In December, the Government appointed Adair Turner to chair a pension commission that will review whether the voluntarist regime for UK private pensions and long-term savings is on track. This potentially paves the way for employer compulsion should the review conclude that the current voluntarist approach cannot be made to work.
AT Kearney analysis indicates that if compulsion is set at 4 per cent – the figure suggested in the Pickering report – this could generate an extra £5bn in premium income. This equates to about 9 per cent of the total pension market.
However, if the Government follows the example set by Australia and increases the compulsion level to 9 per cent over a number of years, this figure could grow to £13bn.
Of course, this approach would be highly contentious in terms of the Government's relationship with business and its impact on the economy but the increased contributions would make a massive difference in closing the savings gap. What does this mean for corporate pension providers?
With this level of additional premium available in the market, new entrants will be attracted, providing a major source of competition to today's pension providers. This is a trend experienced in the US and Australia.
In a post-Sandler/stakeholder defined-contribution corporate pension world, a provider's wrapper may be largely commoditised and the characteristics required to succeed in this market will not be those traditionally associated with providers but IFAs and asset managers. How should providers respond?
With this potentially big revenue opportunity and significant competitive threat, pension providers should focus on top-line growth by maximising their share of the total employer contribution pie and attracting additional voluntary contributions from employees. In particular, providers should concentrate on three key areas:
Technology-based financial planning tools
Internet-enabled pension planning and investment advice tools developed initially for the US 401(k) pension market enable financial institutions to deploy low-cost educational, sales and advice solutions in the workplace. These user-friendly tools allow employees to build portfolios inside the 401(k) wrapper based on the person's financial goals and attitude to risk and are backed up by telephone-based advisers.
The educational aspect of worksite marketing should not be underestimated as this has been a key driver of sales in the US. In a post-Sandler/stakeholder defined-contribution-dominated UK market, particularly with the underlying investment portfolio and asset allocation being the key driver of long-term performance, such tools will be critical in providing educational and advisory support.
Generic financial healthcheck tools are already available in the UK and enable individuals to review their broad financial picture and identify areas of priority in terms of savings, debt reduction and protection. A CD-Rom-based financial healthcheck tool has recently been developed by the FSA and mPower, the US financial advice firm, and will be made available to individuals, advisers and employers. It is likely that providers can make these tools available in the workplace via the internet to allow employees to assess their financial needs, store data for future reference and share it with the provider to identify potentially suitable products.
Worksite propositions based on choice
Choice is a key theme in the PensionS Green Paper and could be a critical success factor in the future of worksite marketing. With the emergence of a wrapped post-Sandler/stakeholder corporate pension world, pension providers will need to differentiate themselves by way of brand and investment performance of the underlying funds. On this basis, worksite marketing propositions offering a choice of quality funds from different investment managers, underpinned by financial planning tools, will be more attractive than tied propositions with little more than tick-boxes and a percentage column to determine an employee's future wealth.
Building the brand in the workplace
With successful worksite marketing likely to depend on deploying technology-based financial planning tools and offering a choice of quality funds from different providers, there is a real potential that IFAs and asset managers could extend their proven capabilities in these areas into the workplace.
In this context, it is critical that providers build their brands to protect their position and provide employers and employees with assurance and access to the above capabilities.
The prospect of compulsion, allied with a boost in voluntary contributions, could herald significant expansion in the pension market. This will attract significant competition and we believe those institutions that can deploy low-cost planning and advice tools, coupled with choice, in terms of a range of quality investment funds underpinned by a strong brand, will be best placed in the market.
It might be insurers, which can safeguard their current position in the workplace, or it might be other institutions, such as IFAs, that are better able to deploy the required capabilities. In the latter scenario, insurers may find themselves providing little more than a wrapper and will become increasingly reliant on securing annuity business, where they have the required capabilities to succeed.