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The incredible bulk will change the pension world

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&#39s 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

not insurmountable.

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&#39s 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&#39s 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&#39s 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&#39s 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&#39s determination to introduce

stakeholder broadly in line with its original concept, has to be a key

longer-term trend.

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.


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