Letting go is hard to do
Zurich Financial Services, which could be called a pioneer in this area, began addressing its legacy issues back in 1998, according to the company’s senior product manager for superannuation and retirement income Kate Deering.
“We were one of the first to recognise that there was going to be a problem with legacy business and we have actually been proactive in moving them from the legacy position to a more current product,” she said.
“We were coming into more disclosure and we knew that if we had a lot of different products that all needed different requirements every time something changed with legislation, it was going to be much easier to make those changes to fewer products.”
Zurich employed a system whereby it, through the approval of a trustee, moved all of its regular premium clients that were making ongoing contributions, into the current product at the time.
“We did that on the basis that the trustee needed to be satisfied that not one member would be disadvantaged as a result of that move,” Deering said.
The process Zurich used to ensure that every customer would be better off was, as Deering described, complicated and took a couple of years to complete.
Complex calculations
“It wasn’t just one calculation that we did — we did a calculation based on the fact that they were going to continue making the same contributions through to age 65, we did another one based on making the same contributions for 10 years, another one that they’d ceased contributions but they kept the plan going until 65, and then another one that they’d ceased but kept the plan going for 10 years,” Deering said.
“For those clients that would have otherwise been disadvantaged, we put an immediate bonus into their plan.”
She said the company had since finished migrating the bulk of its non-super legacy products and anticipated the process would be completed by this time next year.
She added that Zurich would finalise the process for its superannuation products as early as September.
However, the very definition of a legacy product — that is, an old managed investment product no longer offered for sale and operating under an older system — suggests it will always be an issue for the industry.
“We are always going to have legacy products, just because the product will become old,” Deering said.
“But the way Zurich is approaching it is that we recognise the value of the block of business we’ve got, and we have reduced it down for superannuation to two products and we will be able to keep those competitive with the marketplace and if, for whatever reason, we need to upgrade them in 10 years then that will be something we’ll look at.
“If you’ve got two products, it’s a lot easier to look after than 40.”
A long way to go
But what of the majority of companies in the marketplace that, unlike Zurich, are still managing a large block of legacy business?
According to AMP director of mature products Andrew Hobern, there is currently a substantial amount of money in legacy products around the industry, and AMP is no exception.
“In our case they are profitable products and they continue to provide good value to customers.
“However, there are some very real operational issues that affect providers and there is also the fact that some of these products don’t offer all of the features that modern day consumers actually want,” he said.
“The operational issues are things like the systems they run on are generally very old systems where relatively few people know how to maintain those systems, so that anything that comes along is a challenge to providers to keep working effectively.”
He added that legacy products tended to cost the company more than modern systems and that the compliance processes surrounding them were not as efficient as their contemporary counterparts.
Hobern said AMP was managing its products, which were all still profitable, on a case-by-case basis.
“I guess we’re lucky because we have got a little bit more scale than some of our competitors and therefore the crunch point for economic proposition of these products hasn’t hit us yet,” he said
He added though that AMP had opted to close some of its superannuation offerings in the past.
“We transferred a set of products last year into a modern set of products. That was a fairly large project that cost AMP a lot of money but it did provide benefits to customers,” he said.
“The key hurdle is making sure it’s better for all customers and a major impediment there is tax.”
He said the current regulatory regime focusing on product migration was limited in scope.
“Once we’ve stopped selling them (legacy products) we’d like to be able to collapse them into modern products, but at the moment the rules make it very difficult for that to happen and therefore it’s largely not happening,” Hobern said.
“It will only get resolved once the Government has changed regulation for life products, managed funds and superannuation schemes and as a key part of that, tax neutrality is essential.”
Team approach
But the head of product for AXA’s life office/wealth, Elizabeth Foley, said the entire industry needed to be involved in order to resolve legacy issues.
“I think there needs to be a lot more talking in the industry and sharing of ways forward. There may also need to be some tax relief for some issues to be able to wind funds up, because in the end it does cost the consumer,” she said.
“I think there are areas like that where we need to work with the regulators and also get some buy in from the tax office to say what we can do as a whole to make the industry more efficient.
“There has got to be a more formal legislative or industry approach taken to get over some of the key issues.”
She said AXA did have legacy issues, but had implemented a plan to manage them.
“We’ve got some significant books of business that are closed to new plans and some of those for us are really large and, therefore, we are prepared to invest dollars in them and we are very conscious of the need to deal with these legacy issues,” Foley said.
“We have a project that’s looking at product rationalisation … and this year we have successfully terminated seven small unit trusts.
“Our areas of concern are things like when there is legislative change, such as fee disclosure, it becomes very expensive to do across a number of legacy products and platforms and that starts to build costs for the company and therefore also costs for the customers.”
Best practice
Looking forward, Foley views these management issues as part of best practice for AXA.
“It’s a broader commitment to simplify our business — I just see it as good product management,” she said.
“In the end it comes down to simplification and cost reduction … it makes more business sense.”
Foley added that change was inevitable and the industry should accept and manage it through simpler business systems.
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