Stakeholder will bring planning to the fore ahead of just flogging plans
Spotting the winners in the stakeholder pension market isa matter of careful analysis.
The Welfare Reform and Pensions Act in 1999 laid out the basic framework for stakeholder pensions. During 1999, the Government issued a series of consultation papers on detailed aspects. Regulatory Update 64, issued in April 1999 by the PIA, gave some guidance on advice for personal pensions in the run-up to stakeholder in 2001.
It is worthwhile stating again the main points from the update:
Individuals should not delay starting to save for retirement.
IFAs should take account of stakeholder in the advice they give to customers and make sure individuals are aware of its introduction, probably through the reasons-why letter.
Keep full, detailed files on the sales process and advice given because if there isno evidence then it did nothappen.
IFAs should take account of the ability to convert to a stakeholder without “material disadvantage” to the consumer.
The Government's strategy of moving the pension plann-ing area to a low-margin, low-remuneration, fund-basedfee-type environment is gathering momentum.
A lot of the Financial Opt-ions network members are already working on level commission on bigger schemes and packaging protection benefits with group and personal pension sales to balance remuneration.
But there is only so far advisers can go as their time for advice and research needs to be paid for and there is still a great reluctance to pay fees.
Now product providers have had the chance to allocate their millennium bug IT personnel on to new projects, we are seeing new pension products being launched. Some are fully embracing technology through development of back-office systems, web-based support, integrated call centres and – most important – face-to-face technology training for IFAs.
Just as IFAs need to manage their business successfully through this transition period, so do the product providers.
Many of the leading product providers are consider-ing their remuneration levels to IFAs as indemnity commission is a “loan/debt” to IFA firms and providers will have to do a risk analysis against that debt like any other business.
We are looking at firms committed to the growth of the IFA profession through actions and not just words.
The future for stakeholder pension provision will definitely be in electronic administration – during the sales process, new business take-on and client servicing.
Misys IFA services set up a cross-networks project team during the last quarter of 1999. The three stated objectives for the project were to achieve:
1: Excellent product for the consumer – individual and group pension.
2: Excellent training for all members within our networks.
3: Differentiated proposit-ions on service and/or remu-neration.
The first stage was to issue a technical tender document to 15 leading product providers. We asked for technical details on how providers saw their product delivery based on current information and interpretation.
A major area to be answered was: Do you have a minimum Standard & Poor's (or equivalent) rating of AA?
Finally, we looked at how quickly and to what standard the response was sent to us.
At this stage, a numberof providers were dropped from the selection process through a failing in one or all of these areas.
We took eight companies forward to face-to-face interviews with a senior panel of people drawn from our networks and across all departments. It was agreed that all eight of the companies could probably survive in the stakeholder market for the first few years. Our task was to select the best from the best.
It was a difficult job, especially as we had already agreed to go forward with only six providers on the recommended list for our members to consider so as to give the sixa stronger chance of survival.
In a 1 per cent world, the amount of actual detailed product research from month to month would be minimum. The major review would be on service levels, electronic delivery and possibly some fund performance although trackers may be prevalent.
The agreed basis for our final decisions was the abil-ity of the eight product providers to answer the follow-ing questions.
1: Will the provider still bein the stakeholder market in five years time?
2: Is the technology they are proposing simple to use for IFAs and clients should the IFA allow them access to update certain transactions?
3: Is the technology del-iverable on time and to Origo standards?
4: Are the marketing propositions supportive of IFAs obtaining large market shares in the low to middle market areas?
5: Is there access to exter-nal funds within the 1 percent charging structure?
6: What are the people skills/ management strategy and current working relationships?
7: What is the price of thecontract and IFA remuneration levels for giving advice andconducting some administration events?
8: Does the provider havea unique selling point?
9: Is the consumer or IFA brand of the provider strong and robust? We are looking to work with companies which intend to offer a suite of pension contracts, suitable for different parts of the market, including GPPs, PPs and stakeholders.
These contracts will need to link with a number of remuneration options, which recognise the need for ongoing advice when advising clients on pension planning.
We envisage a single product covering full advice (with suitable advice charge/AMC as set by the IFA) through to pure stakeholder product with restricted margins.
Our IFA member firms'target client markets aremainly employer GPPs from two to 400 people, with the major number being in the five to 25-person market.
These will be employers committed to health and welfare benefits to employees. It was important for us that the providers also saw themselves being in this marketplace. Some were discounted at this stageas they were clearly looking to cherrypick bigger schemesand not be as supportive to the middle to low markets.
We need to “sell on” additional benefits with the pensions schemes such as individual/group protection ben- efits, including life cover, critical-illness insurance, accident, sickness and unemployment cover, private medical insurance and so on. Ease of collection will be important.
These are some of the criteria we believe the product providers have to fulfil for them to survive and thrive in the stakeholder environment come April 2001.
Steve Pearson, Operations director, Financial Options