Competition for auto-enrolment business is strong. Advisers must ensure their recommendations are robust. John Lappin reports.
A few years ago you could have been forgiven for assuming the 2016 and 2017 micro-employer auto-enrolment peaks would be almost universally accommodated by Nest and the other big master trusts.
But while Nest – with its obligation to accept the business – Now: Pensions, The People’s Pension and the L&G master trust will doubtless take the lion’s share of micro-employers, the range of other options is growing.
This is, first, because the number of smaller master trusts, including some offered by adviser businesses, has increased significantly. Second, many established providers now accept the business, provided that the employer – with or without help – does most of the administration and hands them data in a format that requires little provider input.
Tough test
The scale of the challenge facing the pensions industry is colossal. In the next two years, around 1.8 million small and micro-employers will have to offer and contribute to an auto-enrolled pension – a huge test for an industry already coping with competing challenges around pension freedoms, charges and, potentially, tax relief, as well as for small employers themselves.
A television advertising campaign is already under way to get the news – and the warnings – about non-compliance to this group of employers, but the scale of the onboarding challenge is vast. While the arrival of more players in the market helps address capacity issues, some experts are worried about the multiplying numbers of master trusts.
PTL managing director Richard Butcher says: “What is slightly frightening is that there are still people creating master trusts in an already crowded market and they are building up a business model around hoovering up a lot of these small employers. These may be third parties that see the opportunity but they won’t have tried and tested systems. There are risks around the untried and untested providers.”
Finance & Technology Research Centre director Ian McKenna echoes these concerns, especially where margins are tight. He says: “We are seeing new master trusts coming in, but how sustainable are they? If you are dealing with a proprietary life assurance company and the charges are not enough to pay the bills, they can take the hit. If you are looking at a smaller master trust, what guarantee have you got that they will achieve sustainable critical mass? We have not seen one that has stopped trading yet, but if you have a master trust that can’t continue, and an adviser has recommended it, it won’t reflect well on the adviser. Advisers need to be smart about whether they have recommended solutions that are sustainable.” Nest, with its public service obligation, is the scheme that is expected to take a large proportion of the very smallest employers and says it is braced for more business.
High capacity
Nest executive director of service management Nick Sex says: “Nest has been designed for scale from day one and is already managing significant volumes, with around 2.4 million members and over 27,000 employers. That means we’re dealing with thousands of transactions on a daily basis.
“The large number of employers staging from now on brings home the challenges of the next stage of auto enrolment. How do we help them stage smoothly and effectively?
“Innovation, particularly in technology, is one way to help. Employers will need to be able to self-serve quickly and efficiently or outsource the admin cost-effectively to third parties. Tools such as Nest Connect, our dedicated portal for advisers and intermediaries to manage Nest on behalf of their clients, and Nestweb Services, which will allow employers to do their auto enrolment admin through their payroll software if they choose to, are essential.”
He adds that Nest is ready for high volumes. “Around a third of our customers have told us that other providers they approached were unwilling to enrol their entire workforce. So we’re playing a vital role in auto enrolment and we’re focused on fulfilling our mission to help millions save confidently for retirement.
The People’s Pension head of policy Darren Philp says: “Looking forward, it goes to a different order of magnitude from January onwards. There are a number of key differences when we get to firms with below 30 employees. One is the sheer volume. We had around 60,000 over two or three years but there are almost that many a month now.
“Our analysis shows that smaller employers need lots of support and guidance to understand AE and pensions. Don’t underestimate the support they will need. We have a lot of experience from B&CE, but you can’t emphasise enough the amount of support and guidance needed to choose and run a scheme. Until now, companies have had dedicated staff. We are doing a lot of work on how we can make it as easy as possible. We know the people small employers turn to will be very different – smaller IFAs, accountants and book-keepers.”
Sex adds that Nest is ready to work with IFAs. “Our research clearly shows that small and micro-employers want help with auto enrolment. With 74 per cent of them wanting support, they are going to be keeping the intermediary community very busy.
“Nest Connect was developed to help IFAs and other intermediaries support employers. The portal means intermediaries have a direct relationship with Nest and it can manage all their clients through one account. We have already got around 3,500 intermediaries signed up as Nest Connectors. They say it’s what auto-enrolment needs – solutions and products that make the process easier, especially as the volume of employers ramps up.”
While providers may be ready to receive data in a format that suits them, it is still not clear whether employers will be able to fulfil their side of the bargain, with or without the help of an intermediary. Butcher is reserving judgement on whether the whole process will grind to a halt. He says: “Nest says they can accommodate this. The major insurers say we can do all this online if the employer logs on and does the work. Yet it still seems like a phenomenal mountain of work, so I would say the jury’s out.”
Admin costs
McKenna says: “Even life companies need to consider whether they can do that integration with payroll in terms of managing their own costs. Things can work very well if it goes through without touching the sides, but if it doesn’t, where it involves manual reconciliation, and if you are charging tiny amounts per month, what is your capacity to absorb that administration cost?”
The emphasis from some advisers is on offering a helping hand. Lighthouse Group’s managing director for group employee benefits, Roger Sanders, says many employers are pushing back their staging dates so those due in November will really be looking at early in the new year. “The most important thing for all providers, including master trusts, is to have a clear idea of what your forward pipeline is. That is why we brought the life trust out in June – as an incentive to use the Lighthouse pensions trust for staging later, but to offer access to the life cover now.”
Over the odds
Sanders says employers’ attitudes vary, from those who take their responsibilities to staff very seriously, to those who feel embattled business-wise and don’t want to spend an extra pound if they can avoid it.
He adds: “My experience of dealing with SMEs is that if you have 10 or 15 staff and you are sole proprietor, you know those staff are crucial to your business. They have probably been with you for many years. You are conscious you want to reward them and you will have been uncomfortably aware that you haven’t given them a pension yet. It was one of those things you were going to do. Now you have to, and some are doing it more willingly.
“In that situation you can discuss coming in at more than the minimum and there is huge kudos with staff if you stage early and come in higher than the statutory minimum. Some are even saying they will do the 2018 level now, though many are opting for basic salary because they have a better idea of what it costs from one year to the next.
“In terms of capacity, we shall have to see. It hinges on how many want their hand held. Our proposition is ‘we do it all for you’ and we have 200 advisers trained up locally to help employers do this. Other solutions have no human involvement and the employer does it electronically. We are looking for employers who want a longer term relationship with a local adviser.”
Advisers selecting schemes have to be able to demonstrate their process for doing so is robust. The Pensions Regulator expects that, where a professional adviser puts forward a single provider solution, they must clearly inform the employer that there might be another pension provider that could offer a more suitable pension, unless the adviser has conducted a clear selection process. To meet this need, McKenna’s organisation offers a service called Quality Analyser, which benchmarks providers.
“We benchmark pension providers and put them through an exhaustive list of questions. Our current auto-enrolment questionnaire is about 1100 questions,” says McKenna.
“We have research software free to all adviser members of the PFS that enables them to add an employer’s priorities to identity which providers are most suited.
“We benchmark all the providers, aggregate that analysis and play it back to advisers in different ways. We prepare the analysis factsheet in a consistent style so advisers can easily compare providers.
“One of the big changes as we get into the micro employer element is that not every provider will accept every employer. An adviser using the comparison service can put in the number of employees, average contributions and percentage of staff turnover to identify whether the employer has a transient workforce.
“They can identify not only who is the best provider based on the individual employer’s priorities and needs, but which pension provider will take the scheme. The adviser can produce a very detailed report, based on the employer’s priorities and who will or won’t take the scheme,” he adds.
Employer charges
The other big issues advisers should be watching out for are payroll integration and charges to the employer for onboarding.
“There is a cap on the charges that can be made to the member and you can’t pass the cost of advice to the underlying member, so more and more providers are introducing employer charges,” says McKenna.
“You could say Nest doesn’t have such charges but you need to understand what it does and doesn’t provide. Nest provides streamlined integration with payroll but it won’t carry out all the member obligations an employer is legally required to do.
“There is a trade-off between all these different factors. An employer needs to make a decision between choosing a pension provider who has really good integration with their payroll software, which might mean the physical level of work their staff need to do is reduced, or they will have to pay some costs to their pension provider or middle ware provider for picking up the administration.”