Demutualization dictates a review - Standard Life paring its pension plan to cut costs

By Daniela Cambone | May 20 2004 02:05PM

Victim of a slightly bulkier cost structure than its competitors, which makes it less enticing to investors, the Canadian division of Standard Life decided on an action plan to polish its position this year. Topping the list is a review of its pension plan. Productivity gains are another goal.

This review in Canada stems from Standard Life’s decision at a global level to shift from a mutual to a public corporation. This change was triggered by an edict by the British regulatory authorities in January 2004 that imposed new accounting methods intended to better reflect the financial profile of U.K. financial institutions.

In the aftermath, Standard Life was accused of possessing insufficient financial resources to honour its commitments. Standard Life’s reaction was to launch a strategic review of its activities in order to highlight its financial health.

On March 31, Standard Life revealed the broad outlines of its strategic review and confirmed the demutualization. Overall, demutualization for the insurer is the best option for maximizing the value of the company, delivering performance, reducing risk and crystallizing value for members. It also allows quick access to capital at a better cost.

Another decision was to preserve the Canadian division. The Canadian operations are the largest Standard Life presence outside the United Kingdom, accounting for approximately 15% of the insurer’s new business premiums over the last three years.

The review also revealed that the Canadian operations are profitable and that they are self-sufficient in terms of capital.

Little effect in Canada

The president of Standard Life’s Canadian operations, Claude Garcia, presented a new action plan to his management team on March 31. The top priority: to place the institution on an equal footing with its competitors with regard to profitability.

In an interview with The Insurance Journal, Mr. Garcia said he was confident that he would not need to alter the original Canadian business plan even in a context of demutualization. The strategic review in Canada revealed higher excess costs than among the competitors, but he insisted that the problem is not major.

For example, he noted that Standard Life Canada stopped selling participating policies a year ago. Now only 59,000 of its 1.2 million Canadian clients have participating (par) policies. Overseas, these policies are more dominant. Therefore, stressed Mr. Garcia, the markets where demutualization will be felt more are in Germany, Ireland and the United Kingdom where there are the greatest number of par policies. Standard Life has slightly more than five million clients worldwide, 2.6 million of whom hold par policies.

However, the priority is to pare the pension plan of Standard Life employees. “Our program is more generous than those of our competitors,” Mr. Garcia explained, “the difference is that 100% of the costs are paid by Standard Life.”

The same applies to employee benefits: the insurer’s contribution is greater than that of its competitors. One avenue evaluated is to level the employee contribution to that of its counterparts. This goal prompted management to form an advisory committee that will recommend solutions to implement this year. Mr. Garcia is aware of the challenges they face “We have to treat our employees well if we want them to treat the clients well.”

Presently, 55% of employees have adopted a defined contribution plan, with the remainder opting for a defined benefit plan. Their choice, however, is not irreversible.

Another factor driving Standard Life’s excess costs is that the company is in growth mode, Mr. Garcia explained. Today, the company does not recoup the costs incurred by each policy. For now, this approach is part of a solid strategy to boost sales.

Effect on brokers

In turn, he continues, demutualization will have little effect on Standard Life’s brokerage channel. In the past many brokers voiced concerns over the deterioration of services after a company demutualizes, however, Mr. Garcia highlights this will not be the case.

“It is a non-event in Canada. I can assure the brokers that my business plan will change very little and there will be no change in terms of level of customer service. We think we can maintain a clear financial objective without changing service,” said Mr. Garcia.

The insurer is also ready for its competition. Standard Life reported its Canadian operations witnessed a sales increase of 19% year-to-date over last year. Mr. Garcia attributes its impressive results to its jump in mutual fund, pension, group insurance and individual savings sales. Though he notes the mutual fund growth to be one of the strongest. In the mutual fund distribution sector alone, the Performa division posted sales growth of 80% for the same period.

“Last year we did not have a great year in pension sales. There was a very big player who ruled the market and we did not get any jumbo cases,” said Mr. Garcia. However, he adds that this big player, which he preferred not to disclose, has since been bought out and in turn has allowed Standard Life to jump back into the market.

As for its life insurance division, Mr. Garcia said that the insurer’s sales dipped in this sector. He said the drop in sales was small and is reflective of the market.