The 2008 economic downturn has effected financial institutions worldwide. The life and pensions industry in Ireland is currently operating at approximately 50% of its volume of 2007 (David Glennon, 4, 2010). Despite the value of Zurich Life/ Eagle Star' s investment fund falling by 30.5 % over the course of 2008, Zurich Life Plc managed to outperform it' s key competitors during this volatile period as shown in figure 1. Irish_pension_funds_Jan062009
Figure 1 Pension Investment Funds 2008. Source: Finfacts, 2009.
Zurich Life's key competitors in Ireland are the main Irish banks -
Irish Life & Permanent
Bank of Ireland
These institutions have seen their market capitalisations fall considerably, both Moody's and Standard and Poor's have downgraded the Irish bank' s credit ratings. Zurich Life has been able to differentiate themselves from the Irish banks and demonstrate their financial strength in contrast to the ailing Irish banks which have required extensive recapitalisation.
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The pensions industry is facing a challenging future as it seeks to find measures to deal with the EU's aging population. By 2051 50% of Ireland's current population will reach the retirement age, this will see a threefold increase in the numbers who are over 65. Eurostat have predicted that when population growth rates are analysed in combination with immigration predictions, the ratio of people working to those retired will decrease from 6:1 to 2:1 by 2051 (Eurostat,5, 2007). It is estimated that the average Irish citizen needs to save â‚¬9,100 more per year to fund their retirement (Aviva, 6, 2010). A strategy that involves both the public and private sector is required to address these issues.
The Irish Association of Pensions Funds published a survey in 2010 called the "Pension Investment Survey". This survey stated that at the end of 2009 the total value of Irish pension fund assets was â‚¬72.2 billion, this included both passive and actively managed funds. It indicated that passive investment is becoming the dominant investment style in Ireland. This style of investment attempts to reproduce market returns and does not attempt to outperform the market which is in contrast to active fund management which attempts to produce surplus market returns over market (target) returns. Investment funds offering passive funds have benefitted from this change of attitude to a more conservative approach. In 2000 passive funds had a market share of 1.5% and had assets valued at $2.6 billion by the end of 2009 this had increased to $92 billion, this represented a 35% market share (Sonya Morris, 7, 2010).
Pestel Analysis of the Life and Pensions Industry
National Pension Reserve Fund - The IMF and the ECB approved a â‚¬85 billion contingency fund with an interest rate of 5.8% for the Irish government and the Irish banking system in response to the serious solvency issues regarding Irish banks. The Irish banks require the funds to cover the losses sustained as a result of their overexposure to the collapse in prices in the Irish property market. As part of the agreement the Minister for Finance Brian Lenihan has indicated that â‚¬10 billion may be used from the National Pension Reserve Fund to fund Ireland's â‚¬17.5 billion input to the EU-IMF bailout announced in November 2010 (Progressive Economy, 8, 2010).
Tax policy - As part of the government's four year recovery plan pension tax relief will be cut, it will now cost an extra â‚¬32 per â‚¬100 euro to invest in a pension scheme. Higher taxpayers will see the tax relief rate they receive fall from 41% to 20% for pension investment (Tom Deegan, 9, 2010). Salary reductions and increases in unemployment have affected people's ability to continue to contribute to their pension schemes.
The Irish Government has chosen to retain it' s 12.5% corporation tax rate which it seen as vital in attracting and retaining foreign investment, retaining this low tax rate is an important part of the Irish Government' s recovery strategy that has been outlined in their four year recovery plan.
Employment - As a result of the current economic downturn the unemployment rate in Ireland is currently 13.2% (CSO, 10, 2010), unemployment is forecast to remain high in Ireland in the coming years and is expected to remain over 10% until 2014. (CSO, 11, 2010).
Political stability - whilst the EU is a politically stable region as a whole, the current economic downturn and the austerity measures being imposed by European governments have sparked demonstrations across Europe in 2010. The unrest has contributed to market uncertainty and has put extra pressure on European governments
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Economic growth - After a negative growth rate of 8.2% in 2009 the Irish economy emerged from recession in 2010 (CSO, 12, 2010). Ireland is expected to see a growth rate of 0.1% in 2010 and 1.75% in 2011 (Dept. Of Finance, 13, 2010). The Eurozone economy is expected to grow by between 1.4% and 1.8% in 2011, lead by strong economic growth rates in the German economy (IStock Analyst, 14, 2010).
Interest rates - The ECB currently has an interest rate of 1%, the president of the ECB Jean Claude Trichet expects this rate to stay in place until mid - 2011, the low interest rate is a response to the uneven economic recovery that is currently underway in the EU.
Exchange rate - The ongoing economic crisis in the Eurozone has seen a reduction in the value of the euro against the main currencies of the US dollar and British Sterling. Exchange rates play an important role in determining levels of international trade and a lower value Euro is seen as important for Irish exporters.
Deflation - In Ireland in 2010 prices have decreased by 0.8%, this gives Ireland the lowest rate of inflation in the EU (Eurostat, 15, 2010).
Pension Fund activity - Over the course of the first eight months of 2010 the average managed fund has gained 3.4%, this has seen returns range from a high of 6.0% for Standard Life Investments to a low of 1.6% for Aviva Investors. Zurich Life's total Irish new business increased by 5.2% to â‚¬144.9m, this was â‚¬136.6m in September 2009 (Zurich Life Plc, 16, 2010). Over the past twelve months the average fund returned 9.5%. The returns gained over the past year have ranged between 13.2% for Standard Life Investments to 8.0% for AIB (Finfacts, 17, 2010).
Population growth - The Irish population is expected to increase to 5 million by 2030 (CSO, 18, 2010). As this will see an increase in the number of people qualifying for a pension, Ireland must adopt measures to increase the work participation rate of people in older age brackets i.e job sharing amongst older workers.
Age distribution - While the average age of the Irish population is 35.4 which is less than the EU average of 38.4 (Eurostat, 19, 2010), like most Western European countries it has an aging population. Ireland is expected to have an average age of 39 by 2030.
Broadband - 100% broadband coverage in Ireland will increase competition with foreign based firms as potential customers have easy access to details of their pension schemes and investment opportunities.
Online Systems - Investment funds are increasingly moving towards the use of complete online systems, thus reducing staff levels in their customer services and administration departments.
Pension Age - The age at which a person becomes eligible for a pension will increase in 2014 to 66, in 2021 this will rise to 67 and by 2028 it will have become 68.
Regulation - Increased regulation is expected to ensure transparency in regard to pension charges, the pensions board is expected to be allocated increased powers in the coming years. As of 2014 all workers over the age of 22 will automatically be enrolled in a new pension scheme that will see workers contribute 4% of their annual pay, their employer will contribute 2% and the state will pay 2% (National Pensions Framework, 20, 2010).
I have identified the following as the key drivers for change in the life and pensions industry-
Age Distribution - Europe's aging population is going to increase the costs of providing for retiring citizens. The EU will have to address this future imbalance by further expansion or by introducing policies that will encourage EU citizens to increase birth rates.
Regulation - With relaxed regulation been held up as a major cause of the economic downturn and in particular the Irish banking crisis, reform of banking laws is set to increase in the coming years. In December 2010 Minister for Finance Brian Lenihan introduced sweeping changes to the control the Irish Government has over the Irish banking sector.
Economic Growth - Each EU member has been set a target of reducing their deficit to within 3% of their GDP by either 2013 or 2014. Increased tax revenues will put governments in a better position to reduce their deficits. A return to economic growth will see a reduction in unemployment in the EU and an increase in salaries. This will ensure people are in a better position to provide for their retirements.
Analysis of the Life and Pensions Market
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As part of the industry review I have conducted a five forces analysis of the life and pensions industry, this has been done to assess the current state of the industry and identify areas of strength that can be improved upon.
Porters Five Forces Framework.
Potential New Entrants:
Suppliers: Competitive Rivalry Buyers:
High High Moderate
Potential new Entrants
Economies of scale - Large scale capital investment would be required by new entrants to set up and operate a life and pensions fund, the cost of managing investment funds and of conducting market research are considerable. Barriers to new entrants entering the market include the experience curve effects that give incumbents a cost advantage over potential new entries.
High Differentiation - In a highly competitive market product differentiation is crucial in attracting and retaining customers. Competing companies brand their products in a product packet with their other services, this gives them an opportunity to differentiate their products further.
Legislation - The Irish government have begun to enforce stricter rules concerning the banking sector in an attempt to restore confidence to the industry. The National Pensions Framework published in March 2010 poses serious challenges to the core business of companies operating in the industry. It contains proposals to cut tax relief on pension contributions along with reducing other pension benefits. The cuts in government expenditure and tax increases in the Irish budget of 2010 increased further the challenges currently being experienced by those operating in the industry.
Retaliation - Incumbents would be expected to retaliate should new players enter the market. The investment funds that are in a healthy financial position could undertake a policy of reducing premium rates to reduce the attractiveness of the market or incumbents could establish a presence in the new entrant's own market.
Moderate threat of new entrants.
Threat of Substitutes
State pension - Proposals to cut tax relief on pension contributions along with reducing other pension benefits as part of the government's four year recovery plan and the introduction of a new state pension scheme in 2014 will increase competition within the industry.
Foreign Competition - New technology is changing the business environment in which Zurich Life operates. As access to technology increases through the rollout of broadband, Zurich Life will face increased levels of competition from their international competitors.
Extra Industry Effects - Throughout the course of the property bubble in Ireland, many people invested in property to provide for their retirement. With the subsequent fall in property prices, this is no longer as an attractive option and people are increasingly looking to diversify their investments to offset potential future falls in investment values.
Moderate threat of substitutes.
Low Switching Costs - In today's marketplace, switching between funds has become easier and more common. The costs of switching between funds are low and in the majority of cases no extra charges are incurred.
Buyer Competition Threat - The threat of backward vertical integration is low because of the large scale investment that is required in the operation of a life and pension fund.
Concentrated Buyers - The target market for life and pension funds is middle to high income earners who are in a position to provide for their retirements in additional to the state pension. Middle income earners have been negatively effected by changes to tax relief on pension contributions announced in the 2011 Irish budget.
Moderate Buyer Power
Supplier Competition Threat - Over the course of 2009 and 2010 the nationalisation, by the Irish government, of banks has contributed to the fall in the value of their shareholders investments and in certain cases shareholder investments have been devalued entirely. This has lead to the collapse of share prices as investors fear the complete nationalisation of banks with large debts.
Concentrated Suppliers - There are a number of players operating in the industry, with the main players comprising of Irish Life & Permanent, Bank of Ireland, AIB and Zurich Life Plc.
Supplier Power High
Competitor Balance - Companies operating in the life and pensions market have been under sustained pressure since the onset of the economic downturn. Irish banks such as Irish Life & Permanent, Bank of Ireland and AIB have seen their market capitalisations reduced, both Moody's and Standard and Poor's have downgraded their credit ratings.
High Exit Barriers - The high exit barriers that exist in the industry have increased rivalry, as the companies operating in the industry fight to increase market share. The large investments made by companies can be difficult to sell and increased regulation has restricted who pension funds can legally trade with.
Industry Growth Rates - Lower growth rates since the 2008 economic downturn has contributed to an increase in competition, Irish managed pension funds by 3.4% in the second quarter of 2010. This had an effect of reducing gains made earlier in the year and has resulted in the average managed fund increasing by 2.5% since the beginning of 2010 (Inside Ireland, 21, 2010).
Competitive Rivalry Threat High
The industry has weathered the effects of the economic downturn and growth rates have returned to certain companies operating in the market. The Irish banking crisis continues to have a negative effect on growth rates as the availability of credit is a major issue for people and firms throughout the country.
Company Analysis - Zurich Life Plc
Zurich Life Assurance plc is one of Ireland's largest financial services providers. Its core products are life assurance, pensions and investments. In Ireland, Zurich Life Assurance is based in Blackrock, Co. Dublin and employs over 600 people.
Founded in 1978, the company was originally known as Shield Life. In 1990, Shield Life became part of the Eagle Star Group, which was owned by British American Tobacco Industries plc. In 1998 The Eagle Star Group was taken over by the global insurer, Zurich Financial Services.
Headquartered in Zurich, Switzerland, the group employs over 60,000 people serving customers in over 170 countries (Zurich Life, 22, 2010). Zurich Financial Services is one of the largest financial institutions in the world. Its two main business areas are general insurance, which accounts for approximately 75% of its business globally and life assurance (pensions, protection and investments), which represents 25% of its business. Zurich Life in Ireland deals primarily with life assurance business. This is unique within the group in that Ireland is the only country in the Zurich group where the life business is larger than the general business. As at 01 October 2010, Zurich Financial Services has a market capitalisation of â‚¬26 billion and is rated AA- by Standard & Poor's (David Glennon, 23, 2010).
In 2008, it was announced that Dublin would become the European Hub for the groups' life business. This means that all the operational aspects of Zurich's life business in Europe would be based in Dublin. This has resulted in a significant increase in employment of 60 people.
When Zurich Life plc announced their results for the first nine months of 2010. Anthony Brennan the CEO of Zurich Life stated
"our 2010 performance continues to be strong across life and pensions business..............The strength of our parent company Zurich financial services gives our customers peace of mind that we are part of a global company with one of the best financial strength ratios in the world".
Over the course of the first three quarters of 2010 Zurich Life has seen it' s life market share increase to 13% and it' s total market share increase to 18% from 16% at the end of 2009 (Anthony Brennan, 24, 2010).
SWOT Analysis of Zurich Life Plc
The following SWOT analysis was undertaking to assess the strengths, weaknesses, opportunities and threats facing Zurich Life Plc.
Increased market share in 2010 to 18%.
Zurich Life's image has not been tainted by the Irish banking crisis.
Zurich Life benefits from having a widespread international presence, this global presence ensures that the company brand is known and respected throughout the world.
Zurich Life is a well established global brand.
Firms who operate passively managed funds have gained a larger market share, this market share grew to 35% in 2009.Â This growth is outlined in figure two.
Zurich Life needs to keep pace with it' s rivals in relation to the use of technology and it's uses for new business generation.
With many of the Irish banks having to receive financial assistance, Zurich Life can increase market share by emphasising their strong financial position and their ability to return profits for their investors.
Zurich Life can further develop their cross border business, which has seen a significant rise following the opening of the new European hub in Dublin.
With the EU having an aging population (CSO, 25, 2010) the incentive for people to provide for their retirement is increasing and should provide for an increase in business for Zurich Life.
A drawn out economic downturn will see a decrease in investments.
While offering a diversified product range is advantageous, some investors prefer to deal with specialist investors who have a detailed knowledge of niche market areas.
Figure 2: Growth of Passive Investment Funds. Source: Morningstar Direct Fund Flows
Industry Summary and Conclusion
The industry is making a recovery following the 2008 stock market crash which had a devastating effect on investment funds worldwide. Under the Irish Government' s Four Year Recovery Plan, tax relief for pension investment will be reduced from 41% to 20% (Tom Deegan, 26, 2010). This will pose new challenges for the industry and this will have a big impact on middle income earners who seek to obtain an adequate level of a self funded pension. Technological advances will change the way companies do business within the industry, as new online systems are rolled out, companies will be in a position to scale down their staffing levels and offer their customers a faster and more efficient service. This will enable companies to reduce costs. While the life insurance industry and the Irish banking industry are separate entities, new stricter financial regulation will improve the image of the Irish financial sector as a whole. Going forward, consumer confidence needs to be regained and the image of the Irish banking sector needs to be repaired for the industry to grow.