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Positively charged

In a speech at the recent Cazalet Consulting conference on asset management, life insurance analyst Ned Cazalet brought some much needed cheer to the industry by focusing on the positives in life and pensions.

He also reeled off the industry’s considerable and well documented problems.

These include widespread churning and falling persistency rates caused by high commission levels and low transfer penalties, the misleading focus on new business rather than true profitability, an ailing with-profits sector hit by the collapse in equity markets and lower yields as a result of a “chaotic” shift away from equities to bonds.

The rate of earned premiums to claims has been negative for the last three years despite new business spend continuing to run at £7bn a year, according to Cazalet. Low inflation is also dragging down future equity returns and bond yields while increasing liabilities.

Admittedly, all is not well in the life and pension industry. But on the bright side, Cazalet said there are major opportunities for life offices which adapt their business model, focus on true profitability and “put the investment horse before the product cart”.

He said net UK household wealth has increased from £3trn in 1991 to almost £6trn in 2004 using 2004 prices – a 4.8 per cent growth in real terms. The number of higher-rate taxpayers has also increased substantially. HM Revenue & Customs figures for 2003 estimate that 230,000 UK adults have wealth of £1m-plus.

Life expectancy is increasing, meaning that people need to invest more money into pensions. He highlighted the ageing baby-boomer population, new decumulation markets and the vast opportunities in the defined-benefit buyout sector.

Cazalet believes the future lies with fee-based wrap platforms and open-architecture fund supermarkets.

Skandia head of marketing, life & pensions Billy Mackay agrees there are growing opportunities in pensions or, as he prefers to call it, funding for retirement.

The accumulation phase has obviously benefited from the increase in higher-rate taxpayers and the expanding range of vehicles such as self-invested personal pensions and multi-manager personal pensions. Players specifically targeting higher-net-worth individuals, such as Skandia, have positioned themselves to benefit from these devel-opments, says Mackay.

Although there is potential for considerable expansion in the post-retirement market for those hitting 75, Mackay says this will depend largely on how the Government handles alternatively secured pensions and whether it breaks from its dogmatic focus on forced annuitisation.

Mackay says more rigorous disclosure requirements for final-salary schemes have raised a lot of questions about their sustainability and causes widespread concern among scheme members. He says there is a clear opportunity for advisers to help members but anyone looking to compete in this notoriously complex area needs to invest heavily in training.

Scottish Life group head of communications Alasdair Buchanan is circumspect about the prospects for the industry. He says “You can look at what is happening very positively or very pessimistically. The very positive things have always been there. There is a huge natural market for pension savings and, as people live longer, they need to save longer. But there is a huge gap between this and what is actually happening.”

Buchanan says the negative publicity around pensions generated by the Maxwell scandal has lingered on, amid pension misselling, commission rip-offs and growing lack of trust in the Government. This means many people still believe they are better off investing their money in property than in pensions.

Buchanan concedes that the industry will benefit from people moving out of DB schemes into defined-contribution schemes and group personal pensions but says this will only prove a short-term fix. He says: “Firms will do well for a period of time but once the deal is done, that is it.”

He is also sceptical about claims that wraps and open-architecture fund platforms are the only way forward. He argues that there is a significant gap between the potential of wrap and reality.

Buchanan says wrap is all well and good in an ideal world but, in the real and messy world of life and pensions, where a customer may have several pension pots, it is problematic. There is also the question of whether consolidation of pension arrangements is the way to go and whether it is good advice for a customer to transfer pension arrangements.

Yet Standard Life chief executive Trevor Matthews argues the industry is on the brink of a golden age of financial services due to demographic changes, particularly the ageing baby-boomer population.

Matthews concedes that there are some challenges surrounding legacy issues in the implementation of platforms but is confident the industry is positioned to overcome them.

Mikir Shah, senior vice-president at specialist financial analyst Fox-Pitt Kelton, does not agree with the view is broken.

He says: “We are positive about the same things but Cazalet is coming to the party a bit late. Life offices are already taking action and moving to open architecture.

“We conducted a study on pension lapses recently and do not believe the majority is churned business. The majority of surrenders are in the life sector, not pensions.”

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