I am a strong supporter of a competitive market and at AXA we very carefully underwrite all new schemes before deciding how keen we are able to make our terms for a particular enquiry. What is surprising however is why, simply for the sake of market share, some providers seem content to write new corporate pensions business at negligible margins knowing they must be storing up a massive financial challenge for the future.
The upside of a ‘price war’ is that clients will end up with very low charges and will rightly feel they have secured an excellent deal for their employees, which in the short term anyway they have. What we have seen though over the last few years and indeed as recently as this year is one provider after another struggle to sustain their corporate pensions businesses on the margins they were generating and in a number of cases has led them to completely withdraw from the market. This in turn often leads to clients having to review their pension arrangements with many starting to question the validity and robustness of the original advice given to them by their advisers. This scenario is going to be an increasingly bitter pill to swallow for some clients who will simply not have the money available to fund the associated costs of another review so soon after a previous one.
The downside comes as other providers feel compelled by clients and their advisers to get close to or match the terms being offered by the one or two providers who are so obviously out on a limb when their terms are compared to most. The result of this strategy is it simply skews the whole approach to robust rational pricing attempting to create a sustainable market, serving only to sustain a false economy where the client will arguably be the one who ends up losing out in the future.
If some level of sanity is to return to the pricing of new DC schemes, what we really need is for more commentators to place less importance on the market share of corporate pensions volumes that providers are writing and instead focus on the underlying profit margin that the business is actually generating. If you also consider the impact on the numbers that comes from recording internal scheme re-writes as ‘new’ business, as some providers regularly do, the amount of actual profit being generated by some starts to become highly questionable! This change in focus would allow many of us to continue directing our efforts to providing good quality customer service and communications innovation which are the bedrock of any corporate pension arrangement at a price which makes financial sense to all parties involved.
There may be a hypotheses that says we could find ourselves in a situation where all schemes are so keenly priced that the terms will never be beaten (can only then go up) but the providers will fail in the most important aspect of customer service as they struggle to find the budget to sustain their corporate pensions business.
And let us not underestimate the impact of personal accounts on our books of pension business, but we will leave that debate for next time…