The introduction of the stakeholder pension is currently the key focus for
many but it is important to understand that it is also just one aspect
ofthe paradigm shift that the financial services industry is experiencing.
A review of the issues raised by the arrival of stakeholder and the
potential solutions to these provide a useful indication about how the
industry is likely to change over the next few years.
The changing demographics of the UK population means the anticipated cost
of providing state pensions is going to increase steadily over the next two
decades untilit swallows up a significant proportion of the annual budget.
The Government needs to find alternative ways for individuals to achieve
income in retirement.
The introduction of stakeholder is a part of its strategy to achieve this.
It is based on the fundamental belief that people will save for retirement
themselves if the processis made sufficiently easyand flexible.
This is tempered by a realisation that a huge publicity programme will be
required to raise public awareness, concerning both its availability and
the consequences ofnot taking any action.
It is estimated there willbe in the region of 14 million people
contributing to stakeholder pensions by 2005 out of a pre-retirement adult
population of around 40 million.
By anyone's standards this is a huge potential market that is simply too
big to be ignored by any organisation wanting to be considered a major
player in the industry.
However, the implications of the stakeholder contract means that making a
profit from this market is not going to be easily achieved and will be
fraught with risk.
The stakeholder single charge cap of 1 per cent ayear is low but certainly
A number of the traditional contracts have similar “reductions in yields”,
especiallyfor longer terms and bigger contributions.
However, the single charge becomes more significant when combined with the
low minimum premium of £20a month and the ability tostop, start or
transfer thecontract at will.
Providers will still make money on these contracts but possibly not for as
long as seven to 10 years. So they really want to keep their stakeholder
In order to do this, they will have to improve thecontract terms as a
client's fund grows. They will findit hard to subsidise the smaller
contracts from the bigger contracts.
The cost of running a stakeholder policy, from inception to ongoing
administration, has to be drastically red- uced, not just tinkered with.
This has required massive re-engineering of systems, processes and IT
infrastructure. It involves a huge investment of resources, both time and
money, and all the major players have taken this step.
In many cases, having made the decision to make the change, providers
arefundamentally questioning all aspects of their business and are
exploring how far the new technologies can be taken.
The traditional IFA business model involves the payment of advice from
comm- ission generated from the contract being sold. But the stakeholder
contract has such slim margins that any initial commission is minimal.
The Government's solution is the construction of easy-to-use decision
trees that should enable potential clients to draw their own conclusions as
to the best way to proceed.
However, if the draft decision trees are a true indication of what will
ultimately be available, then a significant number of individuals will be
advised to seek further advice.
Limited advice structures, probably operating via call centres, are
another part of the solution.
However, there are still unanswered questions as to how this potential
problem will be dealt with.
Given the slim margins, the most effective method of distribution is to
implement stakeholder contracts in bulk. Thus, the major focus is towards
limited companies and affinity schemes.
This will almost certainly involve considerable adviser input and IFAs are
regarded as a key part of this process.
The Government's guidelines regarding those companies with existing
arrange- ments have also opened a significant marketing oppor-tunity for
those that are ableto exploit it.
This involves a general review of an organisation's retirement benefit
provisions, probably paid for by fees, and appropriately either upgrading
what they already have or implementing something new.
In either case, the employer should then be excluded from the requirement
to install a stakeholder arrangement for its employees by October next
To perform these reviews, you will need to be able to access the right
people, combined with a high level oftechnical competence.
However, this route will only reach a certain number of the target market
and there will be a considerable number of organisations that will both
need and want to install a stakeholder scheme.
In these circumstances, as the employer is not obliged to contribute to
the scheme, the efficiency with which it can be put into place becomes even
more critical and will be heavily dependent on IT solutions.
There are also a growing number of self-employedindividuals for whom
stakeholder will be extremely attractive, both with its net contributions
and inherent flexibility. Electronic trading via the internet and digital
TV will be one of the main routes to this market.
Although many companies may set up stakeholder arrangements and this may
be achieved in large numbers and very cost-effectively, in order for the
schemes to be run profitably, it is vital that large numbers of employees
decide to join that scheme.
This will mean there will have to be vigorous internal corporate marketing
using many different strategies to reach the potential members. Again, the
involvement of an adviser is likely to be a key factor.
There are numerous potential longer-term issues, many of which are pure
speculation at this point.
However, the consumer demand for better value financial products and
services, as demonstrated by the Government's determination to introduce
stakeholder broadly in line with its original concept, has to be a key
The knock-on effect of the new 1 per cent era has already been felt among
other pension products, especially group personal pension plans, and it
cannot be long until demand and knew technology makes this a common theme
for virtually all product ranges.
In this new world ofproduct commoditisation there will plenty of
opportunity for those who are prepared to re-examine their markets, method
of operation, and business processes.
As in any period of change, there will be many challenges and risks.
However, the rewards for those that are successful are potentially
enormous. For those that do not understand the need to change and then do
something about it, mere survival may well prove to be beyond reach.