David Prosser: The beginning of the end for the savings market as we know it


Outlook For Standard Life and its rivals in the UK life and pensions sector, the next 18 months will see a phoney war. The real action in this marketplace begins at the end of 2012, when the Financial Services Authority at last implements the recommendations made by its retail distribution review, a process that began five years ago. The most significant of these reforms will be an end to commission payments to independent financial advisers from product providers.

Standard Life claimed yesterday that it is well-placed to benefit from this change, since it has already dropped such commissions. So it may prove, though one imagines that the headstart is going to be very shortlived. In fact, the abolition of commission, which is long overdue, ought to be of real benefit to many life and pension providers.

For several years now, this has been a market in decline for all but the very biggest players. The cost of paying a commission to an IFA for selling a product means the provider does not begin making a profit on its new customer's business for several years. And since the sales commission system incentivises advisers to keep introducing their clients to new product providers, the customer invariably jumps ship well before that break-even date.

The business model of the insurance sector was miserable enough before the financial crisis: compare the total new premiums claimed each year by the big insurers over the five years to 2008, say, to the industry's total increase in assets under management, and you'll see that most sales were churns of existing clients rather than genuinely new business to the savings industry. Even worse, when thecrisis hit, savers began taking their money out.

That prompted an exodus of product providers from the UK life and pensions sector, where scale has, until now, been the only way to make a return, certainly from the mass market. The abolition of commissions, however, will begin to redress the balance.

What the new model should mean is that savers' money gravitates towards the best providers of savings products, rather than those insurers that pay the biggest commissions (or have sufficient scale to generate low enough costs to cope with the issue of persistent churning). That's good news for consumers, of course, but also for those product providers which get their act together before the end of next year.

Their fortune will not, however, be shared by all IFAs, many of whom fear a good proportion of consumers will not be prepared to pay fees for financial advice, even if they do not have to pay upfront. The FSA reckons that as many as 13 per cent of these advisers may go out of business because of its reforms, though that will include a number who will no longer be allowed to practise because they do not pass the regulator's new qualifications in time (a group for whom it is difficult to have much sympathy).

Still, as Standard Life pointed out yesterday, the UK long-term savings market remains attractive, despite the allure of faster growth from developing economies. The combination of an ageing population and declining state assistance for pensions is an open goal for the industry. To score, however, insurers and advisers alike must work out how to take advantage of next year's reforms.

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
peopleMathematician John Nash inspired the film Beautiful Mind
News
Richard Blair is concerned the trenches are falling into disrepair
newsGeorge Orwell's son wants to save war site that inspired book
Life and Style
Audrey Hepburn with Hubert De Givenchy, whose well-cut black tuxedo is a 'timeless look'
fashionIt may be a paradox, but the industry loves it
Arts and Entertainment
The pair in their heyday in 1967
music
Life and Style
fashionFrom bathing dresses in the twenties to modern bikinis
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine