment would reduce group risk overall. “I see this as a net negative. Yes, some employers may start to look more at flex. But auto-enrolment is set to mean more employers will look to reduce costs, and the cost of group risk could rise. We have to find solutions and in the long term, it could turn out ok. Nest is going to happen, and for some clients it is going to be a big shock.”

Taking a pragmatic approach, Stav O’Doherty of Perfect Health said: “I see things as being chaotic. It will be difficult for providers to get their costings right.

There is a lot of work to be done. Let’s not forget that the people who have a good pension and benefits scheme are in a minority. Many people know nothing about pensions and they need educating in this - and then about protection too.”

She continued: “We also need to see how Nest is administered. The government has announced its agreement with Tata, but to date it does not have a great record for managing IT projects and safe record keeping.”

While there are clearly some worries from group risk advisers on the effect of auto-enrolment, the proposed removal of the default retirement age is predicted to compound these problems. The group risk market could face potentially massively costly rises in claims if people who are covered are much older, even if the industry gets the opt-out that it is looking for.

Katharine Moxham, Group Risk Development’s (GRiD) spokesperson, explained that GRiD has been in intensive negotiations to achieve relevant exemptions for providers and also through the recently passed Equality Act.

“Our submission was well received in the call for evidence in terms of its quality and depth of thinking, and proposals from the government are due to come out in the summer. With the Equality Act, our arguments were taken on board.”

“I had a bizarre experience recently when one client was sending a number of staff on a regular basis to Helmand province in Afghanistan, and the insurer did not bat an eyelid, but when we spoke to them about insuring older employees, they panicked”

Moxham said she believes the default retirement age of 65 will be removed (something that indeed happened in the emergency Budget).

“What we want to see is an upper age limit agreed where benefits can cease. But, I would emphasise that we don’t want to see people left with nothing -we want to see equal spend. That could mean people receive more salary, for example, or perhaps a contribution towards long term care.”

O’Doherty added: “I have heard talk of age 68, but why not run it with state pension age? It would also seem concerning that any change is going to cost the industry more.”

Meanwhile, Winter added: “For all the negatives for the market, we also have to listen to those who want to work longer, and also employers who say they want to keep people on - and provide some benefits for them.”

Winter referred to an extreme experience that highlights perfectly the magnitude of the problems faced by employers wanting to insure older workers. “I had a bizarre experience recently when one client was sending a number of staff on a regular basis to Helmand province in Afghanistan, and the insurer did not bat an eyelid, but when we spoke to them about insuring older employees, they panicked,” said Winter.

There is a nettle that needs to be grasped here - and my concern is there are far too many discriminatory practices going on. There will need to be redesign, and the affordability issue tackled.”

Delegates at the event said the Retail Distribution Review (RDR) remains one of the key challenges to the sector, with confusion as to whether group risk will sit within it persisting. Of particular concern was the potential for problems over commission disclosure, in the event that group risk is sold alongside products where investment advice is being given particularly in flex schemes.

CP10/08, Pure Protection Sales By Retail Investment Firms, said retail investment firms must explain how they are remunerated for pure protection services associated with investment advice, and disclose the amount of commission they receive if the customer then purchases a pure protection product. However, there could be breaches of this should sales be taking place through a flex platform with limited or no advice provided.

Moxham emphasised that a great deal of work has been going on behind the scenes to ensure that clear guidance is produced by the regulator and that advisers and providers do not run into any nasty surprises at a later stage.

“We have been making sure the FSA is aware of group risk, and we are now waiting for clarification of what the final position will be. I am hopeful of a reasonable outcome. Group risk is quite different to pensions, investments and mortgages,” she said. Key to the RDR is bringing about a more transparent market and the substitution of fees for commission. But several delegates pointed out that it is already common practice for providers to pay the adviser a commission that is disclosed to the client.

Out of this sum, the adviser will take an agreed amount - and may possibly rebate some to the client.

Enrich’s Barnes said: “What matters is that intermediaries agree with clients how they are paid. We would not want to see commission being completely banned - what we are looking at, in comparison to other sectors, is far smaller sums in any case.”

And, as Simon Fletcher of Johnson Fleming pointed out: “To take a fee out of commission tends to be far more appealing for many clients, not least in that they do not have to do the accounting work. And the sums we are talking about are in marked contrast to pensions. I would add that I don’t see any big problems with group risk in terms of charging. A few years ago we heard of horror stories where a £1 million group risk contract was earning the adviser some 12 per cent commission. Now, there are far more stringent reviews. Advisers and insurers have been beaten down on costs - there is far more transparency all around.”

“A few years ago we heard of horror stories where a £1 million group risk contract was earning the adviser some 12 per cent commission. Now, there are far more stringent reviews. Advisers and insurers have been beaten down on costs - there is far more transparency all around”

Jamie Winter of Towers Watson added: “Yes, advisers who were charging huge commissions have been found out. Now, if a client said they had been quoted 12 per cent, we could probably charge them around 4 per cent.”

It was pointed out repeatedly that pensions advisers earn far more in terms of fees - but the inference was that group risk has not blotted its copybook and so it is other advisers who face more of a squeeze.

Delegates added that the challenge of introducing RDR-compliant remuneration structures into the group risk space was made easier by the fact that the shape of commission more closely reflects when work is done. Pension advisers carry out the greater part of their work in setting up the scheme, yet today’s commission structures allow providers to spread these up front costs over many years, a flexibility that will be outlawed under the RDR’s proposals for consultancy charging. The regular annual commission on group risk products does not face this challenge. Furthermore, there are typically no employee contributions to pay for group risk products.

When it comes to headaches facing group risk advisers, one issue became clear - the ’p’ word. Procurement - and the increasing involvement of those working in this field - is something that is becoming part and parcel of the group risk adviser’s role.

As Barnes put it: “The HR team are going to be interested in scheme design and the quality of advice. Procurement is all about approving a number, and they want to try and squeeze and feel it.”

So, is there a risk that procurement departments are set to become even more controlling - and will ultimately end up make the final decisions on what benefits are put in place? Fletcher said: “I’ve noticed we are coming across procurement more often. It started as a trend within pensions, which I also advise on, but you now also see it in group risk.”

“No sensible business is going to say they are coming out of recession without keeping a very close eye on what is going on for a while longer”

O’ Doherty said: “We identified this trend last year. HR will still be leading discussions and wanting to know about benefits, but procurement will come back and say what the decision is.”

Clearly, this must have its frustrations. Winter said: “It could be quite dangerous if procurement is involved in scheme design.We wouldn’t be comfortable with it. You want to deal with people who understand what you are talking about - and that is not going to be procurement.”

But, even if the pains of procurements must be accepted, advisers are generally positive about the coming year. Fletcher remains bullish: “Our targets at Johnson Fleming are up on last year - but we are confident we an do more business even if employers are negotiating more on premiums and are being more demanding. We need to reflect what is happening. Many companies will have been through a tough time and while they don’t want to cut back on benefits, it’s a much tighter process.”

Moxham added: “With procurement, it’s all about the widgets and that’s something we don’t want to see.”

No advisers were talking of a full scale recovery, reflecting the caution their clients are expressing.

“No sensible business is going to say they are coming out of recession without keeping a very close eye on what is going on for a while longer,” said Barnes.

While the worst of the financial meltdown is behind us, the challenges facing the group sector appear, on the face of it at least, as great as the opportunities.

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