Thursday, May 6, 2010

The Life & Pension Industry's Vicious Circle

The Life and Pension Industry is starved of 'new' business. Economic woes have led to folk reducing or stopping their contributions for Life Insurance, Pensions and long-term Savings and Investments plans. Others have simply put off their decision to buy these products because of all the uncertainty. The Government decision to slap a 1% Levy on Life Insurance and Savings and Investment Policies has not helped matters either.

One would assume that this would lead to Life & Pension Companies introducing innovative consumer friendly ways of enticing punters to buy their products. Instead of bending-over-backwards to acquire 'new' business, it would appear that they have resigned themselves to a policy of 'rob your competitor'. I am defining 'new' business, as transactions that are not set up with another provider already and have not reached their maturity/end date.

The industry standard at the moment is to offer incentives to advisors to move their book of business from one provider to another. I cannot, for the life of me, understand why the companies are even entertaining this zero-sum game. The exercise is fraught with danger, in particular, from a consumer perspective.

In my humble opinion it is a disaster waiting to happen. The company that receives the transfer of business gets to report magical and illusory 'new' (to them at least) business figures at the end of the year. If you're a manager and you are rewarded on 'gains' in market share, then you are going to be quids in at the start of next year. If you are an advisor, you will also have received some incentive payment. Let's face it, you are not doing it for no reward. However, if you are a consumer, you are going to be caught in the cross-fire.

There may be genuine cases where transferring a transaction from one product provider to another is in the best interest of the policyholder but I would argue that, in the majority of situations the reasons for the transfers are spurious and incentive driven.

Something needs to be done. The Life & Pension Companies need to cop themselves on and stop encouraging the transfers of business from one provider to another. Otherwise, they will be mired in a mis-selling scandal and the business models that they currently employ will implode, as the same transactions are passed around from Billy to Jack every few years. They have to acknowledge that the consumer is the most important person to the survival of their business.

To the consumer, I say : 'If a proposal is presented to you to transfer from one product provider to another, make sure that the reasons for the transaction are in your best interest. Get a second opinion. Ask for confirmation, in writing, that there will be no entry or exit penalties/charges on the 'new' transaction and that you receiving a more favourable annual management charge. Ask for written confirmation from the company that the business is being transferred to that the advisor has no 'deal' with them that stipulates a required minimum level of business.'

It's very disheartening to be watching this from within the industry.

Caveat Emptor.


Sean said...

Interesting point about a form of moral hazard for managers in the companies to want a bad year followed by a good one.

I have to compliment Quinn here, their offer to pay the 1% government stamp duty this year is very welcome.

I'm currently going though an exercise to reduce my AMC on non pension index tracking funds, and the market has not changed that much in the last 8 years.

To access a lower than 1% AMC you need either a considerable fund, or else to be with a provider for 15 years.

Gerard said...

I don't think that they would actually 'want' a bad year. It's just that the market here is limited in it's potential for new money that would be invested in investment and savings plans, at the moment.

Zurich Life are currently not charging the levy.

The competition in the area of the market that you are interested in is limited. There would appear to be little or no appetite, amongst product providers, to reduce AMCs for these types of funds.

It is surprising though that one of the international providers of these types of funds have not tried to capture that market. Unless, they consider it not commercially viable due to its size?

Of course, the new 1% Levy is not going to help matters, as it increases the cost to the investor.

Sean said...

I have long thought that was a business opportunity. But I dont know what is involved in starting a company to offer these funds to consumers 8-(

We would expect, that the profit motive should be driving them. profit is quantity x margin. I can only assume that this formula gives a larger result in other countries.

I hadn't investigated Zurich Life, Do you know what their AMC is for (non pension based) nil commission index tracking funds?

Does anyone have any idea of the number of euros invested by people/companies in Ireland in index tracking funds?

Gerard said...

We're going way off topic here and I'd like to keep this post specific to the title.

Perhaps the whole index tracking, and cost debate might be more appropriate to a forum like AAM?

I don't know the size of the index tracking fund market here and I'm not sure about where one would get the relevant information. I doubt that the IIF would have a breakdown between managed/indexed.