The scale of infrastructure needed to support life and pension operations means many providers continue to endure systems and processes created for an industry very different to the one that exists today.
Reductions in profit margins are finally laying bare the cost of antiquated information technology, outdated attitudes, bygone cultures and laborious processes.
The life and pension sector is undergoing change of a scale similar to the industrial revolution. Never before has the industry experienced significant change at such a rapid pace.
Prophecies made by previous generations are coming true. We have seen companies closing to new business due to high unit costs, leaving only the big, the strong or the focused to survive.
To help find the solution for long-term survival, many life and pension companies are turning to specialist consultancy services that force them to ask some critical questions of themselves and the way they operate. Essentially, these questions can be summarised as:
What will our place be in the new financial services world?
How can we transform ourselves to ensure we get there?
Rising to the challenge
Every business needs to review its strategy regularly. Life and pension companies have in the past been driven by the demands of their distribution channels or the desire for bottom-line results to generate shareholder dividends.
More recently, financial pressures and regulatory reform, particularly CP121, have begun to determine the direction of the industry.
The old adage “it is time to take stock” is more relevant today in the financial services business than ever before.
How long will it be before the 1 per cent world begins to swallow up the full product range? We have seen the introduction of Cat-standard Isas and, more recently, stakeholder pensions. Endowments have been made redundant, along with those who administered them. Fund supermarkets offering significant discounts have begun to eat away at single-premium business.
New companies entering the market have proved to be strong competition. They have had the considerable advantage of starting with a blank piece of paper and not having to contend with baggage accumulated over the years.
There is also, of course, the challenge – or threat – coming from Europe, as well as the global market.
If you are a life and pension provider, have you started to ask serious questions about the way that you do business? Was there ever a time when you mapped out what your organisation does and really asked the question – why?
Manufacturer, distributor or administrator?
It is not enough to consider what you have been in the past. It is necessary for this to be reviewed but it is more important to ask where the organisation wants to be.
Most life and pension companies have had a five-year rolling plan. With the speed of change within the industry over the last 20 years, rarely have these plans come to fruition. Short-term plans and targets are far more realistic. So where will you be in 12 months time?
A focus on core competencies is an established trend. This is forcing a disaggregation of the value chain, where businesses play to their strengths and outsource non-core activity. Does your expertise lie in the manufacture of products, in distribution or in administration? No single company is likely to be an expert in all three.
Driving down costs
Cost-cutting has always been on the agenda but never more so than today. Previously, some companies have resorted to removing layers of management. Some have offloaded experienced (and more expensive) staff, replacing them with inexperience and inefficiency. Another alternative has been to penny-pinch, squeezing peripheral expenses such as stationery and travel.
Unfortunately, this has cut into the very bone of administration and providers will suffer the consequences when there is little of substance left. It is also far from a strategic approach to long-term operational effectiveness.
Some companies may argue: “We have always done it this way.” This is why some operations continue to handle business in old ways. Organisations have found change difficult to handle and inertia all too easy to accept. The excuse of having always done it this way is no longer acceptable. It may have worked well five years ago or even last year but it does not mean that it works today.
It is difficult to see a future for companies doing business the old way. It is time to look at attitudes and culture. These are deeply embedded within organisations and are very tough challenges to address.
Those promoting change from within are often viewed with suspicion. They are the ones who are seen to have a hidden agenda. Self-diagnosis can be useful but external consultation for the more serious conditions offers more credibility, supported by tried and tested business techniques.
Change is essential if life and pension companies and IFAs are to remain profitable in the future.
In my next article, I will look at how organisations can exploit these challenges to gain a competitive edge in the new world.