Trustees have twin objectives of maximising investment returns within their mandate whilst controlling investment costs. The advantage of having access to fund managers across the market is understood. However historically, only trustees of large schemes with the financial resources and economies of scale could access institutional investment markets.
Financial institutions and in particular, some large high street banks, are probably at the top of the list, fuelled by the abundant availability of capital and the ability to sell debt. In the process, these companies lost sight of the average person who still had to continue to pay their mortgage or credit card payment, but safe in the knowledge that most of their debts had been packaged up, securitised and sold to another institution in a far away land, who also liked the idea of playing in this market.
Closer to home, we are not immune from the ripple effect of these fundamental business failures. For the corporate pensions industry we face these challenges too, but more specifically we must continually address our quality control and persistency assumptions as we move into an era where clients have more choice, may choose the personal accounts route and move, or worse, have to auto-enrol all of its staff who didn’t want to join in the first place. These are not insignificant assumptions for the pensions book of business. If providers aren’t selective in supplying pension schemes the business could become toxic in the future. But some weren’t and have written extensively, in any sector, Nick Groom,
Distribution and Marketing Director,
Corporate Benefits, AXA Lifeincluding many retail or manufacturing businesses with high turnover.
After reviewing data around what has been tendered for in the market, and using a robust underwriting pricing model, out of a number of tenders received over the last two years, AXA declined to offer price on around 30% of them. Of this 30%, just under half, were from these particular sectors and have ended up being written elsewhere.
No sector is immune from the ravages of this crisis. I choose retail and manufacturing as an example only, and because we are seeing many high profile businesses of this type fail. When they do fail, and if they are a significant proportion of your book of business, the impact on the provider is likely to be greater. This is due to the high turnover and low contributions, which must make them candidates to go the personal account route. A significant number of small pots of money (in some cases not even covering the cost of administration) therefore sit on the platform. Each year they dilute the aggregate value further. As a result this could change the ability of that provider to be competitive, profitable and therefore ultimately sustainable over the longer term.
So perhaps, as we learn from the current financial crisis and embrace the need for far better corporate governance, we will see CEOs and Boards of those who disregarded basic underwriting principles taking greater interest.
We may see them getting more involved, to the point where they start asking questions regarding the impact of this recession on their back book of business, and why it is no longer the cash cow on their balance sheet they never needed to worry about.
Nick Groom,
Distribution and Marketing Director,
Corporate Benefits, AXA Life