Standard Life to slash pension charges by 40%

Somebody had to blink. In the event it was Standard Life.

Somebody had to blink. In the event it was Standard Life.

The Edinburgh-based mutual life insurance giant yesterday announced that it is to slash pension charges by more than 40 per cent and offer guarantees to 800,000 of its 1.5 million endowment policyholders. This will inevitably be seen as an attempt to put flesh on promises made by Scott Bell, the managing director, to learn the lessons of the anti-demutualisation campaign.

But to focus entirely on the public relations impact of yesterday's announcement risks missing the wider implications for the life insurance industry as a whole.

For years, life industry executives have been talking among themselves about the "1 per cent world". This is industry shorthand for the charging environment being ushered in by the Government's stakeholder pension initiative, which, for all the bravado, had them all quaking in their boots.

Until now, no-one in the industry had the courage to say out loud what has long been obvious - that once the Government-imposed charging ceiling of 1 per cent became accepted for stakeholder pensions, it would soon morph into the benchmark for pensions across the board.

That is the nettle Standard Life has grasped and painful it is, too. The life insurer is saying its new charging structure will apply not just to stakeholder pensions but as from next April to pension policies Standard Life has already sold.

The move has huge and potentially catastrophic implications for the life industry. Scrapping the existing front-loaded charging structure in favour of a flat 0.8 per cent annual charge would wipe out billions of pounds of embedded value from the balance sheets of proprietary firms, if adopted industry-wide.

Standard Life is a mutual with opaque accounting practices and a huge capital reserve. It also had most to lose in the new world. As well as holding 20 per cent of the UK personal pensions market, it was unique in selling policies without prohibitive lock-ins and was therefore seen as most vulnerable to attempts by rivals to poach its in-force business.

Ned Cazalet, an independent life industry analyst, said: "This is not motivated by consumerism. It is motivated by Standard Life's fears about a lot of wolves around the sheep pen. Had they not acted they would have had a huge problem with customers leaving in droves."

Mr Cazalet says others will baulk at the cost of repricing existing pension policies. But he agrees that as from April no-one is going to sell a policy that allows providers to cream off up to 3.5 per cent of the value of the pension pot as happens now. "There is going to be a huge problem for the industry. They did not price those policies where they did for the hell of it, they did it because that is what they cost to provide," he said.

When, after the last election, the Government announced its plans, the industry went through its usual Freudian reflexes of denial, then anger. The golden age for the industry when it could charge what it likes without customers being able to work out that they were in many cases being fleeced has gone for good.

Almost without exception, the industry bigwigs said that to deliver a pension at that cost was impossible. As April 2001 looms, not only are all the big players falling over themselves to offer stakeholder friendly pensions but they are being priced at well below 1 per cent. According to Moneyfacts, an industry database, several of the big players are offering to sell pensions at 0.75 or even 0.6 per cent with Legal & General pledging to enter the market at 0.5 per cent.

Mr Cazalet said: "People are starting to realise that it isn't really 1 per cent. You have to allow a bit for commission and then before you know it you are talking 0.3 per cent. Stakeholders is causing such destruction in the life industry. It hasn't even started yet."

Although Standard Life is holding out, others have seen the writing on the wall. Scottish Widows sought refuge in the bosom of Lloyds TSB last year. Scottish Provident has just gone to Abbey National, while Scottish Life is about to be sold. The question is who will be next.

Mark Wood, chief executive of Axa, the insurance giant, believes that survival will all be down to scale. "We have thought long and hard about this. Consolidation is an inevitable part of the process. That is what the little flurry of takeover activity was about this summer. There are about 180 life offices, writing little or no new business. If you look at it rationally, you have to ask yourself why if we have three or four supermarkets in this country, we have to have 180 or even 50 life offices. And it isn't going to stop there. There isn't an endgame. People think that once we are down to three or four it will stop but the reality is they will continue to fight for business."

In a sense this is a victory for Gordon Brown, the Chancellor. One of the key ambitions of his programme of reform of City regulation which led to the old self-regulatory bodies being swept away by the Financial Services Authority was to open up the industry to the wider public. Mr Brown believed that in the past, too much energy was going into producing overly sophisticated products for the few, and not enough into simple mass-market products for the many.

The stakeholder initiative is forcing the industry down a road of greater transparency, simplicity and lower costs, from which the consumer can only benefit. "The Government started a process that basic laws of competition are going to finish, that is driving costs down right across the industry," Mr Wood said. "It is all positive for policyholders.