Unsustainable?

It's all over the news again - food inflation, and how unsustainable our current food-production and supply systems are.  We've seen the CE of Sainsbury's appearing on NewsNight, seeking to reassure us that the supermarkets are trying to do the 'right thing' in relation to packaging, in order to alleviate escalating demands on limited landfill sites.  There's the rising pitch of the debate over the carbon footprint of transporting 'organic' foods from China or Argentina, to satiate our demand.  There's the recently publicised issue of the stresses between increasing demand for grain and other basic foodstuffs, falling crop yields, and an exponential rise in demand for biofuels.  Watch out for the price of rice in 2008 - significant increases are being projected, due to poor crop yields!

The worrying issue of 'unsustainability' is also reflected in the financial services sector.  From an FSA perspective, the matter is linked more closely to the commission-based advice model, but this does appear to be something of a red-herring.  The issue of sustainability, or the absence thereof appears to be a longer-term issue affecting the writing of 'traditional' pensions business, right across the insurance sector.

This has been highlighted by Member-firms' inability to obtain terms from traditional insurers for group personal pensions, or group stakeholder contracts.  Far from stakeholder being the 'easy access' to pensions that the Government intended, we are now seeing a market where de-minimus limits of £100-£150 per month per member is rapidly becoming the norm.  Want a 'designated stakeholder' scheme?  Well, you'll be disappointed, as this rare beast has now become extinct.  It seems as if over the last 12-18 months, this market has silently imploded, making any publicised Governmental utterances supremely irrelevant.

Of course, it's easy enough to conclude what all of us secretly knew: stakeholder business was never going to be profitable, and the companies which jumped on the Government bandwagon in order to capture market-share were bound to have their fingers burnt.  However, it seems the crisis is bigger and has greater longevity than that.  It transpires that a large proportion of our major pensions-providers were writing group pensions business unprofitably, long before the advent of stakeholder.  Uprating old contracts to comply with new charging standards has only exacerbated the problem. 

And whilst we continue to await some informed comment from the ABI in respect of the practical implications for employers who want to set up some modest pension provision for their employees, it seems as if there are no easy answers.  Feedback from insurers so far indicates that each proposal will be considered solely on its own merits.  The days of cross-subsidies are long gone.  Each individual item of business has to be profitable.

Thankfully, initial or indemnified commissions on group pensions are now, largely, relegated to the history books.  Hopefully, this could open up the group pensions market for firms which do not have exposure to legacy business - watch out for the Wraps and fund supermarkets starting to make inroads in this sector.