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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


clients.


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


year.


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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