Corporate Benefits, AXA Life
The Government’s drive for a simple charging structure has reshaped the DC market with providers recouping costs now through a single annual fund management charge (AMC). Gone are those allocation rates, policy fees and penalties which featured in previous generation products. This is good news for consumers. For providers, however, it has presented challenges to ensure their overall portfolio of trust and contract based schemes remain financially viable, whilst the market adapts, develops, and demands innovative new ways to price and value corporate schemes.
In particular, this has led to the development of far more sophisticated actuarial pricing models, enabling the provider to evaluate each of the characteristics within a scheme which affect profitability, for example, industry type, annual contributions, age, turnover, and much more. The income persistency (using an assumed AMC) and specific expenses for each scheme are forecast to determine the AMC required for an acceptable level of profit in an acceptable timeframe.
Then came along differential pricing between active and deferred members (AMD)
Interestingly, the market once demanded that scheme leavers enjoy the same terms offered as the grouped arrangement. The market, through AMD type enhancements is now looking once again for differentiation, so leavers now subsidise the active members of the scheme. This has presented the model with a much more positive view of turnover, and has almost turned it on its head, with the high turnover schemes now looking more attractive. However let’s remember that poor schemes with high turnover are still poor schemes whichever way you look at them!
I don’t intend to discuss the arguments for and against this approach in this short article, but we as an industry must ensure that trustees and employers fully understand the reason why the employees they represent are enjoying such advantageous terms, and that they are comfortable to levy higher costs onto leavers to benefit active employees.
One of the reasons for the introduction of AMD type pricing is to give some form of protection to the adviser, in the case of AMD that is price protection. Another way to do this might be with the introduction of Save More Tomorrow (SMT) programmes that we are pioneering. These involve members choosing automated future increases on joining, with the option to change or stop in the future.
Much like AMD, this business is more attractive to providers as it assumes future increased and known cashflows. Therefore more competitive terms can be secured, but unlike AMD, it offers more benefits than price protection alone:
– The adviser’s relationship from a client and staff retention viewpoint is protected through competitive pricing and a superior product, whilst the employee values his benefit and builds a far more meaningful and real pension with his employer.
– Research suggests a higher take-up rate, and that the majority of members continue with the increases bringing further benefits to both the eventual pension for the employee and the potential remuneration for the adviser.
– The relationship between adviser and client can prosper, as time is freed for the adviser to add some real value in the knowledge that employees, contribution increases are taken care of.
– Can drive up contribution rates to beyond that of personal accounts contribution requirements, whilst helping employers prepare for their coming, and meeting the Government’s aims of people saving more for income in retirement.
Whichever route is chosen is down to good old fashioned and solid financial advice. The industry is collectively developing new solutions quickly and efficiently to meet the demands of modern employers in today’s modern world of benefits provision.