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Will policyholders ever be put first?

A report has called for new company structures to ensure pension policyholders are treated as equals to shareholders – but can it work?


by Michelle McGagh on Aug 01, 2012 at 11:01

Will policyholders ever be put first?

A campaign group has called for pension providers to be given a 'fiduciary duty' to work in customers’ best interests, but can financial companies ever put their customers’ needs ahead of the demands of their shareholders?

FairPensions, which campaigns for responsible investment, has warned that too many savers have no control over their pension schemes and that nobody in the pension chain of employer, employee benefits consultant, pension provider and asset manager has to work for the consumer.

In theory, the whole chain should be working to deliver the best outcome for savers. It especially makes sense for pension providers –in other words insurance companies – to do a good job for their customers, because the better outcomes consumers get from financial products the more they will be willing to put their money into investments.

Conflict of interest

However, as FairPensions points out, there is an inherent conflict of interest for insurance companies between serving consumers and serving shareholders.

It recommended: ‘New governance structures at insurers should be explored with a view to ensuring that policyholders’ interests are fully embedded in decision-making – for example, standing policyholder committees or policyholder AGMs.’

It also said the government should ‘consider whether more could and should be done to promote alternative business models which help to structurally eliminate conflicts of interest’.

But can this conflict of interest ever really be eliminated? Insurance companies need shareholders to invest and they need policyholders to save, but the difference is shareholders can quite easily pull their money out if they don’t like the strategy of the company.

However, for policyholders saving for the long term in pensions it’s not just a case of pulling the money out – they can incur costly penalties.

The industry fights back

FairPensions is advocating a fiduciary duty, which is effectively a legal duty to work in the best interests of consumers, but from the Association of British Insurers’ response it seems that the insurance industry would lobby hard against that being introduced. It said there was no proof that enforcing a fiduciary code would produce better outcomes or better and cheaper pension products.

The report notes two types of business structures that could be better used; mutual structures where there are no shareholders and the business is answerable to the policyholders, and not-for-profit organisation.

But how workable are these models on a wide scale? The flip side of the policyholder/ shareholder argument is that although a company being listed on the stockmarket means that dividends do have to be paid out to investors, those investors also provide a source of capital which makes the company stronger, which is good for policyholders.

The truth is there is no perfect business model, which is why a fiduciary duty to do right by customers is a good idea. Let’s just hope that the insurers see that working for policyholders is beneficial for everyone and start acting accordingly.

1 comment so far. Why not have your say?

Rob Walker

Aug 01, 2012 at 14:37

...however, more clarity on how a policy is growing (or shrinking) would be a very good idea along with some framework for 'fair practice'. Similarly with other investment products such as endowment policies. It beats me how these financial schemes can get away with being so unintelligible when one tries to dig into the detail.

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