Stakeholder pensions, launched this April, are intended to enlarge the pensions market by encouraging more people to invest in a pension scheme, both privately and through their employer.
Driven through by the Labour administration, stakeholder pensions are receiving a less than enthusiastic welcome from the pensions industry itself. The reason is simple: margins. The Government has imposed a 1% cap on annual management charges, squeezing the profit margins for product providers.
"The first thing this shouts out is that pension providers have to reduce huge swathes of cost," comments Euan Robertson, business development director at financial software firm Spektra. At the same time, he adds, companies want to market their pensions products to a wider audience. "The only way to do all this is electronically," says Robertson.
The major pension providers have already confirmed their commitment to participating in the stakeholder pensions market, not because they expect profitable business from the market - in one recent survey, three-quarters of pension providers said that it could take up to 10 years to make a profit from stakeholder products - but because they are concerned that if they do not invest in the market, it will be left open to competitors.
"Pensions providers are going to have to invest without a return for some time," says Robertson. "It is a defensive strategy, but providers see stakeholder pensions as the shape of things to come. Their products have to be a lot more flexible in terms of what is delivered to the consumer."
Online systems provide greater flexibility for both providers and consumers. It may once have been acceptable for a company to have had only two dates each year on which employees could join its pension scheme, but that will not be the case with stakeholder pensions. "People will want to join at regular intervals, to change their contributions and so on," points out Robertson.
This has created a major challenge for pension providers, which are looking to the Internet to provide the low-cost mechanism they need to support their products. But there are a number of obstacles on the route to Internet-based sales and support for stakeholder pensions, including concerns about system performance and integration with legacy systems, as well as the potential cost of building e-commerce platforms.
"Stakeholder pensions are driving a revolution in the whole pensions market and to survive, product providers and intermediaries collectively need a different business model, to provide cost-effective support for pension products," comments Mark Sayer, e-business development manager at Axa Sun Life, one of the UK's largest life, pensions and investment companies. "At the same time, this is also seen as a response to growing consumerism in the market and the need to provide more facilities for pension-holders." This could include, for instance, the ability to apply online for a stakeholder pension, to check the size of the pension fund, or even switch funds.
Axa Sun Life has been working in e-commerce for some time and was the first UK company to launch a real-time extranet quotation service. But Sayer emphasises that providing Web-based support for stakeholder pensions is only one aspect of the company's overall approach. "We are building a model that provides mixed access, by paper, phone and Web," he says. "The key requirement in this market is scale and you won't get that through a proposition that is only Web-enabled. In a few years' time, there may be only five or six key players in this market. We are one of those players now and we intend to stay that way. Web-based systems are important, but in the context of a broader proposition."
Chatter Cheema, e-business manager at online software supplier iE, says some pension providers still don't know if they can operate within the 1% cap. "The companies we are talking to are Web-enabling their existing systems and their main challenge is ensuring these systems can handle the volumes of traffic expected," he comments. Cheema says e-commerce is not the only weapon pension providers will have in the forthcoming battle for stakeholders, but it will be crucial. According to iE, the government has created, more by default than by design, the first financial services product for which an e-services component is not just optional, but compulsory.
The stakeholder challenge
With the launch of stakeholder pensions this April, financial services companies are being forced to cut costs drastically to comply with the government cap on management charges, while also trying to provide better services in the fierce competition for customers. Web-enabled pensions are, by default, the only way forward and signal a sea-change in business models within the financial services industry.