An organisation that represents a large number of businesses or individuals decides to offer a pension scheme. The concept seems wonderful to the broker or life company involved. Unfortunately, the reality can be disappointing because few people understand what they are taking on.
The first thing to consider is why people join the organisation in the first place. In many cases, members gain a recognised status within their industry and sometimes a widely-known trademark.
They might join in order to unite with others or perhaps to campaign effectively. But joining to be able to buy a product is rare. This means brokers often overestimate the influence of associations in selling products and are subsequently surprised at how few members want to buy the association's pension scheme.
The second problem is that most associations consist of a wide variety of members. Inevitably, if a broker offers one deal that fits all members, as most associations prefer, the better quality clients end up
cross-subsidising the others in order that everyone can benefit from the deal.
This allows other brokers to attract the better clients away so that, in most cases, the broker or life company ends up offering unprofitable terms to the smaller clients.
Affinity pension schemes can work if you are prepared to ring-fence the better quality clients and promise they will not be cross-subsidising the smaller policies. We have done this very successfully with pension schemes for the information technology and telecom industries. If you do not offer this assurance, you can expect the better clients to go elsewhere.
You also have to consider the association's own interests. Obviously, they will want the products sold under their name to be better than those normally available on the market. Some associations offer better cost-cutting opportunities than others – the best will have members who can keep communications costs down by using the internet, salaries (and therefore premiums) will be high and there will be a large proportion of younger employees. These associations deserve the best terms.
However, many brokers and life companies – they know who they are – do not give enough thought to this and embarrass themselves by offering mediocre terms. Some prey on associations' naiveties by offering them deals which are worse than those available on the open market. This only goes to show how naive these brokers are themselves in abusing associations' trust, as they are certain to be fired when members point out the poor terms.
In order to price this type of contract, you must decide whether you are going to offer individual meetings with members, which may be impossible for smaller brokers, or deal by post. In the latter case, you need to bring the price well below the standard stakeholder costs of 1 per cent. I suggest the annual management charge should be 0.85 per cent at most.
My advice to any broker considering entering this market is to think very carefully. It involves a lot of work and investment but the margins have to be extremely thin. We invested over £100,000 last year in order to provide the service that affinity clients expect, including guarantees and freephone numbers. As yet, we have seen little return.
Relying on the association's brand name alone is insufficient. A market-leading product with low charges is essential. Consider the individual's point of view – they see the association's brand but they also examine the deal you offer and the quality of your marketing.
For example, Tesco once sold pensions. Despite its established brand, the amount of money its managed fund received in two-and-a-half years appears to be roughly equal to the amount we process on one good day.
Similarly, if you cannot offer association members a better deal than they could find elsewhere, you cannot expect to make a success of affinity pension schemes.