There has been a great deal of debate about the introduction of stakeholder pensions. To better understand the opportunities and threats that stakeholder might bring to the IFA, CMG carried out an extensive research project in conjunction with Towry Law and 15 of the major product providers.
CMG's research shows that stakeholder pensions can help the IFA develop existing business and build new, profitable relationships with employers and their employees by off-ering a more comprehensive service for enhanced emp- loyee benefits.
From CMG's research, the targeting of profitable employer relationships is going to be crucial. Key factors affecting profitability are:
Variable levels of ser-vice depending on employer segmentation.
Convincing employers of the added value of IFA services.
Scale of distribution.
Exploitation of worksite marketing.
Efficient payroll/contribution processing.
Large-scale exploitation of appropriate technology, especially the web.
While providers may be able to establish a direct relationship with bigger employers and affinity groups, the small and medium-sized employers will continue to rely on the IFA.
SMEs are unlikely to be as sophisticated as the big corporate market. For that reason, any segmentation of the potential client base and linked services must also be kept simple. There are three main segments.
The enthusiast or enlightened employer. This employer understands that, by providing a comprehensive emp- loyee benefits package, it will attract and retain good staff, demonstrate a caring attitude, improve morale, remove or reduce financial loss on early death or illness (by planning and spreading the costs of retirement for employees and their families).
This employer is likely to be prepared to contribute in excess of 3 per cent of salary or basic pay to employees' pension arrangements.
The professional. Now that the Government has imposed a pension provision facilitation obligation on this employer, they will wish to handle these obligations using the most effective and cost-efficient methods.
Previously, they were not prepared to contribute to their staff's pension plan and this attitude is unlikely to change.
However, if in meeting their statutory duties, they are able to offer an improved choice to their employees within a limited budget and thus a low-cost benefit, they will do so.
In denial. This employer previously made no provision for their staff and their attitudes will not have been changed by Government legislation.
They will not contribute to an employee's pension scheme and are unlikely to be prepared to pay fees that are necessary to cover the costs of an int-ermediary helping the emp-loyer meet their statutory obligations.
Individual high-net-worth customers may fall within this category and IFAs will not want to lose their personal custom.
However, nor can they afford to loss-lead as customers will happily accept free or loss-leading services and still place their profitable business elsewhere.
Fortunately, many emp-loyers in denial are very small and so are excluded from legislation.
IFAs must develop a series of tools to assess quickly the attitude of employers and a series of sales aids to engage potential clients in commercially viable services, including other employee benefits.
Those prepared to contribute substantially can be offered higher-value services on an inclusive basis.
Those services may include specific employee benefits in addition to pensions, such as health insurance, family pro-tection, other insurance-related products, investment advice and products, as well as education for staff to better understand the world in which they work, for example, the importance of pension provision.
This has a direct benefit for the employer as employees tend to significantly underestimate the value of the benefits provided by employers.
As by-products, both the IFA and employer benefit from reduced costs associated with employee benefits administration, while at the same time, the quality and scope of services provided are improved.
Of course, employers who only want help in meeting their legal obligations must be persuaded to pay fees linked to explicit services.
Not surprisingly, the enlightened employer is by far the most attractive segment, with the following criteria being important when identifying profitable businesses:
The level of employee and employer contribution.
Staff retention and consistency.
Employer endorsement and active support.
Minimum numbers (20-100).
Total contribution levels (£10,000 a year minimum).
The web provides opportunities for lower-cost distribution but cannot easily take the place of good face-to-face advice, at least as an introduction. Thus, an employer-sponsored communications strategy will continue to be the favoured approach.
The advent of stakeholder pensions provides the ideal opportunity for IFAs to seek to exploit worksite marketing for the sale and support of employee benefits.
The communications strategy should include:
Worksite meetings, planned in advance and advertised, held in company time.
The use of payslips to give details of meetings and, ultimately for deduction of contributions to minimise cost and improve persistency.
The provision of a fee-based helpline to provide information and advice.
Posters in the workplace advertising future meetings and the telephone helpline.
Video/CD-Rom presentations to create more of an impact and confirm the prof-essional standing of the IFA/ provider.
Members booklets or brochures, personalised and tailored information also enhances the take-up rate but this will be dependent upon access to HR and payroll data.
An employer intranet site to include at least a “brochure-ware” description of the plan and preferably to give access to much more information via links to the IFA/provider.
Access to the home address of the membership to mail invitations to employees to encourage attendance at presentations and to deliver ongoing documentation.
Any briefings sent to staff should include a clear summary of the benefits and should be distributed in advance to give employees time to understand what is on offer before the meetings.
Documentation should be in plain English with the minimum of jargon. Pre-filled application forms increases the take-up rate.
Perhaps not surprisingly, the use of information technology, both by the IFA and provider, is going to be increasingly important to minimise the cost of doing business.
Duplication of employer, intermediary and provider tasks must be reduced.
Necessity is the mother of invention and the pressure to reduce costs is already driving the development of a new way of doing business across the industry, changing the roles of providers and IFAs and in particular, the use of the web for scheme set-up and servicing.
While there will undoubtedly be ongoing criticism of the Government's vision for pensions, the challenge could be the best thing to happen to our industry for some time.
If nothing else, it will encourage providers and int-ermediaries to work side by side to develop the new e-business infrastructure that must exist to deliver stakeholder pensions for all.
KEN McCarthyMarketing manager (life and pensions division), CMG