Stakeholder pensions will be available next year. But life assurers are concerned that the government has not thought them through. Chris McKevitt explains.
On Hatch Street, Harcourt Street, Dawson Street and Lower Abbey Street, the business districts where the life assurance industry resides, one issue dominates conversation: stakeholder pensions. In July, the government minister in charge of pensions, Dermot Ahern, proposed legislation paving the way for the equivalent of stakeholder pensions. Now, life assurers are obsessed with how to manage Personal Retirement Savings Accounts, or PRSAs.
The 2001 Pension Bill was vague. Nevertheless, the government has promised employer groups and trade unions that PRSAs will be introduced next year. Pensions provision has always been a difficult issue to communicate to the national work force. But, with the population growing at a healthy rate, the need to get the pension's message out is urgent.
The public, especially the bon-vivant young work force, has long been warned of the dangers of inadequate pension provision. Yet currently less than 50% of under-30s have private pension provision. Ahern's ambition is to increase the level of occupational and personal pension coverage to 70% of the total workforce.
Like the UK's stakeholder pensions, PRSAs are designed to provide cheap and portable long-term retirement provision by making it compulsory for employers to provide access. Insurance Institute of Ireland (III) president Paul Donaldson says many hope PRSAs will allow UK institutions that have developed stakeholder pensions in the UK to replicate them in Ireland.
However, there are a number of key differences between the two products. Whereas stakeholder pensions have a maximum 1% management fee, PRSA providers will be able to charge 5%. Also, while stakeholder pensions are applicable to companies employing five or more people, employers with a staff of just one person will be obliged to provide access to a PRSA, with participants contributing a minimum of £5 per week. Stakeholder pensions are voluntary, but the government has mooted that, while the same will apply in Ireland, PRSAs may be made mandatory for those employees with no alternative pension provision.
Thus far, life assurers do not like the Pensions Bill and the Irish Insurance Federation (IIF) has expressed serious reservations. "Our members believe that the proposed structure is overly complex and cumbersome," says IIF life assurance manager Jennifer Hoban. "It will result in higher costs for assurers wishing to participate in the PRSA market, but with no additional benefits for the consumer," she adds.
Life assurers say they are especially concerned about a provision forcing them to establish separate companies to participate in the market and be subject to separate regulation and solvency requirements.
The government is allowing anyone to set up as a PRSA provider if they can obtain a licence.
The PRSA provider would then appoint an insurance company as an investment manager. The Pensions Board would be in charge of regulating PRSA providers, as opposed to the Department of Enterprise, Trade and Employment, which currently regulates life offices.
There is a danger, says the IIF, that life offices would be regulated by one state agency and their PRSA vehicles would be regulated by another, creating an expensive and overly bureaucratic system to monitor something designed to be low-cost and simple to use.
Hoban says: "We feel the proposed structure raises the possibility of a proliferation of regulators which will lead to increased compliance costs for PRSA providers. For assurers, these costs will be in addition to existing compliance costs and will actively militate against the widespread availability of simple, low-cost PRSA products which is the ultimate goal of the legislation."
Donaldson agrees: "While the new PRSA is intended to be simpler, regulation of both the product providers and the products will ensure it is not."
The IIF also raises the possibility of the proposals being in breach of EU law. It claims the proposals breach rules on the freedom to provide services throughout the EU. It is also worried about capital and solvency requirements and the tax implications.
The IIF also says the minister may be premature in capping management fees at 5%, especially given the absence of detail on capital requirements and the level of licence fee payable needed to participate in the market in the first place. Hoban says: "We would query the practicality of a minimum premium of £5 per week. Given the disclosure and other requirements which will apply, we have concerns that PRSA business at this level of premium may not be capable of generating any profit."
The IIF is also urging the government to allow PRSA holders to invest in with-profit funds, although they are not as transparent as unit-linked funds. She says: "We note that with-profit investment is permissible in the UK as an investment for stakeholder pensions. The proposals would make it very difficult to offer with-profit on a standard PRSA."
Hoban says PRSAs are the biggest challenge facing the industry, but one it can surmount though negotiation with the government. However, she says it is too soon to predict whether the doom and gloom commentary now familiar in the UK about achieving enough market share to achieve a sustainable business will prevail here.
There are many questions: Will companies that can't achieve the right level of market share to justify the reduced costs be forced out of the pensions market altogether? Indeed, if the cost structures are too onerous and profit too difficult to generate, will there be that much interest in providing pensions in the first place? Will pensions as they are currently designed, especially with regard to the application of fees, be tolerable to Irish consumers into the future? Will PSRAs cause too much product commoditisation? What will be available for consumers who want something more sophisticated?
One crucial area is just how restrictive the range of investment options attached to a PRSA will be. The more restrictive the range, the better the chances of continuing to provide alternative products targeted at the more sophisticated customer, according to Hoban. "One of the big issues will be the knock-on effect it will have on other types of business," she says. "Will there be a demand for the PRSA low costs to apply to other financial products?"
Those actively preparing for the new pensions landscape will be hoping to tap into the millions of pounds of newly saved funds tied up in Special Savings and Investment Accounts (SSIAs). These were introduced as a way of diverting excess consumer spending out of the overheating economy for a few years, in the shape of attractive savings schemes in which the government gives £1 for every £4 saved over five years.
It is highly likely, says Hoban, that pensions providers will look to appeal to peoples' sense of financial prudence by attracting that money into PRSAs or other pensions products once it is eligible for release from various savings and investment accounts.
Mercer IPT's Paul Kenny says PRSAs are "undoubtedly one of the major issues [for the future], as they represent the most fundamental change that has taken place for a long time."
He says intermediaries will play a significant role in the distribution of PRSAs, probably in co-operation with employers, but that new rules need to be spelled out. Almost certainly, he adds, there will be pressure on smaller intermediaries, but they could benefit from the mandatory access to PRSAs that even the smallest employer may now have to give.
For its part, Mercer IPT has yet to decide if it will participate. It foresees that inflexibilities in the PRSA proposals compared to the existing occupational pensions regime may make PRSAs, except as an AVC substitute, unattractive to ordinary employees.
And while there has been much discussion of PRSAs as life products, very little has been said about the role that technology might play in achieving economies of scale and customer relationship management. Kenny says: "Providers will have to make maximum use of technology to provide the administration and, crucially, the disclosure."
"Those who do not will not be used by intermediaries," he adds.
Local technology companies are likely to compete for the business, but companies involved in providing technology to the UK pensions industry also see the potential of the home market. Leeds-based Ecom Group, which built and hosts IFA Engine, the end-to-end quotes engine used by the Bankhall network of IFAs, has vowed to actively pursue opportunities in Ireland.
Actuary Rob Hudson, of Ecom's business development team, says: "Ecom is keen to use the technology it has developed to Origo standards in the UK to reduce the cost of distributing pension products and is actively looking for strategic partners in the Irish insurance industry."
The Pensions Bill doesn't just stop there. Although a sideshow to the main PRSA debate, a statutory Pensions Ombudsman is also provided for in the Pensions Bill. Currently, consumers have recourse to an industry-funded scheme for dispute resolution and this is the scheme the life industry would prefer to stick to.
However, previous controversy over alleged interference by the industry in the operation of the Office of the Ombudsman in the late 1990s means change is probably required to win consumer trust.
There are just 21 life offices and the four largest account for 65% of the market. And while preparation for PRSAs is dominating the agenda, the industry has just come through a period of regulatory overhaul for providers and intermediaries.
The Central Bank assumed the mantle of super-regulator for the entire financial services industry when its remit was extended in February to include the proposed Financial Services Regulatory Authority.
The critical areas for the life industry were the transfer of supervision of intermediaries from an agency administered by the IIF to the Central Bank from April and new rules in relation to insurance documentation, which require all companies to present information in a standard format. The new disclosure rules came into effect at the start of this year.
According to Irish Life and Permanent group chief executive David Went, the secret to understanding the challenges for the future is to appreciate what forces have been driving changes that have already taken place.
These include increased consumer power, more emphasis on transparency and accountability and the strength of the Irish economy. He says the deployment of flexible technology will be the key differentiator between winners and losers in the marketplace.
Intermediaries must also be forward-thinking, he says. "They will need to be able to demonstrate that their business model can sustain the increased costs brought about by the new regulatory regime."