18 September 2014
This article first appeared in Pensioenadvies.
Pension products are increasingly moving towards Defined Contribution (DC), while a number of pension providers consolidate. The market shows signs of change, but the pace of changes in the market is unclear. The different possible scenarios require different management actions. What will the consumer look like, what are his/her needs in different scenarios? What will competition look like, what are the entry barriers for new providers? And what is the future role of the government. Important management questions to consider as a party in the pension sector to be able to anticipate and prepare for the future. It is time for players in the pension market to take the right position for 4 different future scenario´s.
In this article we discuss 4 different “future worlds”. It is not about which scenario is the most likely. We challenge the reader to ask yourself the following questions:
What should your company do to prepare for each “future world”?
How can your company influence the market developments towards different scenarios?
Are there transitions to be initiated that fit all different scenarios and therefore maximize competitive advantage?
Scenario 1: The Dream
This world showed a fast pace to DC with the existing providers. DC has become mandatory. Therefore large conversions have kept providers busy for quite some time now. Consumers demand a wide range of services that the existing providers provide, given the high level of competition. They needed to become more self-responsible as it is them bearing the risk. The customer has developed a (conscious) risk appetite and used that to choose the right provider. This stimulated providers to develop products aimed at end-users regarding investments, payments and risk management. Custody activities and transactions have been exchanged by new services and transactions directly between provider and customers. It required providers to change the business model from Business-to-Business to Business-to-Consumer. Employees in this world had to deliver high service levels, fit for servicing the end customer. That required a new mindset and new capabilities. Providers who have failed to make that change have seen their marketshare go down significantly, some even went bankrupt.
Competition has increased significantly. Bad DB providers have lost the battle as they have seen their customers shift to new entrants that are opening up the DC market or that have specialist in the “old” DB products more efficiently. The new entrants have introduced a culture of innovation. The “Independers” of the pension sector successfully played the increased importance of the end customers influence.
The Government in this scenario is increasingly relying on professional boardmembers. They are looking for better ways to gain oversight of the market and its professionalism and have developed new regulations to facilitate that. The influence of Europe has become more important and more visible to control the transition to DC.
Scenario 2: Sleep tight
In the “Sleep tight” world actually little has changed. Pace to DC is low and so is the pace of consolidation of providers. The quality of service has decreased due to focus on costs. Providers have chosen to standardize and rationalize products and pension arrangements. And this has led to decline of possibilities and even less focus on the end customer. Some have said the providers are racing each other to the bottom as margins have become increasingly under pressure. The sector had been facing a gradual decline of FTE. And also the number of pension funds declined. And service providers have shifted their focus on the large pension funds. All parties have moved up the value chain. The Government has steered on a decline of the sector.
Scenario 3: Nightmare
There has been a high pace of consolidation but a low pace towards DC. The customer has got less value for money as few providers dominate the market. Only ten large players have survived the competition. This has also led to more governmental influence. And regulations have become even more strict.
Discussions between different customer groups regarding solidarity have put pressure on providers and difficult management decisions. On top of that it is less likely that the end customer will work 30 years for the same employer and that has put pressure on the pension products through employers. This pressure led to develop new products and services has been picked up by providers only limitedly. Due to their market power the few providers demonstrate a low pace of innovation and new product launches.
Scenario 4: Wake up!
There has been a high pace of both consolidation of providers and a high pace to DC. The pension world has been shaken up. Generation conflicts led to a lot of media attention with less solidarity between customers. Every customer needed to make his/her own arrangements for his/her pension. And the influence of the customer had increased accordingly. The marketshare of insured arrangements have grown over the last years. And other new vehicles have emerged due to low switching costs. Due to the market turmoil, the pace of innovation has been high. With different product choices: individual versus collective DC, end user advice products, scalable and high volume products, savings, free investments, insurance products and end customer risk management products. In this world personalized relationship management has become increasingly important; due to limited number of providers and due to the increased focus on specific end customers needs.
Regulations have changed significantly to support the shift of risk from pension funds towards the end customer. As collective DC has gained marketshare, the involvement of the government increased. The government has introduced tax solutions to overcome the solidarity issues. Also regulation has become increasingly international, opening up competition across country borders. This has led to a sequence of mergers & acquisitions, strategic partnerships and international expansion.
Four different future pension worlds led to different customer behavior, different competition characteristics, different products and different governmental involvement. Are you prepared not to let the future overcome you but to create your future world yourself?
Michiel Krol is financial services expert at PA Consulting Group