Corporate benefit platforms are in the ascendancy and have a significant presence in pension providers’ strategy. However with the cost to implement in the £40m to £100m bracket, and profitability for the financial sector pension providers so challenged, it is worth looking at the business case, where we go wrong and how to get it right.
For this paper the definition of corporate benefit platform is an engine whose core service includes employers Defined Contributions pension schemes, ISAs by payroll deduction, a fund supermarket and real time employee transacting.
Why are we doing it?
With the technology originating from retail investment platforms, corporate wraps, as they have been called, have impressive user screens, excellent navigation, and a visual artistry to the tools. Almost every benefits manager, HR director and boardroom decision maker is impressed with the front end demonstrations and the apparent simplicity of making several investment products available to their employees. The major bundled Defined Contributions pension providers – insurance and investment companies – have long chosen to distribute their product via an intermediary such as a corporate financial advisor or employee benefits consultant, and therefore it is to those customers the providers target their distribution strategy. The intermediaries want platforms partly because the bells and whistles offer such a great service potential to clients and partly because they offer the opportunity to derive a basis points income from platform assets. The consequence is that providers have gone into platform build to be “on panel” with the full breadth of advisory firms. There are significant downstream reasons also, including:
Of course the providers have done their commercial assessments before committing to such a spend and we will come back to this.
Will we see a profit? Think about the following issues.
- Retail wraps are well evolved and ideally suited to their market. The transition to the corporate equivalent is still frontier ground. This is not widely recognised and the implications not fully understood. In addition the cost benefit analysis is usually rather optimistic. Although such things as licence fees, hardware and software costs, and post implementation staffing, can be reasonably assessed, the programme management, implementation and change requirement costs are usually far off the mark. For example, the change management aspect is severely underestimated due to lack of understanding of exactly what comes “out of the box”, and therefore the extent to which you will need to re-engineer either your proposition or the platform – probably both. In addition the programme is so complex and specialist it doesn’t often receive the decisive direction and management that it requires and these failings lead to runaway costs.
- There is an assumption that the best clients whose assets have grown under your watch will be with you for longer than may be realistic. Just as they are breaking even or becoming profitable they are often “intermediated” away for a lower charge from a competitor with an apparently better service. This happens too frequently because the incumbent provider isn’t managing the client base as it should. The current clients, their assets, their longevity with you and their advocacy for you in the market, are the most important part of your benefits business but they are often taken for granted. Their contribution to cash flow and profitability are only partially recognised. When you were assessing the viability of the platform you probably expected to transfer your current clients to it in order to reduce overheads and improve service. However when it comes down to the planning and implementation you will find its a lot more difficult than you thought. This valuable legacy business, built using different funds and charging structures, will not be an easy fit on the new platform. Any migration is a significant exercise in its own right. This will substantially add to costs or you may decide its do-ability is prohibitive. This will not only disappoint your clients but also their advisor’s who have a new reason to re-tender the scheme. (The cost for this kind of transition would be in addition to my cost estimates in the first paragraph.)
- As most profit (when it arrives) comes from assets it is crucial to get more assets under management. The idea that a corporate benefits platform gives you reach into other wrappers such as ISA’s, and a direct share service is potentially true but it has not been shown that there is a mass market for this on an employer platform. There may be in the future but not in the near to medium term. The point of this functionality is to enable the employer to offer a highest quality benefit package to his employees as it has been shown repeatedly that employees value the availability of services more than the use of them. It doesn’t follow that employees will maximise or even utilise their options. The reason pensions are successful asset gatherers on an employer platform is that they are a direct employment benefit and employers contribute to their employees pensions. Unless employers were to offer contributions or discounts to other financial products (regulations permitting) most employee investors will currently prefer to use an independent specialist platform for their discretionary investment. This is because investors enjoy being customers of a sophisticated retail industry but as employees they may not want their employer to be associated with their other investing. Anyway, how high is the percentage of discretionary retail investors within the national workforce? Only in relatively few companies would the non-pension investment be substantial. (Or will the recent ban on fund rebates to retail wraps start to rebalance the relative attractions between retail and corporate platforms?)
Where are we going wrong and how can we get it right?
I mentioned previously that the platform front end and the employee engagement tools are impressive. However the main product on the corporate benefits platform is the workplace pension which due to the amount of specific regulation, expected high service standards plus formidable reporting and communication flexibility, is much more complex to offer than ISAs and other retail savings products. There is no out of the box corporate benefit platform solution that combines the retail style platform front end, and other aspects in my definition, with the full functionality of the pensions administration systems. This is work in progress and another reason the providers are seeing such high costs as they spend on change to make the platforms they’ve committed to suitable for their target pension scheme market. Invariably platform developments over reach their cost estimates and over run delivery dates – and therefore functionality is usually trimmed back. Running over time adds to increased costs and reducing functionality further endangers the cost benefits analysis. So if we keep it to just three, what three elements should you introduce if you want to keep costs down, improve your results in several directions and have a springboard for accelerated development once the market direction has been established?
- Recognise that until a pension centric corporate benefits platform has end to end pension admin capability it will be more cost-effective, client friendly and ultimately more profitable to use the platform for what it does best, that is employee accessibility and funds functionality. At the same time fine tune your current systems and improve your existing processes. All these elements can then be successfully integrated by the optimal use of work-flow management and skilled operation. The challenge here is the financial intermediary who wants an end to end single solution platform. In large part this is because it is simple to present and we largely misunderstand how major technology platforms, in any field, are constructed. The best are integrations of different specialist entities knitted together. Well, the providers can solve this by adopting a different approach to their distribution and marketing strategy and it is profitable to do so. They need to have the timely and regular conversations, plus the material and demonstrations that show a strong and successful solution for both new and current clients. At a cost which, unlike some competitors, is not endangering their commitment to the market and which shows they are in a position to evolve to more advanced solutions as either platforms, or pensions admin systems, grow into end to end models.
- Do not allow the corporate benefits platform programme to be led by project management specialists. They are essential to the formalities and detailed running of the project management processes but overall leadership must come from someone else. By leadership I mean someone who is 100% on that job. Ideally he or she would be from the mainstream business. They should have market, customer and product expertise, familiarity with programme risks and a commercial business outlook. However, where such a person is given the role in the beginning they quickly become just a figure-head as the appointee is invariably drawn back to their day job. This is where you can, and maybe should, use an experienced pensions interim who is working for the board or leadership team to deliver all strategic elements of the programme rather than someone working for the programme almost as a technology end in itself (This is a distinction rarely practised). This will, among other things:
- Strengthen the way client management is performed. For instance by understanding where client management is really client service and where you should add an element of commercial relationship management, with the seniority to lead sustainable business development with the clients and advisers over the long term. When a programme of this magnitude is in flight it will disrupt the client base. By the time you set your retention programme in place because you discover a client may be leaving, it is probably too late.
So is a corporate benefits platform worth building? Should it be part of your strategy? Yes, because in due course all bundled Defined Contributions assets in live schemes will migrate to them. But you must have a developed long term strategy that takes account of how the pensions and benefits business is going to change. Don’t bite off more than your business can chew. You do not need to do everything in one development. There may be fewer large providers in future, yet assets from workplace pension benefits, will grow massively over time. Not all market participants will be rewarded but those who follow the tips I’ve offered will have a better chance.