There is almost universal acceptance among friendly societies that after years in the doldrums a resurgence is on the cards.
They believe recent legislation and the continuing shift away from the welfare state towards self-help and self-reliance has provided a massive opportunity to extend their influence and win new members.
If their predictions are correct then IFAs could find themselves pushing increasing amounts of business in their direction in forthcoming years.
Yet IFA knowledge of how friendly societies work and what they offer clients is slight. This is hardly surprising because friendly societies have laboured under an outmoded image for years – few IFAs anticipate dealing with companies called the Order of the Sons of Temperance or the Grand United Order of Oddfellows.
But friendly societies are now marketing themselves more aggressively and looking to make their mark in life, savings and health protection.
Perhaps the most widely known friendly society product is the 10-year tax exempt savings plan, where small investors save a maximum of £25 a month for 10 or more years. But this is merely one of many schemes offered by the 300 societies. These include accident or burial schemes, private medical insurance, pensions and endowment policies.
One scheme of particular interest to IFAs is an income protection policy known as a Holloway contract. This is with profits permanent health insurance (PHI, named after George Holloway, the Gloucestershire MP who pioneered them in the 1870s.
A typical Holloway contract operates by pooling members’ subscriptions, paying out management expenses and sickness claims, then sharing any profits that remain at the end of the year, according to the individual’s shareholding. This accumulates to provide a tax-free lump sum at retirement. Revenue from investments is also shared among members.
Richard Langley-Jones, marketing manager with Pioneer Friendly Society, says the main difference between Holloway contracts and standard PHI is that many dispense with a deferred period and pay benefits from the first day, or first month depending on the policy, of a claim resulting from illness or injury. Policies commonly pay full sickness benefit for the first six months and at a reduced rate thereafter, until recovery or retirement.
In contrast to PHI offered by insurance companies, premiums are usually the same rate for men and women and there is no weighting for occupation. This makes friendly societies particularly attractive to workers in industries with a higher physical risk such as building or construction, where PHI premiums can be high. As with standard PHI, intermediaries should target the self-employed and those with few sickness benefits from their employer.
Langley-Jones says Pioneer sells solely through IFAs, having dispensed with its direct sales force. “We are much happier selling through IFAs. They get a whole choice of products and if they choose us that is good news, particularly since commission is not as much as they get from a life company.”
Langley-Jones emphasises that friendly societies do not simply offer cash payouts but also offer funding and aid in areas such as health counselling and state benefit claiming.
The with-profits element means that there is a payout even if you never make a claim. “PHI can leave a sour taste in the mouth. You can pay for years and get nothing at the end of it,” he says. “With Holloway contracts you get a tax-free lump sum.”
Anita Hutchings, marketing assistant with British Benefit Friendly Society, says members not only get income protection cover, but take out more on retirement than they put in, particularly if they join at an early age.
Sickness benefit is paid after six months’ membership and payouts relate to the size of the member’s shareholding, and vary between £ 18 and £360 a week.
Hutchings says younger members have most to gain from the sickness benefit scheme. A 25-year old paying an initial £22.50 a month into British Benefit’s Basic Holloway Plan would get £ 120 initial weekly benefit. If the investment grew at 5% a year, their fund on retirement at 60 would be £20,600. Growth of 7.5% would give a fund of £34,700.
If you cash in early you may get back less than you put in, however, and members who join at a later age will not see such a return on their subscriptions.
Appeal for the less well-off
British Benefit’s investment portfolio is spread among approved securities such as gilts, debentures, investment properties and equities, and performance has not fallen below 7% since 1973. It has 21,000 members and £73 million in assets.
Subscriptions rise with age. A member aged between 16 and 30 would pay £30 a month for 200 shares, but this would rise to £36 between ages 39 and 42 and £50 between 55 and 58. Members must join before age 55. Gender, lifestyle, including whether or not a member smokes, and occupation are not taken into account, so if your client is a smoker and facing prohibitive PHI rates, a friendly society may prove attractive.
In contrast with what Langley-Jones says about Pioneer, Hutchings says commission paid by to IFAs by British Benefit can compete with life companies.
The main friendly society provider to IFAs is Tunbridge Wells Equitable. Marketing manager Ian Grimsell says that 75% of the society’s business is done through this channel, with the key products being income replacement cover and tax exempt savings.
The replacement income cover is the Tunbridge Wells version of a Holloway contract and is aimed at white collar workers aged 25-35. But Grimsell adds the society is still happy to quote for blue collar workers. In excess of £3 million a year is paid out in claims.
Grimsell points out that the Labour government is favourably disposed towards the friendly society ethos, with welfare expert Frank Field being a notable proponent.
Holloway contracts have traditionally attracted the less well off, says Paul Hudson, chief executive of Cirencester Friendly Society, and may need to offer higher levels of cover to attract the middle classes: “It applies to a wide range of people who want to provide for cover in case of accident or illness, particularly as employers draw back from that provision, as they increasingly are.”
Friendly society membership is also open to children, teaching them about regular saving and the rewards of compound interest, and this membership gives parents benefits too. “If the child is a member they also qualify for sickness benefit which then could be used as replacement income for a parent taking time off work from an employer who does not provide protection in that event,” Hudson says.
Solving members’ problems
Some friendly societies specialise in private medical insurance.
Robin Payne, general manager of business development with Exeter Friendly Society, says IFAs should consider mutuals when dealing with older clients who may be refused PMI or find premiums prohibitively expensive. Exeter will take new clients up to age 79 and has no age-related premium increases. Most are between their 50s and late 60s.
He says premiums compare favourably with mid-range comprehensive policies offered by commercial firms such as BUPA. With no shareholders, dividend payouts or corporation tax to cater for, Exeter’s premiums have risen by an average of around 7% over the last three years, compared to a fall of more than 12% with private insurers, he says. Exeter has 30,000 UK members and works with a network of less than 100 IFAs in the UK.
Marion Poole, general secretary of the Association of Friendly Societies, argues that societies are better placed to pick up the pieces of the welfare state than insurance companies. “Friendly societies want to help their members and don’t reach for the lawyers or the small print when a claim is made, in fact they are known for the speed at which they sign cheques. When a member has a problem they set out to solve it. This is not as common in the insurance field,” she says.
She admits that commission from friendly societies is not the highest in the market.
“Just as societies put pressure on doctors not to charge too much, they put pressure on other professionals. Growth through IFAs is unquestionably happening, however, and will happen more. Getting IFAs to recognise that friendly societies are now much better value for them and much better value for their members is taking time, but we’re working on it,” she says.