Early indications from the auto-enrolment experiment

It may be some time before clear lessons emerge from the experience of first staging firms in auto-enrolment. Most of the big ten companies are keeping their cards very close to their chests and several have taken the opportunity to delay for three months. The full stagers can be counted on the fingers of one hand.
Buck Consultants principal and head of defined contribution and wealth Philip Smith says: “There have been no terrible public stories. Broadly it has been pretty well received as a good idea. You would be surprised if these big firms got it wrong. They can afford consultants and afford the right sort of team for their assessment opting out and everything else.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “It is interesting to see companies with DB postpone or take advantage of the waiting period. But this handful that have gone through the staging date are not typical of UK employers.”
One thing that is clear from the early stages of auto-enrolment is most people wish they had given themselves more time.
Jelf head of benefits strategy Steve Herbert says: “I have heard the HR director of Asda say the firm wishes it had started twelve months earlier. We know many have opted for postponement. You can only push things back three months, but it does delay the rest of us from working out what we can learn from them. All those employers which were saying ‘we are not going to use postponement’ are now saying ‘yes we will use postponement because it is going to save us money’. Whether that is the economy, there is a big surge to do this even at the expense of the complexity.”
Mercer Retirement group principal Rachel Brougham says: “For clients I am working with personally who are staging in Q1 or Q2, good progress is being made. A number had dragged their feet – until they have understood the complexity.  I noticed a step up in workload in September and expect another step up in January.”
However payroll in particular does seem to be a worry.
Barnett Waddingham partner Clive Grimley says: “The first wave has involved a small number of employers who because of their size and have employed a lot of resource. Their payroll providers have been a little lacking. We are aware of a couple of international providers who failed to come home on time and one company has had to resort to a plan B.”
Andrew Cheseldine, principal at LCP, is also concerned about payroll providers: “The payroll companies aren’t as advanced because they have been focusing on Real Time Information (RTI). I have yet to see one that has a genuine ‘this works for all our clients’ plug and play solution. Most of the clients that are coming in have bespoke payroll and there is a wide dispersion of quality and understanding and costs in terms of auto-enrolment.”
Smith says: “Based on conversations with our clients, for me payroll is where I would have most concern. Different payroll providers are offering different solutions, some dependent on your buying different parts of their offering and there is not a consistent approach. If you are relying on a payroll provider to do workforce assessment and have not entered into any negotiations with them, you really need to do that now.”
Brougham says: “All the assessment of eligibility would sit with payroll providers, but it took payroll providers a long time to realise that, because they were busy with RTI with HMRC. A number are playing catch up and putting modules in place to help with eligibility.”
McPhail says: “Most of the conversations we are having are about compliance with the Act and a sense that the pension provider can help, but it is a payroll problem dealing with the AE requirements. It is not something the pension provider can take off the employer’s desk entirely.
However Brougham adds: “The occasions where we have had a working party involving all these stakeholders have worked well. We do process workshops, with the pension provider and payroll provider. It allows you to see who has responsibility for doing what and identify any gaps.”
There are also growing fears about provider capacity, with the risk that schemes will be turned down on commercial grounds or simply because providers will want to service existing clients.
Cheseldine says providers have had to review how they do things, and what they do, including renegotiating terms and considering what they may quote in the future.
He says: “That is because data isn’t quite as good as they had hoped. There are a lot of anomalies in terms of how employers recruit people, and employ them and remove them and issues with subsidiaries not doing what they are meant to be doing.”
He fears some time this year some providers will shut up shop because they won’t want to cause problems for their existing clients and clients they have already promised to take on, all of which will be compounded by the move to RTI.
He says other providers may turn down schemes because they can’t make a profit, so firms may have to go to the next rank of providers down. Even Nest could see its statutory obligations tested, if companies go to them, but give them too little time and expect to stage almost overnight.
Brougham says: “What we have seen with commercial providers is that it depends on the business. If an employer says ‘I have a small proportion of employees in a scheme. Are you interesting in the other 75 per cent?’ Some providers have said ‘no we are not interested’ or ‘we are interested but we will have to put our charges up’. So some employers may have to look to master trusts, or Nest, Now or the People’s Pension. We are saying to employers ‘you need to talk to your existing provider as soon as you can, because you may need a plan B’.”
Cheseldine also points out other significant areas where there could be delays. Employers may not want to enrol in the first quarter because the earnings trigger is expected to jump from £8,015 to £9,440. He points out that this could be a 13 or 14 per cent increase, theoretically removing 2 or 3 per cent of the population from the AE equation.
LCP has also warned about hybrid schemes, where firms could conceivably have pushed staging to 2017 due to a drafting error in the Pensions Act. Thankfully the DWP has now gone on record as saying it will amend the Pensions Bill to take account of the loophole.
More generally, Grimley is also worried that the decoupling of the state pension reforms and auto-enrolment is storing up means-testing problems for the future.
Indeed there remain many frustrations among corporate advisers concerning regulation and policy. At one point recently it looked like Sipps might fall outside of auto-enrolment, something that would have caused huge problems for Hargreaves Lansdown, though that has subsequently been clarified.
Brougham says: “We have had various different organisations shouting at us from different directions for a long time. DWP sets policy, TPR polices it, FSA overlooks some of the landscape and there have been tensions between contract and trust. I don’t know how close that is to resolution. There needs to be some joined up thinking.”
McPhail says: “There is a sense that between the DWP, FSA and TPR they are still trying to work out how they intersect. You have scope for regulatory arbitrage between trust and contract based. There are still a number of uncertainties about scheme design. It makes life complicated.”
On consultancy charging, another late intervention, Smith says he thinks the real focus should be on the total charges.
“I would be comfortable, whether it is commission or consultancy
charging, as long as charges are very competitive.” He says that is happening with Nest and other low cost providers bringing charges down. “But the political climate is strongly against commission and consultancy charging,” he adds.
He says one worry is that without CC or a restriction you may see employers completely relying on providers and fund managers for governance.
Brougham says the DWP was right to flag the issue. “I don’t know if there is an easy fix to explaining charges. Auto-enrolment even with 8 per cent, that is not a lot of money. The least that can be taken out in charges the better. Old legacy arrangements shouldn’t be used for AE.” She adds, however, that most providers she works with seem happy to move on to modern platforms that are better for charging, investment and facilitating communications.
Herbert is more worried. He says: “I think the industry is in for a massively hard time. By the back end of 2013 firms may have fallen off a cliff money-wise. They may be looking to shed consultants. The CC stuff is madness at this stage and companies may now be finding they have to find fees. It is a huge problem.”
However Paradigm Pensions’ founder Steve Bee sees an opportunity to change the market. He says: “When you are putting schemes in place for 50, 60 or 100, I am not sure advice is the right word. The processes an employer will use to manage AE and to do the record keeping should be billed separately to the employer. That is separate to which pension scheme you use, what charges are levied and what they are levied for. I don’t think you should have the people who stay in the scheme picking up all the charges for the compliance processes. The pre-RDR bundled approach has got to change. I think IFAs that are involved in this market have to start acting more like EBCs.”
The big issue for the moment however remains awareness. Most consultancies talked to were, within reason, happy that their clients were in reasonable shape, despite the regulatory inconsistencies.
But the recent Jelf auto-enrolment tracking survey means that there should be concerns about the market in general. It found 38 per cent believe they are ready for auto-enrolment. In May 2012, 31 per cent were aware of their staging date and had started to prepare – compared to May 2011 where 29.5 per cent had started to take steps. Herbert says the RDR charging changes will compound the problem.
McPhail says he is also worried that while large firms with pension departments and perhaps trade union involvement can get the message across to a workforce and small firms have word of mouth, the medium sized firms could fall between the two and that is where engagement and possibly opt outs could be higher.
Bee however is convinced that given anecdotal evidence of the really big firms wishing they had started earlier, the real tsunami for the industry will come when small firms stage.
For the moment, the focus will be on large and medium sized firms. One thing may concentrate employers’ minds. Brougham adds: “Employers are realising they may have to spend some money to get things right for advice or payroll. You only need to mention the £10,000 a day fine if you don’t comply to concentrate minds.”