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Sink or swim in the stakeholder pool

The aim of stakeholder is to increase the proportion of pension funding that comes from private savings. Getting some five million people into stakeholder pensions is a task the Government has sub-contracted to private-sector companies such as IFA firms and life insurance groups.

Like any other private-sector sub-contractor, we each have our own stakeholders who look to us to make profits and there is nothing unhealthy about that. Any business, manufacturer or distributor which is serious about making a long-term commitment to the stakeholder pension venture should have a strategy that will generate long-term positive cashflows for the business.

In an environment with a tight lid on charges, stakeholder is clearly not going to be an easy money generator for anyone jumping on the bandwagon. Rather, stakeholder will be a market where the profitable players will be the ones who think carefully about their strategy, and who play in the areas where their own particular competencies are well suited.

Different areas will suit different players so, hopefully, the whole market will get covered in a manner a bit like a patchwork quilt.

Existing contacts will be a natural place to start for many. This could be in terms of current customers. Alternatively, businesses could use their local reputation to become a natural destination for local employers looking for stakeholder solutions or could use a familiar locality but in a non-geographical sense.

An example of the latter is the affinity-type stakeholder being offered by many trade associations to their members. Often, these have arisen because an IFA with strong connections in a particular trade or industry has used those connections to gain an introduction into the trade body and then helped that body to set up an industry-wide pension plan.

Another way to segment the market is to differentiate the propositions offered to employers which are willing to make pension contributions and those which are not.

The employer which will contribute to staff pensions has every reason to take a keen interest in the publicity of the scheme. It will value help and advice on how to construct a member communication exercise, so the benefit becomes one that is both recognised and highly valued by employees.

An opening gambit for discussing strategy with such an employer might be to ask how it thinks pension costs should be divided between cost of contributions and cost of staff communications. Planning for success requires a suitable spend on corporate communication, which is a fee opportunity for the adviser.

In complete contrast, the employer unwilling to contribute to a pension plan for staff may well regard stakeholder as a nuisance or another of the burdens on bus-iness heaped on it by the Government. Such an employer is looking for a minimalist solution, so that is what it should be provided with.

We can borrow from the direct-marketing industry here and create a pack that contains everything the employer needs to comply with the stakeholder legislation. Such an approach is effectively using the employer as a conduit for a direct mail to its staff, who may be rather more aware of the need for retirement provision than their boss is or at least pretends to be.

It is often the case that the employees of non-paternalistic companies are acutely aware of the need to save and will, therefore, be receptive to what is in effect a highly targeted direct mailshot for pension savings.

Whichever route to market is followed, the mathematics of stakeholder charges make one thing clear. The reliance on a fund management charge as the main source of revenue means that, in the early years, costs will run ahead of charges. This is not the same as loss leading, provided the expectation remains that, in the later years, the position will reverse and an excess of charges over costs will more than make up for the early deficit.

This is a concept that actuaries are familiar with and use to measure the embedded value of a tranche of insurance business.

The crucial point here is that things only get better if the policyholder keeps up the policy. Under stakeholder, customer loyalty will have to be earned through good-value products backed up with good service.

Look at the problem this way and you see why loss leading does not make sense. Any stakeholder provider that loss leads in the formative years of the market by spending too much on acquiring its portfolio of business will find that, as the market matures, other players will be reducing their charges while it is still trying to recoup its initial costs. Its early policyholders will defect to better-value stakeholder pensions, taking advantage of the penalty-free transfer. The provider will lose its customer base, as will the advisers who sold the policies in the first place.

Nor does it make sense to try and justify an unprofitable stakeholder strategy on the grounds of building up a client bank.

“It may cost us a bomb to get these customers on the books but we can sell them something profitable later on,” is the sort of strategy that some of the more gung-ho internet banks have followed. But that is an inherently flawed strategy. Stakeholder customers will have learned how to spot a bargain and are not likely to buy overpriced products offered to them.

What they can be expected to buy, as second and third purchases from the adviser or provider which first introduced them to stakeholder, are further products that share stakeholder&#39s commitment to value for money.

So, in looking to sell on to a customer base or to develop worksite marketing around a stakeholder proposition, all the product offerings need to be able to stand up by themselves in terms of value to the customer and profitability to the adviser and manufacturer.

Over the long haul, it is only the players that can see how to make the new pension market profitable for their own stakeholders that are going to be the successful survivors of the inevitable industry consolidation.

ADRIAN BOULDING Pensions strategy director, Legal & General


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