|
|
|
  |
Cicero Policy BrieferIssue 19, December 2007
Life and pensions persistency tables: good news for IFAs
|
| “Suitability helps improve persistency, so why water it down?” |
Against the somewhat blustery backdrop of the FSA’s Retail Distribution Review, the publication of this year’s FSA Persistency Survey provides us with some clear pointers on potential problems in the current marketplace and how trends in distribution may be contributing to those problems.
One must remember, of course, that the presence of falling persistency ratios is one of those outward measures of potential consumer detriment which first prompted the FSA to launch the RDR, by posing the question as to whether the current distribution model was ‘bust’. Within that context the FSA’s headline findings are to be welcomed in showing that, overall, persistency levels have rebounded slightly on previous years—good news, as it means that consumers are holding on to their long-term savings and life policies for longer. However, in the case of the personal pensions market there has been a further decline in persistency rates. So we have a somewhat mixed picture.
Falling persistency ratios in themselves should not be seen as necessarily a bad trend. One of the reasons why persistency ratios may have fallen could be derived from changes in product design. With more flexible products it is easier for consumers to take contribution breaks without incurring costs. Also, if the original contract does not have significant exit penalties an investor may gain by switching to a better value contract. As the FSA concludes: “We would expect more flexible products to result in lower rates of persistency without necessarily causing consumer detriment.”1
Not that this alone should explain, nor excuse, the current levels of persistency. The FSA cite several reasons as to why persistency may have continued to fall for the personal pensions market. Notably, the continuing negative publicity surrounding the ‘pensions crisis’ has been supported by consumer research elsewhere2. However, other reasons cited may not be as persuasive. The impact of anticipated changes arising from the Pensions Act is unlikely to have stirred as much a reaction as did the Finance Act 2006 which embodied the A-day changes—note the high levels of re-brokering around the introduction of PTA as one example.
Also, it is not clear that a lack of confidence in equity-based products will have played a huge role. While volatility in stock markets undoubtedly gave rise to jittery nerves among investors during the period when the FSA was gathering its figures (2002-05), which may well have impacted negatively on persistency ratios, we didn’t see high-level net redemptions in stocks and shares ISAs, the market value of stocks and shares funds grew healthily throughout that period3, and meanwhile many investors were busy piling into equity-based investments such as precipice bonds (perhaps unwisely).
Deeper into the report’s findings you may well get a sense of other more important factors behind the falling persistency ratios in recent years. Indeed, while the FSA talks about the quality of advice being an important consideration, for example, in helping consumers to fully understand at the point of sale the importance of such factors as suitability or affordability, what it does not do is explicitly make the link between falling persistency and increasing levels of non-advised sales. And there’s plenty of evidence in there to suggest this might be the case.
The clear message coming out of the persistency survey is that for most policy types, the persistency for business from IFAs is better than that for company representatives. Just 50 per cent of life policies (excluding whole life) sold by company representatives in 2002 are still in force. This compares with 65 per cent sold by IFAs.4
Surely there’s an important lesson there for the RDR and any accompanying talk of creating primary advice? Will mass-market bank sales really generate a longer-term mentality amongst investors? How will any attempt to reduce the suitability requirements on salespeople lead to an improvement in consumer understanding of the long-term nature of the products they choose to buy? The FSA’s own findings show that you have higher frequency of lapses for policies sold by single tie representatives than those sold through independent intermediaries. The reason for this, as the FSA concedes, is that where policies are selected from the whole of market by an independent intermediary have a better chance of meeting the needs of the investor—i.e., there is a better match between the product and the investor.
Suitability helps improve persistency, so why water it down? Regulators must realise that attempts to widening consumer access to financial products will be rendered worthless if the sales channel relied upon to open up access leaves millions of consumers wondering what exactly it is they have bought into and disinclined to keep up the payments. Based on the FSA’s own findings, the RDR team would do well to stop and reconsider whether they are in fact moving in the right direction.
Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.
Website development by Kyrios Design
By
Mark Twigg