The moving market of company pension funds : strategy framework for insurance companies

Author: Kerwin Hartman

Studentnumber: 6070191

Supervisor: Drs. E. Dirksen

University of Amsterdam

Faculty of Business and Economics

MSc. Business Studies

The Moving Market of

Company Pension Funds

© Kerwin Hartman, 2012

This thesis is a part of the requirements to achieve the MSc. Business Studies

at the University of Amsterdam. The report represents 20 ECTS points.

ABSTRACT

Reform of the Dutch pension system is inescapable because off the problems caused by the current demographic and economic developments. These problems already results in the fall of many company pension funds (Statistics Dutch Central Bank, 2012). The strategic repositioning of company pension funds creates opportunities for insurance companies, by bringing their pension products and services to the market. To help insurance companies analyzing the moving market of company pension funds a strategy framework is build. This framework is substantiated by existing literature and research, a theoretical analysis of the market, surveys to determine the needs and benefits of company pension funds and interviews with several pension specialists. Due to the fact there is limited academic literature on the strategies of insurance companies in the market of company pension funds, this topic is interesting to study. The complete strategy framework is a tool for insurance companies and provides an answer to the main research question: “What are the matching strategies

for insurance companies in specific segments in the market of company pension funds?”.

The main research questions can be answered with a highly surprising and unexpected answer. There are no matching strategies to each specific segments of company pension funds for insurance companies. By reviewing different ways of thinking about competitive strategy, the strategy clock of Cliff Bowman and Richard D’Aveni is used (Johnson and Scholes, 2008). A differentiation strategy without price premium is advised. Thereby, the Ansoff matrix generates an initial set of alternative strategic directions. The strategic direction of product development is advised to insurance companies. By using the parenting matrix, insurance companies should concentrate on actual or potential ‘heartland’ company pension funds, in segment 1 and 3, where there is both high ‘feel’ and high ‘benefit’. Besides the advised strategy and direction, insurance companies should consider several factors, which can be found in the conclusion on page 58.

In conclusion, insurance companies should implement a strategy to develop dynamic capabilities by a set of innovative specific and identifiable digital processes and systems. Through actively building on these dynamic capabilities an insurance company can gain competitive advantage in the moving market of company pension funds. Future research is recommended because of the high velocity market of company pension funds and the current rapid demographic and economic developments. A repetition of this research within three years

TABLE OF CONTENTS

1 INTRODUCTION ... 4

2 LITERATURE REVIEW ... 8

2.1 Pension Funds ... 11

2.2 Supervision of pension market ... 12

2.3 Company pension funds ... 12

2.4 Sponsor of company pension fund ... 13

2.5 Insurance companies and other pension institutions ... 13

2.6 Comparison of company pension funds and insurance companies ... 15

3 PROBLEM STATEMENT ...19

4 METHODOLOGY ...21

5 THEORETICAL ANALYSIS ...26

6 RESULTS ...46

7 DISCUSSION ...53

8 CONCLUSION ...58

REFERENCES ...61

LIST OF FIGURES ...64

APPENDIX 1 - Research company pension funds (Intomart GfK) ...65

APPENDIX 2 - Overview of SPSS analysis ...71

1 INTRODUCTION

CHAPTER 1

Although the Dutch pension system is ranked number one in pensions according to the Melbourne Mercer Global Pension Index (2011), the system is being challenged to reform. The reports of the Frijns Committee (2010) about the deficiencies in risk management, investment policies and governance of Dutch pension funds and, the Goudswaard Committee (2010) about increasing longevity and financial risks of pension funds, were the starting point for new legislation. Both committees, created by the Dutch Ministry of Social Affairs to review the current pension fund system and advise on pension policy, have recommended a greater focus on risk management practices and better systems for pension fund management to create a ‘future-proof system’. Reform of the Dutch pension system is inescapable because of two underlying trends. First, the rapidly ageing population that is placing the current ‘Dutch General Old Age Law’ at risk of becoming unaffordable and second, the low coverage ratios of pension funds. The first trend places the government budget under pressure, while the second trend is the result of the financial crisis, low interest rates and rapidly rising life expectancies (Government of the Netherlands, 2012). In June 2011 the central government reached an agreement with employers associations and unions on the future scope of the pension system. The social partners agreed on the so-called ‘Pension Agreement’, a roadmap for changes that consists of five recommendations of which more risk sharing for employees and the softening of pension rights are the most important. Approving the final draft took a long time because of elaboration, legislation, and amendments.

Because of the above trends and the economic crisis many pension funds come under the minimum coverage ratio of 105 percent. The coverage ratio represents the ratio between the assets of a pension fund and the future financial obligations. If a pension fund cannot pay its future financial obligations it must report it to the supervisor Dutch Central Bank. Also, the pension fund is required to prepare a recovery plan. The number of pension funds fell since December 2007 from 713 to 454 in December 2011 (Statistics Dutch Central Bank, 2012). Therefore, company pension funds are joining an industry-wide pension fund or an insurance company by merger and acquisition. Also joining newly developed organization, like a Multi-company pension fund or a ‘Premium Pension Institution’ are options for the future. During the IIR-conference 2011 about the reorientation of pension funds Dahmeijer, pension regulator by the Dutch Central Bank, told another 107 of them were in liquidation at the end of 2011. Commissioned by the Dutch Association of Company Pension Funds, Price Waterhouse Coopers developed the report ‘Costs and benefits of company pension funds’ (PWC, 2007). This report also mentioned the presence of an undefined group of pension funds, which is not clearly specified because the Dutch Central Bank does not always use same definitions when publishing the numbers. The authors

concluded that the undefined group is comprised of pension funds in liquidation or in state of formation. All the pension funds together have joint assets of €875 billion (Dutch Central Bank, 2012).

Almost 80 percent of pension funds are company related (Statistics Dutch Central Bank, 2012). By focussing this study specifically on the company pension funds in the Netherlands, a specialisation is made in order to find significant new information. The report of Price Waterhouse Coopers (2007) summarised the changes in the market of company pension funds in four major developments. Firstly, the pension administration is getting more complex. Secondly, appropriate board members for company pension funds governance are hard to find. Thirdly, the charges are higher than in the past. Fourthly, the costs and thus scale are now, more than ever, experiencing affordability difficulties. Bakker (2008) argues in his critical article on the report of Price Waterhouse Coopers (2007), the essence of the report is primarily a self-reflection on how company pension funds think of their own way of working. This makes the report valuable in providing an updated view, but it is inadequate for an argumentatively sound judgement of the growing competition on the market of companies that execute pension schemes, as insurance companies. This requires further research into the actual implementation costs of companies that execute pension schemes, including all investment costs (Bakker, 2008).

Koedijk and Slager (2006) state that the board members of pension funds governance in general did not concur with the changes in the market. The joint governance model in which employers and employee representatives are equally represented is still widespread. Board members, as part of the company, must deal with conflicting interests of the company on one side and the employees on the other side. Besides the changing points, company pension funds also experience pressure to increase legislation, such as accountancy rules (IFRS), risk management (NFTK), administrative organization and governance requirements.

It can be concluded that the economic crisis has changed everything and employees do not build up a pension quietly anymore. Consequently, the austerity of retirement, the increase of own risk and a sense of unease among the participants is the result. Pension funds are in the process of strategically repositioning as financial services companies in a protected environment, specializing in old-age provision (Koedijk and Slager, 2006). This process should not be at the expense of the esteemed Dutch pension system, but ultimately lead to a high quality financial service. According to Koedijk and Slager (2006) the change entails new problems, because banks and insurance companies would like to compete in the market and expand the scope of regular pension funds, which struggle to meet all requirements and obligations. In the end, it seems inevitable that many companies with their own pension fund in the upcoming years will deal with the question of in what form

company pension funds creates opportunities for insurance companies, to sell their products and services. In spite of the considerable size of the Dutch pension sector and the large amount of money that is involved, there is relatively little research into possible strategy frameworks that can be applied to the market of company pension funds. Therefore, many questions remain unanswered. For example, how can an insurance company segment the market of company pension funds? Are there correlations between the properties and needs of a company pension fund and a specific market segment? And finally, can insurance companies select one strategy by matching the needs of a segment of company pension funds?

Due to the fact that there is limited academic literature about the strategies of insurance companies in the market of company pension funds this topic is interesting to study. The primary objective of this thesis is to fill the aforementioned gap. A strategy framework will be developed, to help insurance companies by analyzing the market of company pension funds. This framework can help to map the complicated and moving market of company pension funds and provides insurance companies matching strategies for specific segments of company pension funds. In short, the main research question is: ‘What are the matching strategies for insurance companies in specific segments in the market of company pension funds?’. To answer the questions and come to an supported framework the research literature will be discussed. But especially, because of the limited academic literature that is available the studies and reports of advisory firms will be used.

The literature review contains a description of the Dutch pension system from the report ‘the old-age pension system in the Netherlands’ (Dutch Ministry of Social Affairs and Employment, 2008). As a part of the pension system, the pension funds will be explained. This section is based on Reichert (2011), who divides the pension funds into three different types. A further analysis of the company pension funds will be given, based on studies of Bikker and de Dreu (2009), Koedijk and Slager (2006) and Broeders, Chen and Koos (2009). Next, Broeders, Chen and Koos (2009) will be used to help to describe what insurance companies are, and will give an overview of the differences between pension funds and insurance companies.

In chapter three the problem statement is described by the main research question and three sub-questions. In chapter four the methodology is thoroughly explained. The findings of the theoretical analysis can be found in chapter five and are followed by the results of the survey and interviews, in chapter six. In chapter seven, the findings of the theoretical analysis and the results of the research are discussed. Hereby the limitations, managerial implications and recommendations are described. Finally, the conclusion will summarize the answer on the main research question.

2 LITERATURE REVIEW

CHAPTER 2

The theoretical background for this study will explain the current situation in the Dutch pension system in general and the consequences for company pension funds in particular. To explain the Dutch pension system the descriptions from the report ‘the old-age pension system in the Netherlands’ are used (Dutch Ministry of Social Affairs and Employment, 2008).

The Dutch pension system may be characterised in terms of three pillars, which are categorised in figure 1, overview of the Dutch pension system. According to the publication ‘The Dutch Economy’ of Statistics Netherlands (2008), the first pillar financed approximately 50 percent of the total pensions, the second pillar about 45 percent, and the third pillar around 5 percent. The relative share of the first pillar is slowly narrowing in favour of the second and third pillars.

Figure 1: Overview of the Dutch pension system

First pillar Second pillar Third pillar

Name pillar General Old Age

Pensions Act

Occupational pension funds

Individual pension arrangements

Participation Mandatory for all

Dutch residents

Mandatory for all workers at organizations

Voluntary

Financing Contribution and _{general taxes}

(pay-as-you-go)

Contribution (funded) Contribution (funded)

Parties involved Government, Social _{Insurance bank and}

Dutch residents

Social partners, pension fund and individual worker

Financial institution and individual worker

Tax treatment

No special treatment Contribution rates are tax deductible

Contribution rates are tax deductible

Benefits

Fixed amount, dependent on marital status and number of years resided in The Netherlands

Replacement rate of, in most cases, 80 percent of the average annual salary over a period of a career, including the first pillar benefit

Replacement rate depends on contribution and developments on financial markets Source: Sleijpen (2009)

The first pillar can be seen as the basic state old-age pension under a statutory insurance scheme, also called the state pension. The Dutch General Old Age Law came into force in 1957 and is the foundation for old-age pension benefits (Reichert, 2011). The ‘Dutch General Old Age Law’ provides social security on retirement date and a basic survivor benefit in case of death before pension date of 65 years. In this pay-as-you-go system are the costs of the Dutch General Old Age Law paid by the workforce in the form of contributions. All residents of the Netherlands between the age of 15 and 65 years are insured for the ‘Dutch General Old Age Law’. The second pillar is made up of supplementary pension schemes by virtue of the employer. These consist of collective pension schemes financed by capital funding, and serve to supplement the first pillar. According to Reichert (2011) this means that the pensions are financed from the contributions members of the scheme paid in the past and from the return on the investment of these contributions. These pension schemes are administered by a pension fund, an insurance company or a bank. The third pillar can be seen as private savings for retirement and is formed by individual pension products. These are supplementary personal pensions which benefit from substantial tax-relief and are executed by insurance companies or banks. So entrepreneurs without a public or private limited company are indicated to build up pensions in the third-pillar. Also employees without a pension scheme or without sufficient pension rights are entitled to accrue additional rights in the third pillar although tax-relief is capped to a maximum.

There are various forms of pension schemes, the three standard categories will be described. Firstly, the most common is the so-called ‘salary scheme’, also known as Defined Benefit schemes (DB). In these schemes, the level of pension depends on the number of years worked in combination with the employees’ salary. DB schemes can be divided into final salary schemes and average salary schemes. In the Netherlands, the majority of pension schemes are DB schemes. In recent years many of these pension schemes have been converted from a final salary to average salary schemes. The other pension schemes are a mixture of different types of schemes. In final salary schemes, the accrued pension rights are increased at each career step to the level of the new pension basis. If the average salary is the pension basis then this is known as an average salary scheme. In average salary schemes, the accrued pension rights are related to the employees’ income in a specified year. In general, average salary schemes have conditional indexation. In principle, this means that the pension rights of employees as well as those already drawing their pension are revised annually for inflation or increase in wages in the sector. If the pension fund’s financial situation is such that an adjustment is not feasible, then it will not be applied, and this is why it is referred to as conditional indexation. Pension funds do not have to maintain reserves for future

indexation plans in the long-term. Based on an indexation table the pension administrators indicate to what extent they will be able to keep abreast with inflation under normal circumstances and what will happen if they are faced with a severe economic downturn.

Secondly, in addition to DB schemes there are also Defined Contribution (DC) schemes, where the amount of pension a person receives depends on the contributions paid during the accumulation period and the return on investment achieved with those contributions. Individual DC schemes are not very common in the Netherlands. The capital must be converted to an annuity on or before the retirement date. In principle, the investment risk and the interest rate risk (the risk that the rate for purchasing an annuity changes) rest with the employee. It is also possible that a pension scheme is a combination of the systems mentioned above. For example, a person may have a retirement pension that consists of a combination of a DB scheme (up to a certain salary level) and a DC scheme to supplement the retirement income above this level.

Thirdly, in the Netherlands there are also hybrid schemes in addition to the DB and DC schemes discussed above, these are the so-called Collective Defined Contribution (CDC) pension schemes. In these schemes the amount of pension is based on salary and the number of years a person participates in a pension scheme, as if it were a DB scheme. However, the contributions are fixed for many years. If it transpires that the contributions are insufficient, then the pension benefits will be lower than originally envisaged. CDC schemes combine a limited risk for fluctuating pension commitments for the employer with the advantages of a collective pension scheme (Dutch Ministry of Social Affairs and Employment, 2008).

2.1

Pension Funds

According to the Dutch law, a pension fund and the company as employer are strictly separated, pension funds are legally and financially independent from the companies. There are three different types of pension funds: company pension funds, industry-wide pension funds and pension funds for independent professionals (Reichert, 2011). According to Koedijk and Slager (2006), a pension fund has two important tasks. Firstly, it acts as an employee savings and investment vehicle for pension building. Secondly, as the agency that pays retirement assets in the form of lifelong periodic retirement. Company pension funds provide pension plans to the employees of their sponsor company. They are separate legal entities, but are run directly by the sponsor company and, often, the labour union of the employees (Bikker and de Dreu, 2009). According to Bikker and de Dreu (2009) industry-wide pension funds provide pension plans for employees in an entire industry.

Such pension plans are based on a Collective Labour Agreement between an industry’s companies and the labour unions, representing the employees in this industry. Finally, pension funds for independent professionals offer pension schemes to specific groups such as medical specialist and dentists. In comparison to company and industry pension funds, professional pension funds deal directly with workers and not with employers (Bikker and de Dreu, 2009).

2.2

Supervision of pension market

Pension schemes and pension providers are professionally monitored and supervised by two regulatory authorities, namely the Dutch Central Bank and the Netherlands Authority for the Financial Markets. Under the Pensions Act, the Minister of Social Affairs and Employment is politically responsible for the Dutch old-age pension system (Dutch Ministry of Social Affairs and Employment, 2008).

According to the Dutch Central Bank (2012) a pension fund or insurance company requires the permission of the Dutch Central Bank to start a business. Approval will only be granted if a pension fund or insurance company has sufficient available funds and is led by professional and reputable directors. The Dutch Central Bank monitors pension funds pursuant to the Pensions Act and, insurance companies pursuant to the Financial Supervision Act. Supervision by the Dutch Central Bank reduces the risk that a pension fund or insurance company ends up in trouble (Dutch Central Bank, 2012).

The Netherlands Authority for the Financial Markets (2012) state they are responsible for the supervision of market conduct focused on the question of whether the participants in the financial markets are handled properly and whether they have accurate information. The pension funds and insurance companies are familiar with the laws and regulations that apply in the financial markets and the conditions that they have to satisfy in order to participate in the market. It is often more difficult for the public to obtain such information (Netherlands Authority for the Financial Markets, 2012).

2.3

Company pension funds

According to the Statistics Dutch Central Bank (2012), the number of company pension funds in December 2011 is estimated at 359. Broeders, Chen and Koos (2009) state company pension funds usually come in the form of non-profit organizations or trusts, and are established to implement a collective pension scheme. In general

stand-alone interest. Activities should primarily contribute to the financial interests of the participants and retirees. The responsibilities can be divided in three core activities; the administration of pension schemes, asset management and information provision. A company pension fund has a mandatory governance, which is responsible for policy and implementation. Board members of the company pension fund are appointed by the employers and employees. The appointed members must be formally independent from their background party. In practice this is difficult and for this reason should be implemented within the administration by having members that are employees and members that are employers, to become a joint governance. A joint governance is strongly motivated by the desire of fair distribution of risks within a pension scheme.

2.4

Sponsor of company pension fund

Under Dutch law, the company pension fund is an independent legal person and thus legally independent of the company (Grob and de Haan, 2008). In theory the financial health and investment policy of the company pension fund is separate from the financial policies of the sponsor. However Grob and de Haan (2008) argue that in practice the separation is not what it looks like. For example, it is obvious that a financially weak sponsor may be less likely to help if his pension fund gets into trouble. Also, board members of company pension funds are often an employee of the sponsor, and are thus wearing the same hat, which results in conflicting interests.

Boot (2004) states that separation of capital in a company pension fund provides a relevant protection against events that occur with the sponsor. Nevertheless there is a dependency, so the sponsor is almost inevitably a risk factor. The different goals of a company pension fund and the sponsor create the biggest tension. This tension points again to the conflicting interests when employees of the sponsor also take their place as board member in the company pension fund.

2.5

Insurance companies and other pension institutions

Insurance companies are profit corporations that provide annuities. A life annuity is a financial contract in the form of an insurance product according to which a life insurance company makes a series of payments in the future to the buyer in exchange for an immediate lump sum payment (Broeders, Chen and Koos, 2009). An insurance company provides several products to company pension funds. Besides the general pension schemes, a pension buy-out is an important product. A pension buy-out is a transfer of accrued pensions from a pension fund to an insured contract, which can be an effective way of reducing pension risks for the company pension

fund. Alternatives for insurance companies for a new pension scheme are pension administrators. A pension administrator performs a number of duties in dealing with the everyday management of pensions and insurance policies one of which is dealing with enquiries through various means of communication such as via the telephone, writing or through the internet by means of an e-mail. The administrator also keeps records, as well as updating and analyzing data through the use of computer systems. The processing of contributions, transferring of benefits and arranging payment and claims are also tasks of an administrator. It is also part of their job to give people advice to help them decide what pensions they should choose, if the services of a pension adviser are not needed. Motivaction (2010) states insurance companies and pension administrators can be ranked by company pension funds on familiarity (are the company pension funds aware of the pension products and services of the insurance company) and appreciation (by reviewing the performance of the insurance company), see figure 2. The insurance companies in the red circle have the best image in 2010 and are the current top three insurance companies in the market of company pension funds.

Figure 2: Insurance companies and pension administrators

As of 1 January 2011 it is possible to establish a ‘Premium Pension Institution’. The licences have been applied for at the Dutch Central Bank. A ‘Premium Pension Institution’, like a pension fund or pension insurer, is a pension administrator where an employer can place the pension scheme agreed upon by the employer and his employees. An important characteristic of a ‘Premium Pension Institution’ is that it is not bound to the Netherlands but it may administer pension schemes of companies within the whole European Union. Another characteristic of a ‘Premium Pension Institution’ is that it is specifically aimed at the administration of Defined-contribution pension schemes. When pensionable age is reached, a ‘Premium Pension Institution’ has to transfer the accrued capital to a pension insurer to make the pension payments. So all ‘Premium Pension Institutions’ have a partnership with an insurance company, which ensures that the pension scheme finally also falls under the administration of an insurance company.

2.6

Comparison of company pension funds and insurance companies

According to Towers Watson (2011) larger employers and pension fund managers did not qualified transferring the pension liabilities to an insurance company as a serious option for a long time. The guarantee prices requested by insurance companies were experienced as too high and unnecessary. Also, the reputation of insurance companies in the area of quality of service was moderate. In recent years this view has changed and many employers and pension funds asked insurance company for support and advice. They had two main reasons for this. First, they currently face partially indexed pensions secure at competitive prices, so discounts on the rights and entitlements can be prevented. Second, on the other hand they escaped with the transition to an insurance company by the increased governance requirements imposed on pension funds and their boards (Towers Watson, 2011).

The Goudswaard Committee (2010) states that there are similarities and differences between pension schemes offered directly by pension funds and insurance companies. The risk is not like a pension fund nominated by the active participants, but by the insurance company. However, the contract has a duration of only a few years after being renegotiated, including the required premium. The main difference is that the form of risk by pension schemes of an insurance company is mostly clear in advance. In other words, the insured schemes approximate the balance of a full pension contract.

According to Broeders, Chen and Koos (2009) there are institutional differences between company pension funds and insurance companies, which are both important annuity providers. The residual risk in a

(non-profit) pension fund is collectively borne by the beneficiaries and the corporate sponsor. In case of an insurance company, the residual risk is borne by the external shareholders. First, the authors determine fair combinations of contract parameters by applying a contingent claim approach and compare the fair participation rates in relation to the investment policy in both contracts. The authors find that for realistic parameters the fair participation rate in case of the pension fund is typically lower than the equivalent rate in ease of the insurance company. Second, by using mean-variance analysis they answer the question, which contract an annuity buyer would prefer based on expected utility of final wealth. Broeders, Chen and Koos (2009) observe that the annuity buying choice of a consumer crucially depends on his preferences. The authors state that insurance companies dominate pension funds. And finally, assuming exponential utility, the consumer is indifferent to a choice between a pension fund or a insurance company. These insights are relevant for many practical questions, for optimal pension plan design and fair contract arrangements. Furthermore, the authors find that power utility consumers are indifferent if the long term regulatory default probability of pension funds exceeds that of insurance companies by two to four percent. This supports differences in regulatory regimes found in reality (Broeders, Chen and Koos, 2009).

Blake (1999) states that the non-profit pension funds do not attract funding in a competitive market, but seek to meet pension obligations at minimum cost to the scheme’s sponsor. Typically, insurance companies need to raise funding in a competitive market and as such have additional costs in the form of marketing expenditures. Davis (2002) argues that the investment strategies are different. Pension liabilities of non-profit pension funds are typically more uncertain than those of insurance companies. These differences are reflected in a more profound investment strategy. Pension funds favour real investment opportunities that keep track with the development of liabilities. Often, stocks and real estate are considered the best investment choice. Insurance companies often prefer bonds as the early surrender option can reduce the duration of liabilities significantly (Davis, 2002).

Moreover, Broeder, Chen and Koos (2009) state that there are distinct differences in investment policy between pension funds and insurance companies. On average, pension funds run a larger mismatch risk compared to insurance companies. In addition, pension funds in Europe invest more heavily in equities. Insurance companies are more focused on asset and liability matching and prefer fixed-income assets. This difference in investment strategy is probably best explained by the differences in risk preferences of the financial institutions, which also appear in diverging regulatory procedures.

0 100 200 300 400 500 600 700 < 100 100 - 1.000 1.000 -10.000 10.000 -100.000 100.000 > 337 136 61 602 239 98 Insurance companies Pension funds Number of participants O per at ingc os ts per par ti c ipant (€ per y ear )

For the comparison of execution costs between pension funds and insurance companies it is important to take the strong negative correlation between the operating costs per participant and the collective size into account. Large pension funds have very low implementation cost per participant compared to small pension funds. The comparison by operating costs per participant for pension funds and insurance companies in figure 3, states that a pension scheme executed by an insurance company has lower operating costs per participant than a pension fund. The figure shows that insurance companies in each size class in which both insurance companies and pension funds are active, have on average significantly lower execution costs calculated than a pension scheme by a pension fund (PWC, 2009).

Figure 3: Operating costs by pension funds and insurance companies

Source: Price Waterhouse Coopers (2009)

The report of Price Waterhouse Coopers (2009) states that insurance companies charge lower operating costs than pension funds. Insurance companies charge costs over a larger number of collective contracts and thereby divide scale in organizing the implementation of a pension scheme. It is cheaper when one institution runs twenty pension schemes, than when twenty pension funds each run their own pension scheme. Some examples of fixed costs are accounting systems, the ICT environment and governance structure. Pension funds target these facilities and structures often only for themselves, while insurance companies account their systems and automation support for more pension schemes and an overall governance structure for a large number of

collective pension schemes. Figure 4 is made to summarize the most important differences between pension funds and insurance companies.

Figure 4: Overview of differences between pension funds and insurance companies

Pension fund Insurance company

Who bears residual risk? (Future) beneficiaries are _{residual claim holders, risk}

sharing with sponsor

Beneficiaries are bond holders external stock holders bear residual risk

Contract specifications

- Guaranteed benefit - Indexation policy

Defined benefit pension Contingent indexation

Annuity With profit

Investment policy Typically large mismatch Typically matching of guaranteed liabilities

Regulation parameters

- Confidence level - Recovery period

Low; 97.5% High; three years

High; 99.5% Short; three months

Policy variables

Contribution rate, Asset allocation, Indexation policy and Initial surplus

Premium, Asset allocation, With profit policy and Debt/Equity ratio

Operating costs High Low

3 PROBLEM STATEMENT

CHAPTER 3

The strategic repositioning of company pension funds in the moving market provides opportunities for insurance companies. Due to the fact that there is limited academic literature about the strategies of insurance companies to sell their pension products and services in the market of company pension funds, this topic is interesting to study. By discussing the strategic analysis and the strategic choice of insurance companies, this study will generate a strategy framework. This framework is a tool for insurance companies and gives the matching strategies by a specific market segment of company pension funds. In short, the main research question is:

“What are the matching strategies for insurance companies

in specific segments in the market of company pension funds?”

Notwithstanding, the framework will be developed for insurance companies, but also the company pension funds itself and the underlying employer can use the framework. It will provide insight during the strategic repositioning process that most company pension funds and employers must deal with in the future. The following sub-questions are answered in this study:

This study is specifically aimed at company pension funds because the composition of other pension funds, as industry-wide pension funds and pension funds for independent professionals, are different in amount, size and the need for strategic repositioning of the pension scheme.

Which variables can be used to segment the market of company pension funds?

Are there correlations between the needs and desires of company pension funds and specific market segments?

Can insurance companies select an optimal strategy by matching the needs of a specific market segment?

4 METHODOLOGY

CHAPTER 4

For the research part of this study a combination of research approaches is applied. The development of the strategy framework consists of several steps with different research approaches. Firstly, the inductive approach will be used. Hereby data are collected and a theory is developed as a result of the data analysis (Saunders et al., 2007). These results will determine the variables for a segmentation of the market. Secondly, the deductive approach, in which a research strategy is designed to test the sub-questions (Saunders et al., 2007). The deductive approach is used to trace the needs and desires of company pension funds. According to Saunders et al. (2007) combining the induction and deduction approach within the same study is often advantageous to do.

In this study a mixed method research will be used in the research design, with both separated quantitative and qualitative data collection techniques and analysis procedures (Saunders et al., 2007). According to Tashakkori and Teddlie (2003) multiple methods are useful if they provide better opportunities to answer the main research question and where they allow to better evaluate the extent to which the research findings can be trusted and inferences made from them. So, in this study in-depth interviews at an exploratory stage are helpful to find out what is happening and to seek new insights (Robson, 2002) and a survey is used to collect explanatory data in order to understand the relationship between variables (Saunders et al., 2007).

To answer the research questions, the strategy management process of insurance companies in the moving market of company pension funds is analyzed. According to Johnson and Scholes (2008) this strategic management process can be found in figure 5, and has three main components; analysis, choice and implementation.

Figure 5: Overview research methodology

• PEST analysis • Five forces analysis • The value chain analysis • SWOT analysis

Strategic analysis

• Segmentation of market company pension funds • The strategy clock

• Ansoff matrix • The parenting matrix • Strategy evaluation

Strategic choice

• Advice of pension advisory institutions

Firstly, to understanding the strategic position is concerned with identifying the impact on strategy of the external environment and the strategic capability of insurance companies. The external environment will be studied with a PEST analysis and a Five forces analysis. Thereby, the strategic capability as internal influences will be studied with The value chain analysis. Finally, the SWOT analysis summarises the key issues from the external environment and the internal influences of an organization that are most likely to impact on strategy development (Johnson and Scholes, 2008).

Secondly, the strategic choice component of insurance companies will start with the segmentation of the market of company pension funds. By looking to the findings in the strategic analysis, the strategy clock, the Ansoff matrix, the parenting matrix and a strategy evaluation will be used to give an advice to insurance companies.

Thirdly, the implementation phase of the strategy will be discussed. Stoelhorst (2008) states that the chosen strategy is broken down into detailed plans, then responsibilities and budgets are assigned, and finally performance measures to control the implementation of the strategy are agreed upon.

Overall, the strategy framework is divided in five steps to come with a strategy for insurance companies to enter the market of company pension funds; market database, segmentation, needs and desires, classification and the strategy for insurance companies. A visual example of the strategy framework is placed in figure 6.

4.1 Interviews

During this research two different interviews will take place. Saunders et al. (2007) state that the use of interviews can help to gather valid and reliable data that are relevant to the research questions and objectives. First, based on semi-structured interviews with pension consultants the variables, on which the segmentation of the company pension market can be made, are determined. The pension consultants are working on the team Sales Corporate Clients of an insurance company. According to Saunders et al. (2007) semi-structured interviews will be taken by a list of themes and questions. This means that questions can be omitted and may be varied depending on the conversation. The results of the interviews will be used by the market segmentation of company pension funds. Second, unstructured and in-depth interviews with pension specialist are used to fine tune the strategic decision framework. The pension specialists are active in the pension sector. Saunders et al. (2007) mentioned that an unstructured interview gives the opportunity to talk freely about the topic and come to new insights. The qualitative results of the interviews are processed by citations of the most important findings.

4.2 Survey

The survey will be used to analyze the needs and desires of company pension funds, performed by Intomart GfK throughout Computer Assisted Telephone Interviewing. Intomart GfK is a full service market research firm, specializing in policy, market and media research for the Dutch market. The research is conducted in accordance with the quality system of Intomart GfK that is certified following the standards of NEN-EN-ISO 9001, ISO 20252 and ISO 26362. Intomart GfK endorses the conduct of European Society for Opinion and Market Research and is a member of the branch organization MOA, a Center for Information Based Decision Making & Marketing Research. The total costs of the research performed by Intomart GfK are estimated on €15.000. The survey (see appendix 1) is in Dutch, because only Dutch participants were called. For this research 275 of the in total 359 company pension funds were called at random, between Monday 30 January and Friday 10 February 2012. In these two weeks all introduction calls were made, and followed by planned telephone appointment and reminder calls. The survey consist of general information, the current situation and the needs of pension products and the desires of communication preferences of the company pension funds. In cooperation with pension consultant and Intomart GfK the survey is developed.

According to Saunders et al. (2007) a survey is useful through its ability to clarify the understanding of a problem. The survey strategy allows the researcher to collect quantitative data, which can be analyzed by using descriptive and inferential statistics. This can be used to find possible relationships between variables. Jick (1979) argues that a survey strategy may also contribute to greater confidence in the generalization ability of the results.

The results of the survey are analyzed in SPSS and tested with a validity of 95 percent. Z-tests are used to analyze significant differences between the needs and desires between the four segments of company pension funds. The data from the survey is tested with Z-tests to compares samples and population means to determine if there is a significant difference between the segment of company pension funds and their needs and desires. By the Z-test, the results of two segment variables and the four combined segments in the matrix are tested against each other. If there are significant differences between the two-segment variables, this is visible in the column with the highest value by the character from the column with the lowest value. An example can be found in appendix 2. Moreover, the data needed to be screened for outliers, a Z-score between -3 and 3 is not considered. The symbol ‘.’ means that there are too few observations to make reliable statements about significant differences. The tests were performed with a reliability of 95 percent, so it can be stated with 95 percent confidence that there is a significance difference.

The Bonferroni test is based on the related Z-test but modifies the significance level to take into account the fact that more than one comparison is being made. To calculate this, work out the total number of possible comparisons between any two groups, divide the chosen significance level of 0.05 by this number, and treat the results as the appropriate significance level for comparing more than three groups. For example, in the case of three groups, the total number of possible comparisons is three, which means the appropriate significance level is 0.017 (0.05/3) (Bryman and Cramer, 2009).

5 THEORETICAL ANALYSIS

CHAPTER 5

The theoretical analysis of this study is a description and critical analysis of what other authors have written, therefore the focus on the research question and objectives is necessary (Jankowicz, 2005). Within this critical review different ideas of the authors are juxtaposed to form opinions and conclusions by finding the matching strategies for insurance companies on specific segments in the market of company pension funds.

Stoelhorst (2008) states in his teaching note ‘Thinking about Strategy’; ‘most literature on strategic management used in universities have a tendency to present the theories and concepts of the field as if there were one best way to develop strategy. Such an approach suppresses both the complexity of strategic management and the fact that strategy can be approached in many different perspectives. In other words, the implicit message of much literature that they represent the one and only way to tackle strategic management is rather misleading’. Therefore Stoelhorst (2008) states that strategic management is a field of inquiry that consists of concepts, research, and controversies aimed at developing better theories of strategy. He presents the field in terms of its historical development and the most important schools of thought that have contributed to this development. According to Stoelhorst (2008) three aspects of strategic management can be distinguished: the process, the content, and the context of strategy. The process of strategy states where strategies come from, in our case, how do insurance companies actually develop strategies and how could they do so more effectively. Which types of strategy there are, and which strategies can give insurance companies a competitive advantage, is discussed in the content of strategy. Finally, the context of strategy is about how specific organizational or environmental contexts affect the process or content of a strategy. Do different types of insurance companies require different strategies and different ways of developing these strategies?

Firstly, the process of strategy within insurance companies can be linked to the mission school, which means top management of insurance companies only provides a broad strategic direction to motivate employees. By a common purpose, shared values and simple rules, room for lower-level contributions is created (Bourgeois and Brodwin, 1984). In addition, Quinn (1989) states that the learning school is an emergent pattern, strategy formation is a continuous, evolving process that involves learning in both internal (developing core competences) and external aspects (the environment of the moving market of company pension funds).

Secondly, the content of strategy within insurance companies can be linked to the positioning school of Michael Porter, which means the outside-in view. Industry conditions determine an insurance company’s performance. Buzzel and Gale (1987) state insurance companies will realize superior performance if they enter the market of company pension funds with a large profit potential and position themselves well in the market by choosing a generic strategy. The resources that are required follow from positioning choices.

Thirdly, the context of strategy within insurance companies can be linked to the environmental school, which means that strategy is about adapting to (changing) environmental conditions (Phrahalad and Doz, 1987).

The typical literature conception of strategic management is of a three-step process; strategic analysis, strategic choice and strategy implementation. This approach to strategic management can be seen as the ‘standard model’ of strategy according to Stoelhorst (2008) and Johnson and Scholes (2008).

5.1 Strategic analysis

According to Johnson and Scholes (2008), understanding the strategic position is concerned with identifying the impact on strategy of the external environment and the strategic capability of the organization. The external environment is studied with a PEST analysis and a Five forces analysis and will give rise to opportunities and others will exert threats on the organization. Thereby, the strategic capability as internal influences will be studied with The value chain analysis to consider its strengths and weaknesses. Finally, the SWOT analysis summarises the key issues from the external environment and the internal influences of an organization that are most likely to impact on strategy development.

PEST analysis

The PEST analysis is used for analysing the broad macro-environment of insurance companies and is categorised in four different areas and stands for; political, economic, social and technological. All area’s are summarized in the figures 7.1 till 7.4 on the following pages. Each category is displayed by a box and accompanied by a short description, the influence of the factors are explained. All findings are collected by several relevant documents, conversations with employees in the pension sector, newspapers and journals.

First, the political factors that influence insurance companies and company pension funds are described. Of course the pension agreement of 2011 in the Netherlands, has the biggest influence on the moving market of company pension funds and the strategy of insurance companies. According to Towers Watson (2011) the aim of the pension agreement of 2011, among other things, is that there is a greater chance of future indexation, at the expense of the level of certainty about the nominal benefits. In addition, any costs of a further increase in life expectancy at the expense of the participants go through a lower indexation, so the security in respect of

guaranteed nominal benefit, regardless of future increases life expectancy and actual investment returns. Comparing the security of pension schemes to a pension fund versus an insurance company becomes increasingly complex by various Financial Services Acts (Towers Watson, 2011). Redesigning guarantees more opportunities with an attractive proposition for the customer to come. Most pension contracts have, in addition to an interest rate guarantee of three or four percent, a profit sharing scheme that is based on the actual investment return. If the yield is lower than the discount it will be replenished from the equity of the insurance company.

Figure 7.1: PEST analysis

Second, the economic factors are described. The development of interest not only determines the return on investments in government bonds, but also has implications for whether the assets of company pension funds are sufficient to meet their obligations. The Goudswaard Committee (2010) states that the market value of a stream of future pension benefits can be determined by those with cash to earn interest. The invested capital in proportion to the cash value of the liabilities determines the coverage ratio of company pension funds. The lower the interest rate, the higher the present value of the liabilities and the lower the coverage ratio. In other words, the lower the interest rate the more money the company pension fund must set aside to pay future liabilities. Company pension funds have long worked with a discount rate of four percent to the present value of their liabilities. Changes in interest rates did therefore not have an effect on the valuation of the liabilities and the coverage ratio. With the pension agreement of 2011, a market-based interest rate was introduced (Goudswaard Committee, 2010).

Third, according to Goudswaard Committee (2010) the most important social factors for the pension trends are the demographic numbers. Figure 8.1 shows that the population aged between 20 to 64 years, the potential workforce, has increased from approximately 5.5 million in 1950 to the current 9 million.

Figure 8.1: Composition of the population Figure 8.2: Population aged above 64 years

Source: Goudswaard Committee (2010)

Because of the post-war baby boomers and the subsequent halving of the number of births per woman in the seventies, the population of 0 to 19 years has now stabilized at a level of less than 4 million. Simultaneously, the number of people of 65 years and older increased as a result of rising life expectancy, from 2.5 million people in 2009 to an estimated 4.5 million around 2040. This is reflected in an increase of the gray pressure which is expected to increase during this period from 24.6 percent to 48.8 percent (see figure 8.2).

Figure 7.3: PEST analysis

But when a longer period of time is analyzed, it becomes clear that the coverage ratios have already been in decline for a decade, see figure 9. Of course, company pension funds faced with ever-increasing life expectancy. Without adjustment of the retirement pensions schemes, pensions would be paid for longer than previously anticipated.

Figure 9: Coverage ratios pension funds (1999-2010)

Source: Ministry of Social Affairs and Employment (2011)

Fourth, the technological factors are becoming more and more important. The increasing presence of social media and networks on the digital platforms demands new innovations. The technological innovations provide opportunities for pension- administration and communication towards customers.

Five forces analysis

Porter’s Five forces framework was originally developed as a way of assessing the attractiveness of different industries. The Five forces constitute an industry’s structure. According to Johnson and Scholes (2008) it can provide a useful starting point for strategic analysis and can help set an agenda for action on the various ‘pinch-points’ that they identify. In figure 10, the Five forces analysis is shown. Each of the five forces is discussed and developed on the industry of insurance companies with the focus on their pension activities. It is important to defining the ‘right’ industry. Most industries can be analysed at different levels. This case is specific for insurance companies which focuses on pension products and services. Recklies (2001) states Porters Five forces framework has some limitations. It is not able to take into account new business models and the dynamics of markets. The value of Porters framework is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way and useful as a starting point for further analysis.

Figure 10: Five forces framework

First, the threat of new entrants, which depends on the extent and height of barriers to entry. It can be stated that economies of scale are important. Because the insurance companies have reached large-scale of pension products and services, it will be very expensive for new entrants to match them and until they reach a similar volume they will have higher costs. Also a barrier to entry come from the experience effects that give

than an inexperienced new entrant could possibly do. Until the new entrant has built up equivalent experience over time, it will tend to produce higher cost. Legislation or government action also influences the industry by regulation of the market of company pension funds (Johnson and Scholes, 2008).

Second, the bargaining power of buyers, where the company pension funds have not influence on the industry of insurance companies which are focussed on pension products and services. There is no presence of a few large company pension funds for the majority of sales, which leads to an increased buyer power. Also, there are high switching costs. It is difficult for company pension funds to switch between insurance companies and therefore company pension funds do not have a strong negotiating position.

Third, the threat of substitute products or services, which offer a similar benefit to an industry’s products or services, but a different process (Johnson and Scholes, 2008). It can be stated that the pension products and services of insurance companies do not have threat of substitutes. Company pension funds do not have the option to switch to alternatives.

Fourth, the bargaining power of suppliers, those who supply the insurance company with what it needs to process the pension products or services. The most important supplier is responsible for the operating system, which is necessary to processing the pension products and services. It is expensive or disruptive to move from the supplier of the operating system to another. Therefore, insurance companies becomes relatively dependent and correspondingly weak (Johnson and Scholes, 2008).

Fifth, the competitor rivalry, organizations with similar pension products and services aimed at the market of company pension funds. In paragraph 2.5 ‘insurance companies and other pension institutions’, the industry of providers of pension products and services can be found. In the current economy all insurance companies seek to reduce costs by increasing their volumes. They typically cut their prices, prompting competitors to do the same and thereby triggering price wars in which everyone in the industry suffers. On the other side, all insurance companies seeks to develop new pension products and services.

By summarizing the findings of the Five forces analysis, it can be concluded that there are no highly unexpected findings. The competition between existing insurance companies in the industry are high because, there are no big differences in size, almost all insurance companies have similar strategies, not much differentiation between the pension products and services of insurance companies and there are barriers for exit by the investments of current contracts. However, these findings will be helpful in a strategic management perspective to understand the competitive forces in the industry and the likely success or failure of the insurance companies in it (Johnson and Scholes, 2008).

The value chain analysis

The value chain describes the categories of activities within and around an insurance company, which together create a pension product or service. The concept was developed in relation to competitive strategy by Michael Porter. Figure 11 represent the results of The value chain for insurance companies, which focuses on pension products and services. Thereby the ‘outbound logistics’ is deleted because this is not applicable.

Figure 11: The value chain of insurance companies

Johnson and Scholes (2008) state the primary activities directly concerned with the creation or delivery of a product or service. Each of the groups of primary activities is linked to support activities. Support activities help to improve the effectiveness or efficiency of primary activities. The value chain helps with the analysis of the strategic position of insurance companies, a generic descriptions of activities that help understand if there is a cluster of activities providing benefits to company pension funds located within particular areas of the value chain. The primary activities are used in the interviews to analyse the most important factors of The value chain.

The benchmarking analysis, which can be used as a way of understanding how an organization’s strategic capability, in terms of internal processes, compare with those of other organizations, is not used in this study. This because there are no big differences between the internal processes of the insurance companies.

SWOT analysis

The SWOT analysis leads to the identification of the strategic issues and is especially for insurance companies which are focussed on pension products and services. The findings of the external and internal analysis are summarised in the SWOT analysis, see figure 12. The aim is to identify the extent to which strengths and weaknesses are relevant to the changes taking place in the business environment (Johnson and Scholes, 2008).

Figure 12: SWOT analysis

Pension knowledge

Full-service capabilities

Low operating costs

Scale of economies

Amount of customer data

Technologie infrastructure is complex and value chain is insufficient Lack of risk premium and differantiation

Long time to market by slow decision making

Limited knowledge of customers needs

Requirements of supervisors

Innovative business movement by developing of new products Development of internet products and

technological systems

Tendency to package products

High demand for products with a guaranteed return Need for safety and security

Specialized internet insurers

Lack of distinctiveness

More media attention of major insurers leads to greater risk of image damage

Industry-wide pension funds take over small company pension funds

Strengths

Opportunities

Threats

5.2 Strategic choice

The next step is to generate strategic options, in other words, possible strategies to deal with the strategic issues. In choosing among these strategic options, insurance companies should consider their suitability (does the strategy deal with the strategic issues?), acceptability (is the strategy acceptable to the stakeholders of the insurance company?), and feasibility (will the insurance company be able to execute the strategy?) (Stoelhorst, 2008).

The segmentation is based on the Boston Consulting Group (BCG) matrix. According to Johnson and Scholes (2008) the BCG matrix is one of the most common and long-standing ways of conceiving of the balance of a portfolio of businesses. The growth and share axes define four kinds of business which provides a good way of visualizing the different needs and potential of all the diverse businesses within the corporate portfolio. However, Johnson and Scholes (2008) also warn for potential problems with the BCG matrix, which can also be relevant in the variation matrix used in this study. Dividing the market into four segments can cause motivational problems for insurance employees by working on company pension funds which are not placed in the most important segment. In addition, there is also the significant danger of self-fulfilling prophecy in the most important segment. Besides the BCG matrix, which exist of four segments also the General Electric (GE) matrix, developed by McKinsey & Co consultants, is analyzed. In doing so, the way to consider a portfolio of businesses is estimated by the directional policy matrix, which categorizes business units into those with good prospects and those with less good prospects. The matrix also provides a way of considering appropriate corporate-level strategies given the positioning of the business units. The two axes are based on the business strength and industry attractiveness. Both variables can be estimated as high, medium or low. The directional policy matrix is more complex than the BCG matrix. The nine cells make it too diverse by dividing the market of company pension funds in nine segments. The market is with 356 funds too small and a significant difference between the nine segments is not expected (Johnson and Scholes, 2008).

During semi-structured interviews with five different pension consultants the variables, on which the segmentation of the company pension market can be made, are determined. To discuss and analyze possible variables within the database, all kind information about the company pension funds is used. In doing so, variables such as the type of pension scheme, the number of participants (active, sleepers1 and pensioners), financial data (profit, total assets and turnover) and finally the coverage ratio are discussed. After an in-depth study of the variables which give the most optimal segmentation of the market of company pension funds, the

segmentation is based on the total number of participants and the total assets, see figure 13. This is because these variables gives the broadest view of company pension funds in general. Other financial data are not useful by the differences within the type of participants. Also, the coverage ratio is not reliable as starting point of future strategy, this because the volume differences of company pension funds.

In this research a variation is made by dividing the market of company pension funds into segments by two variables which each can be classified in a low and high rate. The boundary between low and high is estimated by the fact that the low and high segments together consists of 50 percent of the total number of company pension funds by each specific variable . The total number of company pension funds in the database is 356 company pension funds. However, by combining the two specific variables each segment do not consists of exactly 25 percent of the total number of company pension funds.

Figure 13: Segmentation matrix

T o tal ass et s H ig h (mor e t h an 1 61 mi lli o n €) Segment 2 Segment 4 L o w (0 – 16 1 m ili ion €) Segment 1 Segment 3 Low (0 - 2000) High (more than 2000)

Total number of participants

Specific descriptions of each segment, built on the needs and desires of the company pension funds, are leading in the matching process with a specific strategy. After a complete segment description based on the general significant needs and desires and the information from the interviews, a classification is matched with each segment to indicate the priority.

The strategy clock

By reviewing different ways of thinking about competitive strategy, the bases on which a business unit might achieve competitive advantage in its market will be discussed. According to Johnson and Scholes (2008) Michael Porter proposed three different ‘generic’ strategies by which an organization could achieve competitive advantage: overall cost leadership, differentiation and focus. However, there is much debate as to exactly what each of these categories means. To remove such confusions, the market-facing generic strategies of Cliff Bowman and Richard D’Aveni are used (Johnson and Scholes, 2008). These are based on the principle that competitive advantage is achieved by providing customers with what they want, or need, better or more effectively than competitors. Building on this proposition, the strategy clock enshrines Porter’s categories of differentiation and focus alongside price. In a competitive situation, customers make choices on the basis of their perception of value for money, the combination of price and perceived product and service benefits. The strategy clock represents different positions in a market where customers have different requirements in terms of value for money. By looking to the SWOT analysis in figure 12, a differentiation strategy without price premium will be advised to insurance companies. Johnson and Scholes (2008) state that a differentiation strategy seeks to provide products or services that offer benefits that are different from those of competitors and that are widely valued by buyers. The aim is to achieve competitive advantage by offering better pension products and services at the same price or enhancing margins by pricing slightly higher.

Ansoff matrix

The Ansoff matrix generates an initial set of alternative strategic directions, see figure 14. The four basic directions are ‘increased penetration’ of existing markets; ‘market development’, which includes building new markets, perhaps overseas or in new customer segments; ‘product development’, referring to product improvement and innovation; and ‘diversification’, involving a significant broadening of an organization’s scope in terms of both markets and products (Johnson and Scholes, 2008).

In the line of the findings from the SWOT analysis and the differentiation strategy to achieve competitive advantage, the direction of product development is advised. Product development is where organizations deliver modified or new products to existing markets. In practice, even market penetration will probably require some product development, but here product development implies greater degrees of innovation. However, Johnson and Scholes (2008) state that product development can be an expensive and

high-mastering new technologies that may be unfamiliar to the insurance companies. Success frequently depended on a willingness to acquire new technological and marketing capabilities, often with the help of specialised IT and e-commerce consultancy firms. Second, the project management risk, even within fairly familiar domains, product development projects are typically subject to the risk of delays and increased costs due to project complexity and changing project specifications over time.

Figure 14: Ansoff matrix

The parenting matrix

The parenting matrix introduces parental fit as an important criterion for including businesses in the portfolio. In this research the businesses are the transitions of pension schemes from company pension funds to insurance companies. The merger and acquisition of these company pension funds may be attractive in terms of other matrices, but if the insurance company cannot add value, then the insurance company ought to be cautious about acquiring or retaining them. In the parenting matrix there are two key dimensions of fit, ‘feel’ and ‘benefit’ as