There's not much money to be made in stakeholder pensions, so
financial services firms providing them have had to ensure their
systems are up to the task.
This week is the deadline for all companies with more than five
employees to develop the capacity to provide stakeholder pensions
for their staff. Failure to comply with the regulations by 8
October could lead to a £50,000 fine. The scheme, launched in
April, has had an enormous impact on the financial services
industry as it has had to develop IT systems to provide and manage
these pensions, with the added problem that the administration
charge is capped at 1%.
To put this figure into context, in the late 1980s and early 1990s
the financial services sector typically had margins of between 3%
and 5% on pension scheme provision. According to Marlborough
Stirling, which provides software and services to the life and
pensions industries, many providers still operate on a 2% margin
and most US life companies take 3% or more. To work with margins of
less than 1%, finding a cost-effective solution is paramount. So
squeezing maximum benefit from IT systems is crucial.
A report from information delivery firm Actuate says, "Stakeholder
pensions mean wafer-thin margins, the spectre of change, the heavy
hand of government directive and the legacy of cumbersome
technology." The report, Web-based Information Delivery for the
Stakeholder Pension Industry, comments that these factors created
"fear and loathing" in parts of the financial services industry.
Delivering Web-based information is the key to improving
operational efficiency, says Actuate, and addressing the cost
factor, allowing pension providers to maximise account
profitability. The technology will also enable pension providers to
improve the customer's perception of service.
Although the introduction of stakeholder pensions has thrown up
issues and problems for the financial services industry, the
initiative has also provided a valuable opportunity to rethink and
regroup. The report concludes, "Just as stakeholder pensions pose a
threat, asking questions of providers and independent financial
advisers as to how they can market schemes profitably, so they
present an opportunity for this segment of the UK financial
services industry to embrace information delivery."
Financial services houses should not ignore the lessons learnt
developing viable stakeholder pension products, agrees Dave Power,
director of Marlborough Stirling. Even companies that have decided
not to develop stakeholder schemes will not be able to avoid the
fundamental issues that surround them.
Power believes there could be a knock-on effect across the
financial services industry, with consumers putting pressure on
providers to reduce charges on other products too. Simply
administering stakeholder pensions within the 1% margin does not
guarantee survival. Operators need to get lower than this to turn a
profit. But he points out that those who have developed sound
technology-based systems and processes specifically for
administering stakeholder pensions may have a headstart in other
areas.
Too many providers are offering traditional financial services
products running on legacy IT systems, which cannot deliver the
cost benefits or performance of modern systems. "These providers
need to migrate their existing business to modern IT systems, with
serious consideration given to access and servicing via the
Internet," says Power. "Only then will they be equipped to tackle
the greater challenge of administering all life and pensions
products at low cost and give themselves a chance to stay in
business."
Providers will need to open up their back-office IT systems for
real-time, daily business and make customer contact management
elements available at the front-end, says Power. This will reduce
the strain on resources and lead to cost savings while improving
customer service. "It is the only way to win and keep business in
the new world," he says.
Dave Patel, director at financial software house DPR Consulting,
points out that some things must still be done manually. Central to
the Government's stakeholder regulation is the stipulation that
policyholders must be able to transfer to a new provider without
penalty. And to exchange policyholders' details, the providers must
revert to costly and labour intensive manual processes.
"An automated, Internet-based exchange could remove many costs of
swapping client details and provide a simple and economic way of
freeing up the flow of information," says Patel. This would relieve
staff at both the old and new pension provider of the burden of
contacting the client or the other provider. "And any need to print
off or re-input client details would be eliminated," he adds.
Pension providers would still have to update their legacy systems,
however.
Jon Penney of software provider Intellect Services also supports a
standards-based electronic transfer system to migrate customer
details. But for Penney, the key area is application management
software. He says application management software can reduce IT
management costs, help integrate different operating systems and
reduce downtime.
It can also reduce the time to market by helping the providers
distribute product updates to their sales teams quicker. Penney
says one of the company's clients, AXA, cut the time to market
"from three weeks to hours".
Another problem facing financial services institutions is that many
companies, especially smaller enterprises, have set up schemes only
as a necessary evil to comply with the regulations. "One of the
main challenges facing the financial services sector is to get
people using them," says Penney, who believes "there will be a lot
of stagnant schemes out there".
According to Steve Kelly, business development director of
financial services at Cisco Systems, intelligent middleware will
make the process as automated as possible and help draw together
the separate systems used in stakeholder pension systems.
Automating the back-office systems will also cut down on the
administration process.
"What you don't want are human bottlenecks," says Kelly. He points
out that people lose things, take time and make mistakes. And worst
of all, they are an expensive resource.
By setting up an intelligent infrastructure, companies can
reorganise their existing systems and pick out data to populate new
systems. Kelly points out that providers still need a manual
back-up, as not everyone has access to the Internet or a bank
account, but manual methods are "to be used as selectively as
possible".
In the stakeholder market, you need to measure where you are
spending money in the operational process and this means measuring
active business metrics. "In this world, you need to get the
metrics done early to see what you're spending, where your problem
areas are and where you can improve," says Kelly. Insurance
companies can use the experience in other areas of their business
such as claims processing.
Kelly believes the regulations governing stakeholder pensions will
get tighter. Finding a cost-effective method of training staff -
such as e-learning - to make sure they comply with the regulations
will become another important issue.
One reason for the problems is that insurance companies have
invested little in their IT systems recently. "Investment has been
relatively low," says Kelly, who claims that some insurance
companies are still reliant on 20-year-old systems.
NFU Mutual is one financial services house that has invested in IT
in a bid to increase efficiency and drive down costs. It has spent
£3m overhauling the systems and business processes in its life
division.
NFU worked with IT consultancy Keane to integrate an imaging and
workflow system to increase its potential processing capacity
without hiring new staff. Adopting the integrated business model
and re-skilling its employees is central to the long-term ambitions
of the company, which launched its own stakeholder scheme into what
is becoming an increasingly cut-throat and competitive market in
April.
Consolidation will be the likely result of this competitiveness,
with some financial services houses being squeezed out of the
market. Competition in the business marketplace is fierce. Barclays
Bank is offering stakeholder pensions from Legal & General to
its business customers with a 0% annual management charge until
January 2003.
For the key players that do survive, the market potential is
enormous. In a recent survey of employers by the Institute of
Directors, 41% of respondents said that, if they were to give
access to stakeholder pensions through the payroll, they would pay
an insurance firm to do all the work rather than do it in-house.
But for financial services companies, streamlining their IT systems
so that they can survive in the under-1% stakeholder world is just
the first step. The next hurdle will be to make sure the schemes
are used.
Pensions IT healthcheck
Veronica Winterton, senior
business consultant at TC Group, has devised a service called the
Business Health Check to help companies to ensure that they are
ready to work under stringent conditions and still remain
efficient.
Winterton says that pension providers must:
- Develop an administration service appropriate to the various
access channels
- Establish the costs of administering a product and relating
this to marketing plans and revenue models to validate pricing
structure
- Develop a tiered pricing structure for high volume and
membership schemes to get the right balance between competitiveness
and preserving margins
- Accurately price third-party administration services to other
providers
- Target system development to the areas where the most benefits
will be achieved
To do this companies will need to establish an operational model
that:
- Can support customer demands by providing efficient access via
multiple channels including paper, telephone, e-mail and the
Internet
- Dispenses with labour intensive, protracted administration
methods
- Uses effective generic processes to deliver excellent service,
exploiting automation to minimise manual procedures
- Is flexible and scalable enough to deal with the peaks and
troughs of activity as the business volumes grow
- Uses multi-skilled staff to provide a consistent level of
service and exploit economies of scale.