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.