For some providers, single-premium business is the holy grail of pensions, providing immediate sizeable funds to bolster their balance sheets and offer the chance to recoup the cost of securing the business sooner rather than later.
These providers believe there is a shift across the industry towards focusing on single-premium business and away from regular.
Standard Life head of pensions policy John Lawson considers there is a long-term trend to singlepremium business and this switch means that life offices which commit themselves to commission on regular contracts are heading for financial problems.
He says: “With commission paid up front on regular-premium business, you are looking at 10 years upwards to break even whereas with single-premium business you get a big chunk of money and the fund does not take long to build up. There is not a big appetite to go out and get regular-premium business. Lots of providers are looking to pull out of commission on regular-premium business.”
He goes further and suggests that providers committed to paying out commission on regularpremium business are caught in a kind of madness which leaves them at risk of facing enormous losses.
The latest figures from the Association of British Insurers go some way to support Lawson’s position on the rise of singlepremium business.
The statistics show that total single-premium new business in the second quarter of 2007 was £28.463bn, an increase of 20.8 per cent from £23.558bn in the same quarter last year.
By contrast, total regular-premium new business in the second quarter of this year was £1.657bn, a fall of 3.2 per cent from £1.713bn last year.
In total, single-premium individual pension business in the second quarter was £7.185bn, an increase of 71.2 per cent from £4.196bn in the same period last year, total regular-premium individual pension new business in the second quarter was £896m, down by 4.2 per cent from £936m in the second quarter of 2006.
Clearly, these figures incorporate the re-registering of schemes since A-Day, which have powered the leap in single-premium business but while falling commission levels are not in question, how far the decline of regular-premium business is a long-term trend and to what extent commission will no longer be paid at all on these contracts is still under debate.
Norwich Union head of pensions Ian Oliver disputes the position that the days of commission on regular business are numbered.
He says: “Our strategy is to cover the market, including the mass market. Most people are not willing to pay for advice and we make no mystery we pay commission on regular-premium business.”
Oliver also makes the point that it is not the case, from a profit point of view that single premium equals good and regular premium equals bad. “Both have payback periods longer than I would like,” he says.
Oliver says Lawson is right that life offices do need to analyse the marketplace carefully and protect themselves from short-term business that can be damaging. This is why Norwich Union, in common with other providers, operates commission clawback on business that does not stick.
Royal London is among the many providers happy to pay commission on regular-premium business to advisers while also recognising the issues that Lawson is highlighting.
Group head of communications Alasdair Buchanan says: “I think it is true to say that life companies have been paying out relatively high commission on regular-premium business with no protection where policies do not last the term and providers have increasingly had to burn capital to make provisions for persistency.
“Is this problem solved by moving from regular to single-premium business? Yes, to a certain extent. However, there are other models for making regular-premium business sustainable.”
Buchanan and others argue that commission structures which favour single premiums are just one way of making sure that business is profitable.
For example, Royal London offers terms on contracts which vary depending on the industry sector for a group scheme. This means that an adviser might expect less commission on a group scheme for highly mobile hospitality industry workers than they would for more predictably retained accountants or other professionals.
Similarly, Scottish Widows structures commission levels based on how far business sticks.
Royal London also operates the “financial adviser’s fee” which, Buchanan says, is aligned to customer agreed remuneration.
Under FAF, each of the three parties involved in setting up a pension – the consumer, provider and adviser – have a financial stake in the contract being in place for a period, each getting worse terms or less payback if they do not stick to their end of the bargain.
Scottish Widows head of pension market development Ian Naismith says: “We still pay commission on regular-premium business and we are not mad. As an industry, we need to be focusing on what consumers need, not just what we need.”
We can expect the continued rise of single premium business, particularly as Sipps continue to capture the imagination of providers and consumers alike.
Naturally, it is in the interests of the general health of the life and pensions industry that companies remain profitable, but it is also in the long-term interest that providers do what they can to grow the mass market and increase savings levels and this, for many consumers, means having regular-premium plans available and advisers paid to sell the idea to them.
“We cannot get to a situation where single premiums are the norm. Most people cannot afford a big one-off payment. We need regular savings to close the savings gap.”