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Elegy for L&G

Legal & General&#39s decision to take the knife to its commission structure has left IFAs puzzling over whether the life office wants to do business with them any more.

L&G has been a popular brand with the public and most IFAs are happy about recommending it to their clients. So what is behind L&G&#39s move to put in place a commission structure that virtually cuts out all IFAs except those operating on a fee basis? Will other life companies follow suit?

The restructuring sees commission on personal pensions, group pensions and free-standing AVCs fall from 5 per cent level or 35 per cent Lautro plus override to 1.25 per cent level plus override or 12 per cent Lautro plus override.

IFAs point to two possible reasons for L&G&#39s decision to effectively turn away from the biggest distribution channel – the purely commercial consideration that IFA business simply was not making any money and, second, a strategic move towards new distribution channels in an uncertain future where IFAs&#39 dominance is not guaranteed.

The continuing bear market and predictions of poor stockmarket growth for the next decade, coupled with the squeeze on margins in the pension sector, are bound to dampen life offices&#39 appetite for selling pensions in the UK.

Even before the most recent bout of market turmoil, life companies had not been expected to make money on stakeholder business for upwards of 12 years. But the poor level of stakeholder take-up has made even those predictions look optimistic and IFAs are concerned that other product providers could follow L&G&#39s lead.

The Bureaux director Ronnie Lymburn says: “Everyone who went into stakeholder seems to be hurting now. The spend on setting up stakeholder has been followed by a poor take-up and some have been losing money hand over fist. Everyone is talking about the financial strength of life companies and there are so many reviews and changes due to hit the pension sector that life companies are having to make hard commercial decisions. Maybe L&G has had a look at the Pickering report and decided there is nothing in it to help it on stakeholder.”

It is not just L&G which has acted to soften the low of stakeholder. Standard Life and Norwich Union have both cut stakeholder commission rates for IFAs. However, Scottish Widows managed to increase commission from 45 per cent to 60 per cent of Lautro rates in April, until the end of this month when it will look at rates again.

Institute of Financial Planning chief executive Nick Cann says: “Having heard Ned Cazalet&#39s presentation at the PIMS conference last week, it is clear the pressures of working within the confines of the pension market, together with falling equity values, means there is a real squeeze on life companies&#39 margins.

“These cuts by L&G may be followed by further cuts in the future and it is likely to be joined by more providers following suit in the coming months.”

So where does L&G see its business coming from in the future? Its links with Barclays Bank and Alliance & Leicester will give it access to every high street in the land and regulatory changes could provide the ideal springboard for serious volumes of business to go through these channels.

Nightingale Associates principal Michael Lockyer says: “L&G is looking at its links and ties in the banking sector and obviously thinks it can afford to do without us.”

Clearly, the cost of distributing through IFAs is proving too high for L&G. The life office says the commission for products sold through its banking ties will be exactly the same as that offered to IFAs.

IFAs say L&G would no doubt welcome the prospect of entry-level second-tier advisers dealing with vanilla products, as anticipated in the second tranche of change proposed by CP121.

Cann says: “L&G will be looking to white label and to distribute in more cost-effective ways.

“As part of the examinations review, a new class of entry-level adviser is being discussed, advising on stakeholder, Cat-standard Isas and mortgages and other &#39safe&#39 products, with less compliance and a reduced administrative burden. This may be where it is betting on its distribution coming from in future.”

L&G was unable to provide Money Marketing with a detailed response on its strategy for the distribution of pension products and its commitment to the IFA sector.

Spokesman Mike Connolly says: “L&G is not the first life company to cut commission on its pension products. We are committed to the IFA sector and we have a number of projects ongoing that show we are not turning our back on the IFAs.”

But IFAs will take some persuading that they and L&G have a future together.

Lockyer says: “At the end of the day, there are plenty of other providers out there who will pay us commission and there need be no disadvantage to the client. It is a shame because it is a big name and clients trust the brand. But ultimately it does not need us and we do not need L&G.”

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