Who pinched my margin?

Nick Groom, sales director for Axa corporate benefits, looks at the question of provider sustainability and the declining margin of corporate pension products

I wonder what happened to our charges? I knew a time when the industry levied much higher charges than today, and arguably those charges now account for a large proportion of the embedded value in UK life offices.

Since then the industry has seen a natural and expected reduction in the charges on products and services yet it continues to pay the same commissions and is driven to add more bells and whistles to the product.

Perhaps the industry is now paying for its behaviour of many years ago; perhaps it has just allowed the market and the regulator to drive down the charges of DC schemes through the advent of stakeholder pensions too far.

Charges were higher in the past but the industry appears to have moved to the other extreme and there is a belief that it is in danger of eroding margins to the extent that the corporate pensions industry could become unsustainable.

The current proposition required to compete is terrific value for money, but only if providers all hold firm on reasonable charging levels that allow the industry to make some profit.

Corporate pensions business really shouldn’t be ignored as it adds huge value to any provider; it is, arguably, recession proof and not high-alpha.

In my opinion it is a real jewel in the crown, delivering consistently good results and margins year on year. And marginalise at your peril, the corporate pensions market has been around for years, has stood the test of time. It could also provide the greatest incremental opportunities with all that is being proposed to educate and inform through the workplace.

The industry needs to find the right balance between what providers need to do a good job, and what is good value for money for the customer.

If there is pressure on charging levels it leads to lower margin. To maintain margin companies have to reduce expenses or grow business. In the end the customer may suffer as less good people remain in customer service, and everyone knows that great customer service in corporate pensions is about the commitment, attitude and availability of good people.

Providers are just as much to blame in some cases, striving for new business volume through lowest price and offering initial commission with only minimal clawback terms that don’t make commercial sense.

To make corporate pensions business really work distribution needs to be controlled, putting huge emphasis on client management and therefore retention.

Underwriting must be carried out to the detailed extent where, for example, the geography of a client and therefore the travelling expense of reaching them are loaded into the annual management fees – it needs to be that precise. You may then have the makings of a sustainable business.

An example of the way not to control your corporate business was highlighted by a recent strategic review by one of the market leading corporate pensions’ providers, apparently admitting to actuarial pricing and accounting naivety whilst leading the market in new business volumes. How can that happen?

The industry will therefore need to find a point in time where charging at a reasonable level is an accepted principle. Deep pockets cannot remain deep forever; the sensitivity to a change in assumptions within a lower margin business is a huge risk that sooner or later will not be backed by UK companies without product or global diversity – take personal accounts for example and how the providers must factor this into persistency assumptions now.

Everyone needs a fair share of the value chain; the reliance for providers on a small part, after expenses and fund management charges, of a small charge is not really enough to be sustainable in the longer term.

If charging pressure continues to have a detrimental effect on the profitability of corporate pensions business, we will see more providers exit the UK market, which will result in less choice, all because the industry got far too obsessed around the impact of a few valuable and sensitive basis points!