As the gatekeepers to the substantial spoils of employee benefits business, consultants and advisers have long wielded considerable power over the UK’s pension providers. The fear of being left out in the cold in the quest for new business has inclined product providers to keep the consulting community onside and there has been little desire to question the unwritten rules governing these relationships. But the dynamics between provider and consultant in the corporate sector are starting to change, and the once clearly defined boundaries separating the two sides are becoming blurred. Ferocious competition between product providers, pressure on margins in a tough market and a constantly shifting legislative regime have contributed to a rethink of the traditional provider and adviser business models. To ensure survival in today’s demanding environment all parties need to challenge accepted norms and consider trying new business strategies.
One of the more controversial departures from traditional practice has been the increase in instances of providers contacting employers directly as opposed to waiting for the green light from a third-party adviser or consultant.
Dick Strattan, leader of Mercer’s employee benefits business, says: “Generally speaking you can see that the insurers are setting up to play in the space where they deal more directly with employers.”
Andy Cheseldine, a senior consultant in Hewitt’s UK retirement consulting team, says he too has noticed the trend which he describes as a “growing concern”.
He adds: “[Providers] are parking their tanks on our lawns but we are doing the same to them. Changes in legislation and regulation – and the fact we all want to be more efficient and make more money – mean we are all looking at where we can best add value to clients.”
While providers also recognise the move towards more direct contact with employers, they are less eager to admit any involvement, a throwback to anxieties about biting the hands that feed them. Prudential, Zurich and Friends Provident say they are aware that providers are fostering more immediate relationships with clients, but they would always favour working with a consultant.
Russell Welsh, head of corporate pension services at Friends Provident, says: “There are several providers that are increasingly choosing to go down the direct route. Whilst there are benefits of dealing directly with employers, we still believe the intermediary has a strong role to play in this relationship.”
Welsh says his firm’s current strategy is to work in partnership with intermediaries because transacting corporate pensions business with employers is a three-way relationship with providers and intermediaries bringing “uniquely different benefits to the table, meaning the employer benefits from an overall enhanced level of service”.
Meanwhile, Prudential says it would never choose to bypass an employee benefits consultant when dealing with corporate clients, although they do engage with directly when requested to do so by the employer.
Martyn Bogira, director of defined contribution at Prudential, says: “We work directly with clients at an operational level to ensure the smooth running of the scheme. Once a scheme is in place we can work directly to support the communication of the scheme, although for major changes and issues requiring advice we would always recommend clients consult their advisers.”
Zurich is vehemently opposed to the idea of contacting employers directly and says it only works in conjunction with consultants. Stephen Lefley, head of corporate distribution at Zurich, says: “There is a trend towards dealing direct which Zurich has no plans to join.
The symptoms are very clear and unless there are strategic U-turns, some manufacturers may soon show their hand.”
Standard Life says it has a more proactive approach to contacting prospective clients and dealing with existing ones, and does not always operate through a third-party adviser or consultant.
Martin Trenchard, head of business development for Standard Life’s corporate distribution, says the firm considers its relationship with consultants as critical to its business, but it will deal directly where a client or prospective client initiates such an approach.
He says: “Ultimately we are in the business of providing services to employers and their employees, so we have always sought to also build strong professional relationships with our existing and potential clients. Our proposition allows the employer to provide many of the services required to deliver a comprehensive benefit package to their employees; the decision to engage directly or through their adviser is driven by the employer and we will work in partnership with all parties.”
There are several ways in which a provider can deal directly with an employer and these are likely to cause various levels of irritation for the consultants.
However, if it is the client’s behest to exclude the adviser from transactions or discussions there is little they can do about it, and any objection raised could risk damaging their own relationship with the employer. Cheseldine says: “Our objective is to be the client’s trusted adviser and in many cases the contact will result from our recommendation. But if not, it is effectively none of our business; the client has the absolute right to contact whomever they want. We would hope the client would be happy for the provider to pass on details of the discussion to us, but that is their decision.”
However, he adds that Hewitt would take a dim view of providers hijacking a consultant’s introduction for one particular product to discuss other offerings in their range. For example, Hewitt might recommend that a client take an insurer’s group personal pension but would not want it using the introduction as an opportunity to promote their workplace Isa.
“This is probably the biggest problem area because it is where a provider is most likely to step on an EBC’s toes,” he says. “We might already be in discussions with the client on the subject and going direct without discussing it with us in advance might look a bit tacky.”
The most obvious motivation for an employer to cut out the middle man is cost. By going directly to a provider they can eliminate the consultant’s layer of fees. But Trenchard says that even where employers are balancing tight budgets and looking to extract maximum value from their suppliers, they still favour additional input from a consultant.
Trenchard says: “Our experience still indicates that the vast majority of employers bring their consultants into any strategy change or review process as and when they require their services.”
Predictably, consultants list numerous reasons why clients benefit from retaining the presence and guidance from an independent adviser. Alongside arguments about a provider’s bias towards their own products and believing their own hype, there are also concerns about pushing employers and employees to make larger contributions to pension schemes which may not be in their best interests.
“We keep having discussions with providers where they are looking for an increase in the amount of pension saving. While we believe the UK generally should pay more into pensions, that doesn’t mean a 22 year old with student debt and no deposit for a house should be putting lots of spare capital into a fund they can’t access for 50 years,” Cheseldine says. “Let’s look at the broader palette of employer benefits that are right for them.”
Bypassing a consultant can also cost an employer more in the long run if a provider’s suggested course of action fails to take into consideration the company’s wider circumstance. One consultant gives the example where an employer was considering closing its final salary scheme to all future accrual and the provider recommended a group Sipp. However it failed to mention that once there are no active members in a defined benefit plan, section 75 debt regulations insist that deficits are made good, which would have left the employer facing a £130m contribution bill.
Strattan says: “Providers don’t really understand corporates as well as the employee benefit consultants do in terms of dealing with employees and the culture that they have. Basically they are still selling products so that is their mentality.”
Given the dangers of alienating the client with bad ‘advice’ and upsetting the consultants by trespassing on their patch, it begs the question what motivates a provider to attempt to go direct to employers.
Standard Life’s Trenchard says: “From the provider point of view there are no specific advantages or disadvantages in dealing direct. We will work with the employer to implement the best solutions for their employees. There are key decisions to be taken at company level and when the employer is confident about taking these decisions then we are happy to work with them to implement the changes accordingly.
Similarly we are also happy if a consultant is involved in this process.” However, Lefley suggests that where a relationship has broken down between provider and adviser, the former could miss out on new business forcing them to go directly to potential clients.
“This may occur if the provider has a very large existing book which is being rebroked at a rate faster than new business can be written. The existing book may once have been hugely profitable in the old ‘three or four charge’ days, but the stakeholder driver of 2001 put these back books of DC business into a difficult place. Providers could either rewrite them to single charge or risk losing them to another provider offering stakeholder.”
He adds: “Being stuck between the proverbial rock and a hard place forced the rewrite to single charge for many, and if these rewritten schemes are systematically moved away to other providers, then this signals a very negative outlook for those providers affected. Hence it is highly conceivable that these providers will reconsider their distribution.”
Although consultants are uncomfortable with the trend to providers dealing directly with any of their clients, the real anxiety is about protecting the largest, most lucrative business. One consultant says he is unconcerned about providers mopping up the “fiveman bands, chip shops and newsagents” but the large employers are guarded more jealously.
Cheseldine argues that it is down to the consultant to ensure their most precious clients are taken care of properly, thereby pre-empting any desire to seek advice elsewhere.
“The fundamental truth here is that if we don’t have enough confidence in our relationships with our best clients to the extent we are worried about [an insurer] going to them directly, then we should be really concerned if one of our [consulting] competitors approaches them,” he says.
Consultants are also happy for providers to deal directly with employers where it helps share a workload; for example in communications and education programmes for employees.
Where clients have many thousands of employees the consultant may not be equipped to deliver the same level of service as a well resourced product provider, leaving them better placed to take on the job.
Strattan says: “Rather than having loads of people competing to flog things the emphasis should be on who can provide quality advice to the workforce and who has the best systems and solutions for clients.”
Of course for this to work both consultant and provider must be honest enough to admit where their limitations lie and be willing to direct the client to the other side when it is in their best interests.
On the whole providers seem reluctant to step on consultants’ toes, preferring instead to foster three-way relationships involving all parties. Yet as pressures on margins intensify and the market grows ever more competitive, the temptation to move outside traditional boundaries may prove too much to resist. However, providers need to beware that blurring the lines between adviser and provider may not be in the best interests of the client and could undermine the business models that already exist in the corporate sector.
Lefley says: “If providers manufacture only for consultants and advisers with whom there is mutual trust and respect, then there should be no reason for [dealing direct] to become the model of the future. Personally I sincerely hope it isn’t. The ‘Jack of all trades’, in my book, is and will remain the ‘master of none.’”