Banking on a new approach

HSBC’s arrival in the advised group pensions space with its Workplace Retirement Services proposition brings a new kind of provider to the party. For Mike Morrow, head of insurance & investment (commercial) at HSBC, that means intermediaries should be asking themselves fundamental questions about which provider they recommend.

Rather than being just another life office to compare against the rest of the providers in the market, Morrow believes HSBC brings something genuinely different. It is a difference perhaps best exemplified by the bank’s approach to corporate wrap, which tackles the challenge of offering a single view of wealth from the exact opposite direction to life insurers.

Morrow says: “Having spent the last 20 years working for traditional providers the biggest difference I see is the customer view. I have spent the last year running a wrap business where we got very excited about a single customer view of wealth and consolidation of assets. I don’t think anyone in the market right now can deliver that better than we can, particularly if you are a bank customer.”

Morrow says HSBC can already offer pension customers who are also bank customers a fabulous service. Making up on average about a quarter of all scheme members, these customers can already see their pension valuations on their mobile phones, tablets and laptops through their online banking, next to current account, Isa and other financial products.

In terms of engagement this is for Morrow a game-changing proposition. He says: “It is so much more powerful to be able to log on to your internet banking if you are also a bank customer and be able to see your pension benefits right there in front of you as well. It changes the way you feel about pension benefits. Suddenly you can be looking at your pension valuation weekly, which is the typical regularity of visits of online banking customers.

“Contrast that with traditional provider relationships where the interaction is once a year through the benefits statement, and sometimes members don’t even read a statement. By virtue of the fact you are getting in front and centre with people, it creates a lot more ownership and responsibility around pension. I would like to think it would make people start to make more meaningful contributions because they will feel more attached and more engaged,” he says.

Some intermediaries could see HSBC’s foray into the group pensions space as a Trojan horse into their key area of operation, a perspective Morrow understands. He adds that HSBC is not exactly new to group pensions, currently running 12,000 schemes, but is actively targeting the intermediated space for the first time.

“Some of the employee benefits consultancies and the IFAs might perceive this as being risky because we are going to cross sell bank accounts to customers,” he says. “That is not our start point, but I do think that gives you a better possible customer experience, so if we do end up banking more of these customers as a direct result I would view that as a good thing. But I would like to think that IFAs or EBCs should not feel threatened by that in any way.”

So when Morrow calculates whether a scheme is worth having or not, is there any factoring in of the number of staff that might be converted into banking customers?

“Not at all,” says Morrow. “The life company is a standalone life company. So when we look at profitability we look at it on the basis of staff retention, average premiums and the usual provider criteria. There is no cross subsidy at all.”

While the life insurance industry is busy trying to create a marketplace for financial services in the workplace, Morrow believes the more obvious place to do that is where people already do their financial transactions in a trusted environment. The magnetism of the online bank account, he argues, avoids the problem corporate wraps will face getting employees to actually use them.

“I can remember being sat in meetings in insurance companies trying to make the offer more magnetic and attractive, so that people would keep visiting the website. It doesn’t half help if you are visiting the website because you are a bank customer. The magnetism is already there,” he says, arguing this in turn will lead to higher savings in the long run.

“By giving you that constant reminder about savings maybe you do actually manage to break through beyond our 4 per cent savings ratio. In Hong Kong it is north of 20 per cent.”

“I can remember being sat in meetings in insurance companies trying to make the offer more magnetic and attractive, so that people would keep visiting the website. It doesn’t half help if you are visiting the website because you are a bank customer. The magnetism is already there”

What the employer loses out through the bank wrap model, however, is the branding on the benefits they are giving their employees. For the employer, it then becomes a question of comparing the engagement through an employer-branded benefits portal that is possibly accessed infrequently by all staff, or the engagement delivered by regular, perhaps weekly engagement with their workplace pension through a bank portal, albeit only for that proportion of staff who are bank customers.

Morrow says there is nothing yet in the pipeline for the delivery of white-labeled propositions for HSBC pensions in the workplace, but there could be in the future for the right employer clients.

“Other companies do microsites, white labeling and front end technology, and I recognise that is something we do not offer today. Will we in the future? Absolutely because that is the currency you need to when you are talking to employee benefit consultants.”

The bancassurer model has been considered a threat to the intermediary community for years, so what does Morrow make of the recent decision of Barclays to withdraw financial planning through branches in the wake of its £7.7m fine for misselling Aviva equity funds to customers for whom they were not suitable? Does it change the game for the bancassurer model?

“What it highlights is that as you walk into the 23 month countdown to the RDR, the retail bank assurance model, where you’re trying to charge fees in an environment where people only want to buy a bond or an Isa, that is tough,” says Morrow.

“It is going to be the most difficult area for bank assurance to survive. And that is the decision that Barclays has made,” says Morrow. “It has decided that this retail model is in the very difficult box post-2012, it is the most difficult place for them to transition to clean structures and fees. For the average client walking into a Barclays branch who wants to put £30,000 into a bond or £5,000 into an Isa, that is a difficult conversation to translate into a fee-based conversation, because it is a transaction and unless you can make that work through the simplified advice route, it is difficult.”

Morrow accepts the RDR presents challenges to his own organisation. With an IFA arm 67 advisers strong and 213 multi-tied advisers, and a life office, the RDR issues in Morrow’s inbox are wideranging.

“The commission ban effectively says you have got to explicitly divorce the cost of manufacture from the cost of distribution. The customer has to be able to buy a clean products that its factory gate priced and be able to see what the cost of the distribution is,” he says.
“I am wearing two hats – as a distributor and product manufacturer.”

Morrow freely accepts that his organisation is not yet clear how consultancy charging is going to work.

“I don’t think there is enough clarity about what the regulations will and won’t allow. But we recognise that as a product providers we are responsible for making sure we can create structures which make it possible to use the products where they need to be used. In some cases employers will physically not be able to cope with moving over to fees. That is a challenge. The most important thing to get over, though, is that compulsion is coming, and we want people going into good quality schemes at the right level of pension.”

Morrow detects some employers are preparing for the onset of automatic enrolment by setting up pensions paying 1 per cent of salary, reflected in pay settlements, to prepare the way for the 3 per cent they will be required to fork out from 2012 onwards.

“Intermediaries realise investment is where they can offer value but they are going to have to do it in a way that is very transparent, and where you can differentiate the return that you are getting compared to what you would have got out of lower-priced trackers”

“We are starting to see employers make sensible decisions because they want to start to phase the implementation of a pension scheme with a 1 or 2 per cent contribution rate. We have seen evidence of that at the back end of last year and that seems sensible. Get yourself ready for it and get ready early.” Morrow says: “With compulsion in other countries around the world we have seen the savings ratio come up. We are just getting the early stages of compulsion finally come into the UK market which means people will finally start to take pensions a bit more seriously.”

Auto-enrolment could also mean a substantial slice of new business for HSBC Workplace Retirement Services from the more than one million businesses that are already clients with the bank, although Morrow sees many of these being directed by HSBC towards Nest.

“We see the reforms as being good news. Compulsion is a good thing and we welcome it, but there will be a lot of the market we will not want to take on, it won’t be profitable and Nest will be the right option for them,” he says.

So will the bank turn away potential pension customers? “The way we price it will mean that our product will look quite expensive compared to Nest at the bottom of the market. We are quite prepared to live with that,” he says.

When it comes to investment strategy, Morrow says HSBC is agnostic. It has seen interest in its target date protected retirement funds grow to the point that they now represent 15 per cent of pension investments. But it also offers intermediaries a platform to offer their own blended investment solutions.

“Most intermediaries realise investment is where they can offer value but they are going to have to do it in a way that is very transparent, and where you can differentiate the return that you are getting compared to what you would have got out of lower-priced trackers,” he says.

Differentiation is the key for all businesses – and for HSBC’s Workplace Retirement Services proposition, persuading intermediaries that banks can do group pensions better than life insurers will be the difference between success and failure.