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Thursday, 22 March, 2001, 10:46 GMT
Providers braced for stakeholder shake-up
Prudential offices in London
Providers might struggle to make profits from stakeholder pensions
The government is promoting stakeholder pensions as a simple, good value and flexible way for low earners and some other groups to save for retirement.

But for pension providers, the move to offer stakeholder pensions is the latest pressure in an increasingly competitive industry.

The introduction of low-cost stakeholder pensions has forced pension providers to cut costs across the board and has already led to job cuts.

Some analysts say the low limit on what providers can charge to manage the pensions - no more than 1% of the fund's value each year - means the companies are unlikely to make any profit from stakeholder pensions for at least 10 years.

The Federation of Small Businesses predicts the business will be so financially unviable that, within three years, there will be only one provider left.

'Streamlined' operations

Legal & General pensions strategy director Adrian Boulding, who was also a member of the government's stakeholder pensions advisory group, admits that stakeholder pensions will "put a discipline on us" and lead to "more streamlined" operations.

In practice, this means fewer knocks on the door from travelling

We're confident stakeholder pensions will be profitable but we're working on small margins

Adrian Boulding, Legal & General
salespeople and more mailshots and selling over the internet and telephone.

The Prudential is one of those that has already set off down this path, saying in February it would cut 2,000 direct sales, back office and administrative jobs in the next year.

"For every provider, stakeholder pensions have meant re-looking at existing business too," the Prudential's head of pension products development Colin Dilley says.

In it for the long run

Once they are signed up, stakeholder customers are also likely to find more self-service options, allowing them to do things such as check their fund's value online.

Scottish Widows stakeholder pensions programme director George Andrew describes the new products as "a pretty strong proposition for the customer".

He says providers will "need to be there for the long run" to make stakeholders pensions pay but he views the business as a good opportunity and good news for the financial services industry in general.

Providers need to be there for the long run

George Andrew, Scottish Widows

Many providers have had to invest heavily in new computer systems and will be working on slim margins.

But Mr Boulding says: "We're confident it [stakeholder pensions] will be profitable and deliver good value."

"It will be a catalyst that prompts large numbers to save."

Mr Dilley believes stakeholder pensions will also be profitable for Prudential although margins will be "very tight".

More consolidation coming

Even if stakeholder pensions prove profitable, analysts say the new product will drive further consolidation among providers.

Of about 70 existing personal pension providers only 38 - mostly the larger players - have applied to become stakeholder pension providers.

A 10% market share is what is necessary to be viable long-term in this market

Adrian Boulding, Legal & General

Mr Boulding believes smaller life insurers will continue to seek alliances with larger ones to achieve economies of scale in pensions - along the lines of the recent tie-up between Barclays, which closed its life arm, and Legal & General.

"A 10% market share is what is necessary to be viable long-term in this market," he says.

"Clearly, there can't be 38 companies with 10% market shares."

He says the 10 or so stakeholder pension providers that will eventually prevail could also be joined by some niche players.

Mr Andrew envisages a market of 10-20 providers.

Ungenerous rebates

As to the legislation that defines the structure of stakeholder pensions and the ways they are marketed and sold, Mr Andrew says Scottish Widows is "quite happy".

His biggest quibble is with the amount of paperwork.

He says the marketing and sales regulations are unnecessarily strict and might be relaxed a little with no loss of transparency.

Mr Boulding says his biggest gripe is with the National Insurance rebate for those who contract out of additional state pension provision.

"The levels of rebate are far from generous," he says.

"It would be a big help in getting stakeholders off the ground [if these were increased]."

Business view

Pensions background

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13 Feb 01 | Business
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