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Are jobs going East?

It is possibly a little early into the new millennium to start thinking about who journalists will be identifying in 2999 as the best and the worst politicians of the previous 1,000 years. But it has to be a fair bet that when it comes to the most incompetent Chancellor, Gordon Brown will be at or near the top of the list.

There are not many things in which it can be said that the UK is still a world leader. Before Mr Brown&#39s arrival at No 11, it was fair to say our life and pension industry was certainly the most sophisticated in Europe and capable of holding its own in global terms. In well under two Parliamentary terms, the Chancellor has managed to bring an industry of which we could have been proud to its knees.

There can be no doubt that pensions are in the media spotlight as never before. We have probably seen more front-page stories on the subject in the last six months than in the previous two decades. As ever with personal finance stories, the national press are not writing about good news.

As early as his first Budget, Mr Brown could not wait to raid the pensions that millions of citizens expected to be able to rely on in retirement. Over the preceding decade, the spectre of the removal of the advance corporation tax exemption for pension funds had been touted but the Tories had clearly realised that this was a poison pill that would come back to haunt them. No such prudence from Chancellor Brown, who helped himself to a large chunk of the profit from everyone&#39s pension.

The loss of tax credit has clearly exacerbated the effect of FRS17, with devastating effect on the defined-benefit pension market. This in turn has compounded the problems in the UK equity markets as funds have had to dispose of equities in a declining market – an action that can only further fuel the problem.

Would a prudent Chancellor not have foreseen such problems? It is not as if the industry did not try to warn him.

Yet all the above may shortly seem like nothing compared with the true cost of Mr Brown&#39s 1 per cent world – a cost that may only just be appearing.

As every IFA will be aware, insurance company resources have been cut to the bone in recent years. The reason is simple – economic necessity on the part of product providers recognising the margin, or lack of it, that they have.

It has been clear for some time that drastic action is necessary if insurers are to remain profitable. It now looks like the action may be more drastic than any of us may have feared.

If strong rumours circulating in certain parts of the industry are correct, a major UK life office will shortly close its UK processing and admin operation and relocate the jobs to elsewhere in the world where they can operate on a fraction of the cost base.

Although this may sound unthinkable, it is comparatively easy. Modern telephony makes it as easy to operate your call centre in Bombay or Shanghai as it is in Bristol or Edinburgh. If qualified labour is available at a fraction of UK salaries and land costs are a fraction of the UK price, it is not difficult to see how the numbers stack up.

Language and accents are not the barrier that they might seem. The organisations running call centres will put staff through language courses.

A recent study by Marlborough Stirling, which operates an offshore outsourcing operation with Sanlan, a major South African insurer, identified that clerical staff of a particular grade would represent a cost of £27,000 a year in Edinburgh while staff with equal experience and qualifications are available in Cape Town for £10,000. Someone else has recently suggested to me that, moving further East, you can operate your admin for 10 per cent of the UK cost.

A key question must be could it have been avoided and is it too late to stop the haemorrhaging of jobs in this industry?

The answer to the first question must be yes. If Mr Brown had not been so intransigent over the fact that providers had to absorb uneconomic transactions and if he had allowed providers to mandate that low-cost products have to be serviced via channels based on technology, where this could be done economically, we would almost certainly not be facing this situation.

I am in no doubt that the vast majority of insurers would want to act as socially responsible employers keeping jobs in the UK. But that this is not an economic option.

If we could move quickly as an industry to adopt electronic trading along the lines advocated in the Sandler report, this may offer some respite. Recent moves by IFAs co-operating as part of the Adviser Technology Forum – who have stated an aim to agree by the end of the year the process that will be adopted to make electronic trading the standard method of working – may help. But such efforts need to be embraced quickly by insurers.

Perhaps the biggest challenge is that once one ins-urer makes such a move, it will become inevitable that City analysts will be asking all insurers what steps they plan to take on cost-saving opportunities from moving their admin to lower-cost offshore locations.

The job losses will affect financial centres all over the UK but it is hard to see how Scotland, which has already been affected by the high-tech downturn, will not feel the brunt of the consequent unemployment.

This may make Mr Brown less than popular in his home country. Perhaps this could be reason enough for him to reconsider the wisdom of his 1 per cent world?

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