Pensions providers to cut sales incentives 

A shake-up is looming in the commission-driven market for pensions products, as two big providers prepare to impose large cuts in the amounts they pay independent advisers for selling some schemes. 

Standard Life and Scottish Equitable are expected to announce reductions in the next few weeks. The cuts follow initial moves to reduce commissions by Norwich Union, and could herald similar action across the life assurance sector. 

The moves by the three companies are an assault on the practice of paying high up-front commissions for sales of relatively low-value products. 

The shake-up is likely to have a big impact on the sales of both low-cost personal pensions and stakeholder pensions - which are seen by ministers as an important element of their plans to encourage long-term saving - because it will reduce the incentives for independent financial advisers to sell them to the government's target market of people on low to middle incomes. 

Ned Cazalet, an independent insurance analyst, said he expected more life assurers to follow suit. "There is more to come across the industry," he said. "No one has wanted to blink first. Everyone has been waiting for someone to make a move and dare to do the sensible thing." 

The industry's sales incentive structure depends heavily on commissions to drive sales through IFAs, and commissions are likely to continue for more profitable products such as pensions and savings schemes for the better-off. 

Executives say much commission-driven business with less prosperous customers is loss-making, since it takes years for premium income to cover costs. Both Norwich Union and Scottish Equitable are introducing alternative individual pension products with higher charges. These are aimed at the affluent and are unaffected by the changes to commission structures. 

Justin Modray, investment adviser at Bestinvest, the broker, said the commission cuts on lower-cost personal pension products were inevitable. "I think this is likely to happen across the board. Life companies really need to try to squeeze costs down to the bone if they are going to make any money out of stakeholder. Reducing commission is one way of doing that," he said. 

Charges on pension products have been under pressure since the introduction of stakeholder pensions in April 2001. Charges for existing stakeholder pension schemes are capped at 1 per cent, though the ceiling for new stake-holder products will rise to 1.5 per cent from April. 

Standard Life, Europe's biggest mutual life assurer, confirmed on Friday that its commission strategy was under review. The company, which plans to de-mutualise in mid-2006, would not give details, but commission cuts are expected to be substantial. 

"In the pensions industry it is widely accepted that current commission levels are not sustainable," the company said. 

Scottish Equitable - which is owned by Aegon, the Netherlands-based life assurer - is expected to reduce commission on individual regular premium personal pensions and stakeholder pensions. However, it will increase the commission paid on some single premium products for younger age groups. 

Last month, Norwich Union said that it was reducing the level of commission it paid on individual stakeholder pensions and non-stakeholder personal pensions with low charges, from 15 per of the annual premium to 5 per cent.

Financial Times 5 November 2004