Poorer persistency makes traditional pension pricing structures unsustainable, says Scottish Life
Thursday, 29 November 2007
The FSA's annual persistency survey1, published this month, highlights that the traditional methods of pricing pensions plans are unsustainable, says Scottish Life, the pensions specialist arm of the Royal London Group.
The FSA 2007 survey indicates that "the persistency for personal pensions continues to fall" with just 42.3% of IFA-advised clients retaining their personal pension after four years, compared to 45.9% in the 2006 survey and over 70% in the first survey in 1998.
Annual management charge (AMC) only pricing structures typically require customers to keep their plan for most of its lifetime in order to be profitable for the provider. This means that, if customers do not maintain regular contributions into their plan, providers can end up facing a significant loss. The loss is greatest for lapses in the early years, especially if the traditional form of initial commission has been paid by the provider.
Scottish Life launched a sustainable alternative to the AMC-only charge with the introduction of its Financial Advisers' Fee (FAF) in 2003.Since then, the market has recognised that this type of remuneration model (where the cost of advice is taken directly from the fund at outset and the AMC is kept low throughout the term of the contract) can offer better value to the client, as well as being sustainable for advisers and providers. Nearly 90% of Scottish Life's regular premium new business is currently being written using a fee-based structure, primarily the FAF commission option2.
John Deane, Chief Executive of Royal London's Intermediary Division (which includes Scottish Life), said:
"We have been emphasising for some time now the importance of writing new business profitably and not just pushing for increased business volumes and market share on any terms. However there are still a number of competitor companies who are operating in a way that just makes no sense to us.
"As long as this continues, the market will be distorted. However, with the publication of the latest FSA persistency survey, it seems likely that stockmarket analysts and institutional shareholders will be putting pressure on these companies to review their strategies and to make the move to sustainable pricing structures."
– ENDS –
Source:
1 2007 Survey of the Persistency of Life and Pensions Policies, Financial Services Authority, November 2007
2 Scottish Life figures for 1st half 2007. The figures relate to our Individual pension business.
For further information please contact:
Scottish Life
Alasdair Buchanan
Head of Communications
Tel: 0131 456 7133
Mobile: 07919 170 413
Polhill Communications
John Coles
Tel: 07836 273 660
Editor's Notes:
Scottish Life was founded in 1881 in Edinburgh as a proprietary company, becoming a mutual company in 1968.
On 1 July 2001, Scottish Life demutualised and transferred its business to The Royal London Mutual Insurance Society Limited. Scottish Life is a division of Royal London and is the specialist pensions business within the Group, providing individual and group pensions to the market via intermediaries.
Scottish Life and Royal London's other intermediary businesses are based in Edinburgh where 1,200 staff are employed, with 195 working in other parts of the UK and overseas.
Royal London Group is a specialist financial service provider. Its businesses focus on those sectors of the market which value premium propositions, operating through a number of brands:
- Scottish Life – UK pensions market
- Bright Grey – UK protection market
- Scottish Life International – offshore investment markets
- RLAM – fund management
- RLAS – life and pensions administration
Royal London is the largest mutual life and pensions company in the UK with Group funds under management of £32.9 billion. Group businesses serve around three million customers and employ 2,580 people.(Figures quoted are as at 30 September 2007).
Royal London has an interest in Pearl's recommended acquisition of Resolution.Royal London has entered into a binding agreement with Pearl. The agreement provides that, conditional on successful completion of the offer, Royal London would have the right to acquire certain Resolution businesses and assets. The total consideration payable by Royal London for such assets would be approximately £1.27 billion (subject to certain post-closing adjustments). In addition, Royal London has agreed to provide £0.3 billion of the debt funding for any offer to be made by Pearl.
The assets to be acquired by Royal London are expected to include, amongst others:
- Scottish Provident, one of the leading providers of protection products in the UK life sector
- Scottish Provident International Life Assurance, an Isle of Man-based offshore protection provider
- The business and trading assets of the Resolution Management Services Company relating to Life Division North, an administration and service business company based in Glasgow
- Blocks of in-force policies and the related asset management of those policies
There can be no certainty that Royal London will acquire these assets in
Resolution given that the transaction is conditional upon Pearl's recommended acquisition of Resolution being successful.