Time for Change

Undoubtedly, change is inevitable. Within distribution models, especially around remuneration and the value chain of who does what for the client, a significant change to the pensions landscape is taking place with the introduction of personal accounts, and the evolution of workplace wealth services. As Sir Callum McCarthy, then Chairman of the Financial Services Authority (FSA), assessed,“we have at present a business model which is based on incentives which produce results which are unattractive to reputable providers, unattractive to their customers, and whose benefits to intermediaries are questionable.”

The upcoming review of the distribution landscape, and the sustainability of this sector through the Retail Distribution Review (RDR) and commission factoring, will impact the corporate market. The evaluation of the impact of incentives on advice processes, we believe, will assist in removing the perception of provider bias from the advice process. And increase the transparency and understanding of services being provided to consumers. If this occurs, the distribution landscape will need to change.

The current unprecedented economic conditions are making product providers look harder at where they invest capital and the risk profile of that investment. The long pay back period associated with the group pension market, and current liquidity strain issues across the industry, could lead to the conclusion that continuing to offer high levels of initial commission is not conducive to building sustainable
business models. However, many adviser firms are looking at how to create sustainable value in their business models. Initial commission can provide excellent cash-flow in the current year but may not lend itself to building long-term value within the distribution firm.

In 2012 the government is planning to enter the arena with Personal Accounts. This will lead to further polarisation between the volume and quality ends of the market. Some providers are evolving their models to play in a higher quality segment, focusing on medium to large employers, reflecting the need to differentiate their proposition and transform how they support advisers and their clients.

One of the key reasons employers sponsor pension schemes is to recruit and retain staff. The savings needs of the staff are not just restricted to pensions. Many employees may not even value their pensions, particularly those in the younger age group.

Whilst these needs have been around for a long time, technology and a better understanding of consumer decision making is now providing a solution to meeting them. Employer sponsored corporate benefits packages can include more than just a pension. Short-term savings products such as ISAs can be added through development of systems by the providers. We expect this type of offering to become much more widely
offered by employers in the coming years.

As a result of all the above, we would expect the corporate market to change both in terms of distribution and corporate benefit offerings, with the current economic crisis driving hard the speed that these will occur.

Against this background, a colleague recently admitted to me that if only next week would be the same as this week, as it hadn’t happened for a long time. The reality however is, change must happen, if we are to evolve our industry to ensure it continually meets the demands and requirements of its customers.