The firm axed initial charges and hiked commission for its Your Pension Select policy last September. At the time director of pensions Angela MacDonald admitted sales of individual pensions had been hampered by initial charges and advisers struggling to differentiate between the proposition and its stakeholder products.
She explained NU wanted to focus on higher net worth customers in the run up to Personal Accounts.
The offer was scheduled to run out on 31 March, with MacDonald stressing in Money Marketing the hike was only a temporary measure and never part of its long term strategy.
But now it has decided to continue with the strategy into the foreseeable future, with the firm boasting “significant” increases in sales.
NU head of pensions Iain Oliver insists hiking initial commission to increase volume is still not part of its long term strategy but a short term tactical decision which has enabled it to compete on a level playing field with rivals offering better terms to advisers.
He and his team will continue to monitor the market and could, he says, feasibly reduce commission levels soon after 31 March if conditions change.
But the move has inevitably attracted criticism and reopened the debate about the link between initial commission and churn, particularly after the revelation in Aviva’s full year results that it had decided to set aside an extra £224m to cover higher than expected lapses in pensions.
Syndaxi Financial Planning managing director Robert Reid lucidly describes competition for business based on initial commission terms as “a one legged arse kicking contest”.
Meanwhile Hargreaves Lansdown co-founder Peter Hargreaves says NU’s latest move smacks of “incompetence or desperation”, as he claims the firm is paying over the odds for business which will inevitably lapse before it makes a profit. He says the firm is helping to perpetuate churn in the market.
But Oliver insists it is writing profitable business and says the firm wants to move towards a “sounder basis for remuneration” in the long term, which could involve an increased focus on trail commission.
Oliver says there are all sorts of complicated variables which, for obvious reasons, he cannot go into publicly.
But from the outsider looking in it seems a very simple equation. Firms bump up their commission to increase sales – particularly when the product is failing to sell itself. It is difficult to foresee NU reducing initial commission levels if the strategy is paying dividends unless of course, other companies make the first move.
Oliver also says the firm’s persistency problems have less to do with initial commission and more to do with lapses in GPPs caused by staff turnover. He says there is far too much industry focus on initial commission as the be all and all when talking about persistency.
Although he concedes that paying higher initial commission increases firm’s exposure to risk he says it does not increase the likelihood of a policy lapsing. He adds that moving to trail commission raises different problems with regards to persistency as advisers become more exposed to investment performance.