The workload facing advisers and providers in implementing auto-enrolment is as enormous as the opportunity it presents is golden.
Existing schemes are widely under-prepared and a once-in-a-lifetime new business opportunity looms, with unpensioned companies to target, existing clients to review and work to be poached from rival intermediaries. So with this embarrassment of riches, and limited workforce, how are advisers going to cope, and where should they target their resources?
With just a year to go until the first employer staging dates when the biggest companies must comply with new rules there is still a huge job to be done with existing schemes. The consensus amongst delegates at the Corporate Adviser/Aviva Implementing auto-enrolment stepping up to the challenge forum was that 50 per cent or fewer arrangements currently in place will satisfy the new rules. One consultant maintained that 100 per cent of existing schemes are non-compliant.
Andy Cheseldine, consultant at LCP, said: “If you look at the whole set of rules there isn’t a compliant scheme in the UK. Because you’ve got not only to auto-enrol, you’ve got to re-auto-enrol in three years, all those things. If you are asking are contributions sufficient, then the answer might be 50 per cent by scheme, slightly more by numbers of members.”
Craig Rodger, director at JLT Benefit Solutions, said everyone is concentrating on the financial impact of auto-enrolment, but it is the administrative complexities of the new system that will really make companies struggle over the next 12-18 months. Firms are still viewing auto-enrolment as a pensions issue, when it’s actually a much broader business matter, which will impact on HR, payroll and other areas. There is substantial work to do here, with opt-outs, certification, and re-enrolment.
“What’s autoenrolment going to cost, what’s the impact for our administration, what does that mean for IT, what does that mean for HR?”
Cheseldine agreed that calculating additional contributions to make existing arrangements compliant is the relatively straightforward part. What can be more challenging is working out who your workers are for the purposes of auto-enrolment.
Selecting a scheme will of course be driven by the type of workers you employ. If there are many non-UK-nationals working for short periods, you might go to Nest to limit costs and providers won’t take these schemes on anyway as they’re not cost-effective.
Next, said Cheseldine, you have to work out how to communicate the scheme and keep records. He said the largest employers with 5,000 plus workers have the resource for the record keeping. Some providers will do this for schemes, but Nest certainly won’t, he added.
Steve Herbert, head of benefits strategy at Jelf Employee Benefits, said SMEs are putting things off, but that larger companies are better prepared.
But Cheseldine disputed Herbert’s claim. He said he was aware of companies with tens of thousands of employees, where auto-enrolment is only just gaining board time. He said: “They vaguely know it’s coming, but they haven’t been building a policy on it.”
Robin Hames, head of technical and marketing at Bluefin, said companies are running reputational risk if they screw up any fines imposed would be insignificant by comparison.
“If you’ve got a book of business that you’re wanting to get in shape in time, talk early”
The biggest casualties, Cheseldine maintained, will be central and local Government, who misguidedly seem to think themselves exempt from auto-enrolment rules.
“I have this wonderful vision that the first person to be named and shamed will be Andrew Lansley, Secretary of State for Health.” Cheseldine said: “In the NHS scheme nurses get 100 per cent coverage. But quite a lot of nurses also work for agencies and do extra jobs. But for technical reasons many of those are actually paid by the NHS, not the agency. Now you say you’ve got to pension every penny that they earn.
So logically you just put them into the existing scheme. Except you can’t do because the rules of the NHS scheme say you’re only allowed to pension 100 per cent of a job. So they either have to change the rules of the NHS scheme, which last time they tried took 6 years. Or they’ve got to put them into Nest or a DC scheme, in which case they’ll have loads of union issues. And they have only got until October next year to sort this out.”
Hames said with the welter of new financial and administrative requirements, the actual product will be much less of a concern to the employer. More important factors will be: “what it’s going to cost, what’s the impact for our administration, what does that mean for IT, what does that mean for HR?”
Delegates were generally less concerned about DWP guidance on default funds, as it isn’t yet enshrined in auto-enrolment rules although said they believed further regulation is coming down the line.
Default funds increasingly absorb the UK’s pensions savings. And their dominance will increase with the influx of auto-enrolment customers, who are likely to be unengaged, and rolled passively into a pension.
Hames argued that default funds will become a bigger issue and require more attention, with the Nest approach becoming something of a benchmark for other schemes. He said: “A lot of companies haven’t wanted to pay to have a really good profile done of their workforce. And probably most default funds actually sit further up the risk scale than how most employees would describe themselves. I think that there will have to be a greater degree of sophistication come into the selection of funds.”
Neil Latham, principal at Punter Southall said what he described as the whole “political adventure” of auto-enrolment and Nest, will comes crashing to the ground if investments don’t work, so the industry should expect a whole wave of intervention from the Government to get things right.
He warned that the industry ignores the investment issue at its peril as regulators have a nasty habit of coming back to bite retrospectively when poor outcomes become apparent later on. “It’s going to become more onerous for us,” he said.
“You have to work out who’s going to make a difference, and who isn’t going to make a difference. And that’s tough. It makes for some very interesting conversations”
With this tidal wave of business set to hit the industry in the coming years, adviser firms are hungry to recruit extra staff just to cope with existing clients let alone the massive new business opportunities. Advisers thought the busiest years between now and 2016 would be 2012 and 2013. Cheseldine said a lot of the work coming up will be on a one-off basis, and the busy period will trail off after five years.
Both intermediaries and providers will be constrained by the lack of skilled personnel, said delegates. On the adviser side, staff are ageing and there is a lack of new blood, as the traditional channels for bringing in advisers with the right skills have waned. With this diminishing talent pool, consultancies will poach from each other, and there’ll be a premium paid for defined contribution specialists, said Cheseldine.
On the provider side, resource constraints will mean providers will start getting picky. A lot of clients are only just starting to understand how much work they have to do to comply with auto-enrolment, and as Herbert explained, most employers will put things off until the last minute. However, if clients fail to apply with a sufficient lead time, they risk having their terms changed, commission reduced or being turned away.
Cheseldine said in particular with 300-500 person schemes, providers are likely to send late-comers away, and their only option will be Nest.
Paul Goodwin, head of pensions marketing at Aviva, cautioned: “If you’ve got a book of business that you’re wanting to get in shape in time, talk early.”
Mark Futcher, associate at Barnett Waddingham, said laggard clients having terms changed is a major concern, and his company is seeking to pre-empt things by analysing business with non-pension employees, and seeking a commitment from providers in advance.
Aviva will also be more selective about the quality of business it accepts. As Goodwin said: “You have to work out who’s going to make a difference, and who isn’t going to make a difference. And that’s tough. It makes for some very interesting conversations.”
But much as the company would like simply to shift transient workers and low earners wholesale into Nest, Aviva recognises that in the real world intermediaries will want it to take on an entire book. Goodwin said: “The likelihood is we’ll end up keeping some stuff we don’t necessarily want to keep. We’re going to have to be pragmatic.”
Advisers will be in the same position: they too will only want profitable business, and send the rest to Nest. Herbert said: “We as an industry are not going to deal with people where there’s no return for us. Nest are going to deal with those people. If that’s the only place the employer can possibly enrol someone, then we’re going to have to work with the employer to enrol them there.”
In a straw poll at the event, three quarters of delegates said they expect 10 to 25 per cent of clients to put at least some of their workforce into Nest.
Intermediaries will also need to get tough with clients about charging them from now on if they mess up, where previously they’d merely blame the insurer, and advisers would sort the problem.
Cheseldine said: “We’re going to have to say, ’actually we told you what the rules were, you haven’t done it according to the rules, that’s caused the problem, you have to sort it. We’ll help you but we’ll charge you for that’.”
As to the business opportunity presented by auto-enrolment, delegates agreed the most obvious sales opportunity is advisers getting their own existing books in order. Participants at the event were at varying stages. Rodger said he’s busy with other matters too at the moment, including flexible benefits and gewneral GPP reviews, as well as RDR and auto-enrolment work.
Advisers are planning to poach each other’s business through auto-enrolment, if they can. Futcher said advisers can win easy business off firms who haven’t got to grips with auto-enrolment yet. And referrals from law and accountancy firms were seen as big opportunities.
Figures from the Office for National Statistics flag up huge potential new business. There are 25,000 firms with between 50 and 2,000 employees, with a total of 2.6m workers who currently have no pension scheme. This size outfit is classic intermediary territory. Although many companies will be passive, low-cost NEST material, Hames said some are the type of client desirable to advisers like law firms who’ve never quite got round to introducing a scheme for all staff.
Futcher said auto-enrolment is not surprisingly proving a great way to get a foot in the new business door: “It allows us to be able to speak to any company. I’m not just a pension adviser trying to talk to you about employee benefits. There’s actually a real need for you to talk to someone.”
Advisers grappled with the question of what will win business when pitted against their peers. Latham said EBCs are a homogenous bunch: they’re in a regulated industry with regulated products, all have passed the same exams and are saying similar things. But there do seem to be a couple of deal-breakers, serving to differentiate between operators. Herbert said service has always, and will always be the key. Rodger argued that the ability to use technology is of increasing importance: “We’re seeing huge benefits from that. The ability to make HR’s life a lot easier than it has been in the past”.
With all this new potential, however, there are potential new traps. Joel Adams, co-founder of Lift-Financial, said firms may bite off more than they can chew: “Advisers will have a natural inclination to take on clients that we probably haven’t thought much about how we are going to service them later on.”
Which leads us back to where we started, and the issue of how advisers will cope in the next frantic few years. With only a finite numbers of staff in the industry, and a high barrier to entry, advisers could face severe limitations on their ability to expand and maximise opportunities. Smart technology, efficient systems, scalable business models and clever market segmentation will help firms make the most of this golden opportunity.