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Cheap but not cheerful

Recommending critical-illness cover on the basis of price means that clients are missing out on some useful features and benefits, says CBK principal Peter Chadborn

Many an IFA must feel like King Canute trying to repel the tide of competition they face in the protection market.

The cancer cover product from Virgin Money Life with the dubious title of The Big V is a pioneering new product. It claims to be 45 per cent cheaper than traditional critical-illness cover and to address a gap in the market for afford_ able protection.

This approach should be welcomed but it is a shame that it is only offering cancer cover and not cover for, say, cancer, heart attack and stroke.

The staged benefit payments are interesting but leave open to question the claim of savings to be made against a traditional critical-illness policy, which I believe could be tailored with life insurance and terminal-illness cover to offer a comparable alternative.

But is it all about cost? Does this new product not highlight the need to compare and contrast specific features and benefits comprehensively?

When I first crossed over from the dark side, I assumed that the best I could do for clients was to provide the cheapest quote for their protection requirements. But it soon became apparent there was more to it than that because policy features differed considerably.

My conclusion was that an IFA should surely consider the benefits of policies as well as the cost and then make a balanced recommendation. Many apparently only really consider the costs when making recommendations. If this is true, then no wonder there is a rate war.

Unless you are a big distributor that can afford to offer price promises, this is a battle that can never be won. If your primary justification for your chosen recommendation is that it is the cheapest quote you could find, you have only got yourself to blame if the policy comes off the books in six months because your client has found a cheaper quote at

The misguided belief that best advice means the cheapest quote is a philosophy which IFAs need to ditch if they are to remain a credible force in the protection market because there will always be someone offering a cheaper quote. The advice versus non-advice debate will continue to be argued but what is certain is that, more than ever, IFAs need to be able to offer added value for their clients.

This can be achieved because there really are some excellent features which can benefit clients if we only look a little further than just cost.

Take an example from The Exchange of typical mortgage protection quotes for life and critical-illness cover for a male, 35 next birthday, with 150,000 sum assured decreasing over 20 years. There is very little difference these days between the 10 lowest quotes. In this case, the difference is 5.14 a month for reviewable premiums and 5.06 for guaranteed premiums.

The initial research throws up the usual suspects and the easy option is to recommend the cheapest on the list. If we look a little further down the list and dig deeper into the individual features and benefits of the various providers, then we start to get into the realms of real and sometimes unique benefits for little extra cost.

One example is Bright Grey’s Helping Hand service, which includes the invaluable Red Arc rehabilitation and support services for claimants and access to professional helplines for policyholders. These benefits are provided at no extra cost.

Scottish Equitable Protect has a flexible underwriting philosophy. Rather than flatly decline applications as some providers do in search of a completely clean book of business, it adopts a can-do attitude and will offer alternative acceptances for borderline cases by making a rating instead of an exclusion. This can save time when trying to place a potentially difficult case.

Scottish Provident offers an extremely flexible plan including the option of critical-illness cover buyback.

Royal Liver’s tele-under writing process has proved popular with advisers and clients, with business processing times reduced considerably. These are just a few examples of added value that can be found if we look further than just costPlease forgive me if this is teaching you to suck eggs but if this is not a process that you already undertake, take heed because this approach should prove you are really adding value for clients and reduce the likelihood of you facing competition from cheaper and often inferior products.

Be proud of the fact that your recommendation is not necessarily the cheapest. Be up-front and tell your clients that they will get a cheaper quote from Tesco. You get what you pay for and, if they want to take their family’s financial security in their own hands, then they do not need your services.

Our suitability letters confirm that we have not necessarily recommended the cheapest product as we believe that the features and benefits of the policy take precedence over price. Excellent retention levels prove this approach works.

The growing trend for firms to shut down final-salary pension schemes is likely to bring a bonus for the advice market.

Co-operative Group, Rentokil Initial and Arcadia have recently made changes to their final-salary pension schemes and it seems inevitable that other companies will follow their lead. In December Rentokil closed its scheme to further accruals, with future pension benefits on a defined-contribution basis. The Co-op wants to move its final-salary scheme to an average-salary basis, although this is pending FSA approval.

Retail giant Arcadia is keeping its final-salary scheme but is increasing employee contributions from 4 per cent to 6 per cent and raising the retirement age from 60 to 65.

Informed Choice managing director Nick Bamford thinks it is understandable that schemes are closing or being altered.

He says: “In 10 years, I think you are unlikely to see any final-salary schemes in the private sector. They are likely to be extinct. An awful lot will disappear in the next two to three years.”

He adds that the closure of schemes will generate business for IFAs but the move will also dent consumer confidence in financial services. “Winding up these schemes touches on the pension misselling scandal. It knocks consumer confid-ence and creates another excuse for them not to take financial action,” he says/

Scottish Life group head of communications Alasdair Buchanan considers that the initial emotional response could be a short-sighted reaction. He says it is important for the industry to try to minimise the impact on the consumer by helping them to understand what is happening and by not letting them use it as an excuse to bury their head in the sand over pensions.

He believes restructuring of the pension market within the private sector will continue but he finds it difficult to see how final-salary schemes will survive in the public sector because there is a lot of pressure on the Government to ensure consistency between public and private sector pensions.

Buchanan does not think that final-salary schemes will die out. “As yet, there is no real alternative to these schemes and companies are committed to them because they need to get them into reasonable shape before they can wind them up.”

He agrees there will be more opportunities for advisers but he does not think the pace of closures will be fast but more of a steady decline.

Buchanan says: “If it proves difficult for companies to close down or change their final-salary pension schemes then it will probably slow the decline. But if they are wound up quite easily then the decline will be faster.”

There are a wide range of options open to the consumer if their scheme is wound up but there is not one obvious alternative, according to Buchanan. The least likely outcome is that there will be no pension for the employer. Other options include downgrading schemes to defined benefits based on average salaries.

But Hargreaves Lansdown head of pensions research Tom McPhail suspects that moving to a career average will only be a temporary measure used by a few firms. He expects the majority of employers will “drive the truck straight through” to money-purchase schemes.

McPhail adds: “The advice opportunities are as good as I can remember for the last 10 years or so. We should now be well placed to give advice and for a strong professional practice this is a great opportunity.

“I think it will scare the pants off the consumer but that is not necessarily a bad thing. It is a delicate balance between giving people a reality check and making them aware of the issues they need to face up to but not to drive them away altogether by being too heavy-handed. It is a balance between complicity and revulsion.”

Origen head of pension and product research Mark Stopard says companies such as Securicor are not only closing their final-salary schemes to new members but are closing them completely and he expects that others may follow this trend.

He believes that financial planning for pensions will become a crucial issue for major companies and estimates that 25 per cent of FTSE 100 companies have pension deficits that are bigger than their market capitalisation.

He says: “In 15 years’ time, retirement planning will be the main area of advice. Everyone realises that they need advice when they come to retire.”


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