Clerical Medical's future in group pensions has been plunged into doubt after its drive for business volume left it with an insurmountable administration crisis forcing it to withdraw temporarily from the group market.
As a result of the move Clerical, one of the biggest stakeholder providers, expects to lose out on around 1,500 schemes, but hopes to reopen to group business in the first quarter next year. Based on its growth rate for the first six months of 2001, the life office is set to lose £63m by the end of the year, not accounting for the inevitable increase throughout the Oct-ober deadline period.
The repercussions could be even more serious for Clerical as its long term credibility and its ability to re-establish itself in the group market now appear under threat, with IFAs saying they will find it difficult to recommend Clerical in the future.
Richard Jacobs Pensions& Trustee Services director Richard Jacobs believes Cler-ical must be in big trouble to have made such a startling admission and thinks Clerical will find it difficult to squeeze back in to a market that is bound to get smaller.
He says: “There are only going to be three or four providers around in the future and this may be too late for Clerical. It will be very hard for them to come back when others will have been competing aggressively. Only one or two will come through and Clerical will not be part of that. Now IFAs will be wondering where to go for business.I predict Clerical will be out of the market for a lot longer than Q1 next year.”
Clerical is the first to admit that its biggest challenge is to regain confidence from IFAs.
Pensions strategy manager Nigel Stammers says: “We have a challenge to re-enter. We understand and accept that and we understand that IFAs will want proof that we have got it right. But we are happy to pick up that gauntlet.”
The life office says the problem has been caused by an overwhelming influx of business. It reported new group sales up by 43 per cent to £44m from £30.8m for the first half of this year.
So what happened to the state-of-the-art systems from Equitable Life which Halifax paid millions for and which Clerical was expected to use? Clerical also installed brand-new systems for stakeholder from Marlborough Sterling.
Clerical insists the problem has not been with its systems but with receiving such huge volumes of business. The Equitable systems are to remain in Aylesbury and will be used in other parts of the combined business.
Stammers says: “This is not a systems' problem. It is purely about volume. We have had two sell-by dates in quick succession. The Nirvana situation, where business is all set up through e-commerce link, is far from here in reality. We are receiving data in paper form which needs keying in. Many of our customers are not yet e-enabled.”
The pressure from the low margins of stakeholder means Clerical has had to accept this business to push up volumes. It says it has not been cherrypicking group business and has welcomed schemes from all.
Stammers says: “It has been suggested that one or two companies have been cherrypicking and saying no to business. We have not done that, which could have had consequences on the business that we have taken on instead.”
Some IFAs are congratulating Clerical for owning up to its troubles and taking action to ensure the problem does not get any worse.
Informed Choice managing director Nick Bamford says: “This is a grown-up move from Clerical. I think it is commendable that they have come out and said that it would rather maintain its good relations and service standards to IFAs. Other offices might consider doing the same.”
This is more information than many other providers are willing to offer, with many preferring to obscure the number of schemes that actually require administration.
Legal & General says it has set up 24,000 schemes but how many of these are designation-only is not known.
Clerical's growth was in line with Norwich Union which saw sales rise 41 per cent. It admits it has had teething problems in getting stakeholder up and running but says these are now mostly behind it. Scottish Equitable, also says its systems can cope.
ScotEq head of group pensions marketing Colin Bell, says: “We are still seeing a lot of group business and group AVCs on the back of Equit-able Life but we are confident that we are coping with business levels because of our web-enabled technology.”
But Clerical's withdrawal is leading many IFAs to believe that other providers could well be in the same boat.
Roberts Clark director Ashley Clark says: “Insurance companies in general, not just Clerical, always seem to crumble with any increase in work volume. They can then play their joker by refusing to accept new business or offer a four month turn-round.
“This is about poor management. If senior managers spent less time in their ivory-tower offices, on the golf course or in meetings, discussing and planning other meetings, and went back to the shop floor to find out what really goes on in their business these problems would not occur.”
The reality of stakeholder's low margins is that companies are having to drive up business volumes to have any hope of achieving profits.
Now one of the biggest stakeholder providers has had to withdraw temporarily from group business because it was unable to cope. IFAs believe it may find it very difficult to get back.
The threatened big squeeze on the industry appears to have started.