The long awaited stakeholder pension is finally here, but has the employee benefits market really taken up the pension sales’ slack as predicted?
Protection, in the group sense, will undoubtedly change in relation to stakeholder but what everyone wants to know is how fast it is happening. There are two issues. One, a protection gap has resulted from the way this new breed of pension is formulated and sold. Two, there is a very real need for independent financial advisers (IFAs) to continue making a living post-stakeholder.
So, what signs are there of greater emphasis on protection issues in the workplace? And are more IFAs really looking at entering this market?
The 2001 group risk survey from GE Frankona Re gives the market totals for 2000 and 1999, a helpful baseline against which to measure changing sales patterns. So we start knowing that group income protection (IP) total premium is currently £398,364,734, up a healthy £50m or so on the year before – already a useful indicator that the market is moving in the right direction. Group critical illness (CI) income, too, has been rising steadily, now standing at £9,937,890 against £6,469,662 for 1999. These are encouraging trends for any IFA already redirecting pension talents towards employer and employee protection.
A real protection gap A real gap in the market comes from lost waiver of pension premium business, both in terms of new business income and protection for the employers and employees concerned. Basically, although waiver can still be bundled with stakeholder, it is now sold as a separate product.
“Under a personal pension we used to set up the application form so people, effectively, had to opt out of the waiver,” says Jonathon Black, head of sales, group pensions, at Scottish Equitable.
“That was what the market was really looking for from us. With stakeholder the individual has to actively seek anything that will cost more than the one per cent cap.”
This creates a psychological shift from ‘opting out’, to ‘opting in’ for protection. It has come about as a result of the government demanding simple, cheap products. And a lot of providers are still scratching their sales and marketing heads, searching for the best way of replacing waiver of premium cover.
“If people can’t go for it as part of the pension itself, it makes the sale inherently more complex,” says Peter Fenner, marketing analyst for reassurer GE Frankona Re. However, he believes this ought to be good news for IFAs, who are normally more able to go further into the issues than tied reps.
But the danger is we could well end up seeing an overall fall in the number of people with ill-health cover of their pension contributions.
Another problem is that stakeholder brings with it a more restrictive allowance on the level of life cover that qualifies for tax relief.
This presents a real problem for the UK as a whole, which already faces a daunting future in financing the sick and ageing. No wonder then, that Chris Daykin, the Government Actuary, has started to voice his thoughts that there might be a case for compulsory group IP.
So much for the protection gap, what about the earnings loss?
The way pensions are now sold through money purchase, rather than final salary schemes means many employees could be left exposed if they become long-term ill. More positively, stakeholder has the potential to be a foot in the door for advisers, putting them in front of employers and employees who have not had the impetus, until now, to find out more about protection issues.
So, are there any signs yet that the protection market is providing a much needed growth area for the IFA?
According to Eugene McCormack, the director of marketing at Unum, IFAs who have dedicated themselves to the development of the group or personal pension plan market, will no longer follow this route with such vigour because it is not worth their while. “From a product manufacturer standpoint there is an opportunity to channel that energy,” he says.
But Ingrid Skoglund, key account manager of specialist advisers, Company Benefits, fails to see how stakeholder can open up a profitable foothold.
“In the seemingly twilight years of independent financial advice, new markets are frantically being sought but it would be naive for the inexperienced to think group protection advice is a lucrative and natural progression from stakeholder,” she says.
Skoglund believes stakeholder is particularly attractive for employers who are either not in a position, or do not wish, to make an employer’s contribution. These employers may not be motivated or, indeed, able to afford, to offer other fairly expensive benefits such as group IP.
Certainly for the larger players, such as Taylors Independent Financial Advisers, where a typical client holds around 450 employees, stakeholder is small fry and irrelevant. These conscientious employers already offer risk and healthcare benefits and existing schemes have only had to amend eligibility in order to get exemption from stakeholder. And others are considering offering stakeholder as an add-on, much as additional voluntary contributions (AVCs) have been used as top-ups in the past. So no real change in the market there, then.
“The general impression I get is that stakeholder is a damp squib at the moment,” says Stuart Gray, the director at Taylors.
Gray confesses to seeing absolutely no attraction in arranging time-consuming stakeholder business or in placing risk business in the stakeholder target market of five to 50 employees. “Unfortunately, we are not a charity and prefer to operate in profitable market segments,” he says.
A viable provider option?
Employee benefit spin-offs are not necessarily a realistic product option for providers either. “I’m not sure I’ve seen a lot of new product innovation stepping up to this opportunity yet,” says McCormack. “Yes, I can see the market developing post stakeholder, but one of the concerns I have about it is the viable product one could manufacture.”
The need for such a protection product to be economically sound is the crux of the matter. “Stakeholder could have a positive effect on employee benefits, and the interest is there in intermediaries’ minds,” says McCormack. “I suppose the intermediaries who are aware of the opportunities are curious about what the employee benefits product providers may do and how they might respond.”
The premiums in the stakeholder market are expected to be small, so consider the scale of the products designed to protect those pensions and you see even smaller portions, in premium terms. What is actually needed are some very slick, low cost, administration systems. And it is no secret that providers have taken huge costs on board already, just to get stakeholder off the ground, and will want to see some return before investing further into the protection fringe.
However, it seems certain that 15 years down the line we will see a much-changed market.
“It is just a question of being the brave innovator,” says McCormack. “Should you be the one that leads the herd in developing your protection products down that route? In honesty, I don’t think a lot has changed yet. It’s a watching brief.”
A new dynamic?
“Ultimately, stakeholder’s impact will probably arise more from the new dynamics it introduces than from specific features of product design,” says Fenner.
He believes it will change the way some employee benefits are marketed, as well as the expectations of employees. Pre-stakeholder, employees would have had less exposure to the benefits they could get through work, than they will once the stakeholder marketing machines get up a full head of steam.
This would be a positive note on which to close, but there is a post-script. In pure marketing terms the stakeholder/employee benefits link is, potentially, very exciting, stepping up to a real customer need and providing the protection to fit the bill. But the business case for the product is much less obvious. And until the push comes from this side, and a real demand for the product becomes evident, it is not viable.
And we must not overlook the employer’s place in the spin-off protection sale.
“If stakeholder ultimately becomes compulsory then businesses, particularly small businesses, might just regard themselves as collectors of yet more tax and feel they are doing the work of the government,” warns Ron Wheatcroft, the technical manager at Swiss Re Life & Health. “In which case their inclination to offer even more may become rather less.”