The introduction of stakeholder, with its regulated maximum charge, has
forced the industry to reappraise its approach to group pensions.
Fundamental business decisions need to be made by providers and advisers if
they want to continue to compete profitably in this market.
The downward pressure on margins has already hada significant impact on
commission, with most providers paying considerably less to IFAs on their
“stakeholder-friendly” offerings than they were just a year ago.
There are still a few providers apparently willing to pay upwards of 70
per cent of the old Lautro scales but this must be viewed as a short-term
measure to hold on to market share. These levels cannot be sustained in the
longer term if a provider is to return a profit.
It is the concept of profit which is going to be key to survival in the
From the providers' point of view, this means harnessing new technology to
reduce the unit cost of business to the levels achieved by the 401(k)
providers in the US.
This can only be achieved by using internet technology and by transmitting
data direct to the provider's mainframe. Providers have traditionally
managed with a ratio of around 500 scheme members to one case handler. The
latest technology provides a quantum leap to 5,000:1 with “best of breed”
techniques scaling this up still furtherto 1,0000:1.
Providers using the internet simply to transmit data to a case handler's
screen for him or her to transpose that information manually into the
various mainframe functions will never achieve the economies of scale
necessary to compete in the stakeholder market where volume is the critical
From an IFA's perspective, the issue will also centre on how to increase
volumes without increasing costs.
Let us look at a simplified business model to examine this point. If we
consider profit (P) in its simplest terms, the amount of profit an
enterprise makes can be expressed as Total Return (TR) minus Total Costs
P = TR – TC
Total return can be derived from considering the value (commission) of
each unit sold, multiplied by the number of units (policies) sold. Total
costs are made up of fixed costs (salaries, premises, utilities, etc) and
variable costs (bon-uses, building/equipment maintenance, etc).
If we accept that the value of each unit sold (commission) is reducing we
need to consider how to maintain the “TR” side of the equation.
The obvious answer is to write more schemes. This is fine in theory but if
this is not combined with the use of new technology there will be an
increased reliance on manual input.
The business will therefore need more administration staff, thus
increasingthe salary bill to the firm – fixed costs.
So, referring to the formula again, if commission (TR) is to be maintained
(at best) but total costs (TC) are rising, how can a business balance the
equation to maintain profit? There is no answer to this using old
Just like the providers, the solution for advisersto the problem of
balancing the equation lies in writing significantly greater volumes
without increasing fixed and variable costs. This can only be achieved by
utilising e-commerce and interactive online administration systems.
The challenge for advisers is how to use these technologies to enable them
to compete in thisvolume-critical market.
We have seen how providers have developed new systems and advisers should
consider the possibility of forming partnerships with the providers who
lead in this field.
This addresses the question of how to administer volume business but what
methods need to be adopted to increase sales?
Clearly, face-to-face, one-to-one advice remains the favoured approach but
the margins within stakeholder effectively rule this out if the business
is to be profitable.
Worksite marketing provides a solution. This is a method of distribution
which has been little used in the UK for selling regulated products.
Worksite marketing has been used successfully in this country to sell
products such as healthcare and dental plans and deposit-based savings
Worksite marketing relies on being able to articulate a proposition and a
sol- ution to a group of people and follow that meeting through with a well
thought out fulfilment strategy.
The advantages of this method of distribution are:
It is cost-effective.
It provides access to “warm” leads for cross-selling.
Employees are normally based in one or few worksites.
It offers potential accessto directors.
Opportunity to reach specific target markets.
Opportunity for daytime selling.
Ease/reliability of payment (deduction from payroll).
Builds relationships for future product sales.
The initial stages of the sales process are the same as usual but, having
secured the agreement to proceed from the employer, the process is somewhat
Following a presentation to the workforce, one would traditionally expect
the IFA or his team of registered individuals to set up a “surgery” and
conduct a face-to-face meeting with each prospective member to explain the
benefits of the scheme, go through a fact-find and sign up.
The principle behind profitable worksite marketing in the stakeholder
environment is that the employee makes the decision on whether or not to
join based upon the proposition set out in the presentation and sales
This is effectively an “offer to purchase” or “category C” sale. The
employee would complete a pre-populated proposal form and return it to the
person co-ordinating the exercise.
No face-to-face, one-to-one advice would be given unless there was an
arrangement with the employer to pay a fee for such advice if he felt this
to be important. This might be a flat fee based on an average of, say, half
an hour per person.
The contents of the presentation and the member pack are clearly crucial
to member take-up and the success of the scheme.
Some providers are more familiar with this type ofdistribution than others
and again, a partnership witha provider experiencedin this field is
important if the adviser to benefit from their experience and promotional
Following up employees who attended the meeting needs to be an integral
part of the strategy and the most cost effective way of doing this is via
a call centre.
Given a proposed scheme with a good employer/employee relationship and an
employer contribution, combined with a first-class marketing strategy, a
take-up rate as high as 90 per cent could be expected.
New markets require a new approach and business' must adapt and evolve if
they are to survive.