Although the introduction of the stakeholder pension is currently the key focus of many organisations and individuals within the industry, it is important to understand that it is just one aspect of the paradigm shift that the industry is experiencing.
A review of the issues raised by the arrival of the stakeholder pension and the potential solutions to these issues provide useful indications as to how the industry is likely to change over the next few years.
The Government needs to find alternative ways for individuals to achieve income in retirement.
The introduction of the stakeholder pension is a part of its strategy to achieve this. It is based on the fundamental belief that people will save for retirement themselves if the process is made sufficiently easy and flexible. This is tempered by a realisation that a huge publicity programme is required to raise public awareness concerning both the availability of retirement products and the consequences of not taking any action.
The stakeholder concept is therefore aimed primarily at those earning between £9,000 and £20,000 a year.
It is estimated that there will be in the region of 14 million people contributing to stakeholder pensions by 2005 out of a pre-retirement adult population of around 40 million. By anyone's standards, this is a huge potential market that is simply too big to be ignored by any organisation that wishes to be considered a major player in the industry.
However, the implications of the stakeholder contract mean that making a profit from this market is not going to be easily achieved and will be fraught with risk.
Charging structure issues
The stakeholder charge cap of 1 per cent a year is low but certainly not insurmountable. Indeed, a number of the traditional contracts have similar reduction in yields, especially for longer terms and bigger contributions. However, the single charge becomes more significant when combined with the low minimum premium of £20 a month and the ability to stop, start or transfer the contract at will.
Providers will still make money on these contracts but possibly not for as long as seven to 10 years. So they really want to keep their stakeholder clients and, in order to do this, they will have to improve the contract terms as a client's fund grows. They will find it hard to subsidise the smaller contracts from the bigger contracts.
Therefore, the cost of running a stakeholder policy, from inception to ongoing administration, has to be reduced drastically, not just tinkered with. This has required massive re-engineering of systems, processes and IT infrastructure. It has involved a huge investment of resources, both time and money, and all the major players have taken this step.
In many cases, having made the decision to make the change, providers are fundamentally questioning all aspects of their business and are exploring how far the new technologies can be taken.
The traditional IFA business model involves the payment of advice from commission generated from the contract being sold. The stakeholder contract has such slim margins that any initial commission is minimal.
The Government's solution is the construction of easy-to-use decision trees that should enable potential clients to draw their own conclusions as to the best way to proceed.
Limited advice structures, probably operating via call centres, are another part of the solution. However, there are still unanswered questions as to how this potential problem will be dealt with.
Given the slim margins, the most effective method of distribution is to implement stakeholder contracts in bulk. Thus, the major focus is towards limited companies and affinity schemes. This will almost certainly involve considerable adviser input and, hence, IFAs are regarded as a key part of this process.
The Government's guidelines regarding those companies that have existing arrangements have also opened a significant marketing opportunity for those who are able to exploit it. This involves a general review of an organisation's retirement benefit provisions, probably paid for by fees, and appropriately either upgrading what they already have or implementing something new.
In either case, the employer should then be excluded from the requirement to install a stakeholder arrangement for employees by October. Performing these reviews will require the ability to access the right people combined with a high level of technical competence.
However, this route will only reach a certain percentage of the target market and there will be a considerable number of organisations that will both need and want to install a stakeholder scheme. In these circumstances, as the employer is not obliged to contribute to the scheme, the efficiency with which it can be put into place becomes even more critical and will depend heavily on IT solutions.
There is also a growing number of self-employed individuals to whom stakeholder will be extremely attractive, both with its net contributions and inherent flexibility. Electronic trading via the internet and digital television will be one of the main routes to this market, given the ever increasing availability of these media to the population.
Although many companies have set up stakeholder arrangements, in order for the schemes to be run profitably, it is vital that large numbers of employees decide to join that scheme. This will mean that there will have to be vigorous internal corporate marketing using many different strategies to reach the potential members.
Again, the involvement of an adviser is likely to be key in these circumstances.
There are numerous potential longer-term issues, many of which are pure speculation at this point. However, the consumer demand for better value financial products and services, as demonstrated by the Government's determination to introduce stakeholder broadly in line with its original concept, has to be a key longer-term trend.
The knock-on effect of the new 1 per cent era has already been felt among other pension products, especially group personal pension plans, and it cannot be long until demand and new technology makes this a common theme for virtually all product ranges.
In this new world of product commoditisation, there will plenty of opportunity for those who are prepared to re-examine their markets, method of operation and business processes.
As in any period of change, there will be many challenges and risks. However, the rewards for those who are successful are potentially enormous. For those who do not understand the need to change and then do something about it, mere survival may well prove to be beyond reach.