Pensions risk being tarnished further if the industry collapses into chaos under the weight of auto-enrolment, said delegates at last month’s Corporate Adviser forum Implementing auto-enrolment stepping up to the challenge hosted in London in partnership with Aviva.
The industry is capable of making auto-enrolment a success, said Paul Goodwin, head of pensions marketing at Aviva, but it could be disaster if it gets it wrong.
For delegates at the forum, the role of middleware, the software package that will operate between employers, intermediaries and providers, will be crucial. Middleware will, at best, allow straight-through processing of all the different stages involved in auto-enrolment: from data capture, eligibility, certification, payroll, opt-out, to re-enrolment and beyond. Advisers want middleware that can absorb different payrolls in one company acquisitive firms may have several sort the data, cleanse it and apply it to the right accounts.
Neil Latham, principal at Punter Southall, believes middleware will be the answer to an employer’s prayers. He said he keeps telling clients the administration side of things will be more onerous than any extra contributions. “The contribution cost of bringing a load of new people in will be less than the administration cost. Defining what earnings are and doing the record-keeping and all the rest.”
“Nest is just the qualifying scheme for those who can’t find on
Latham expects few clients to develop their own solutions: “I don’t think many employers will ever engage and do it themselves. It’s too complicated, it’s not the day job, they’re struggling enough to make money in these difficult times without this load coming on.”
He says middleware will be available to clients in the same way as any other services. Like comms, it’ll be a bolt-on that suppliers may or may not provide, depending on whether the employer’s prepared to pay for it. Ownership of data, however, will be important for intermediaries to maintain.
Goodwin said Aviva is working on middleware that is provider-agnostic, flexible enough to deal with employers with multiple pension schemes, who may want to use Nest as well, and can take multiple payrolls. Goodwin said: “We have to think almost what will the simplest employer want and what will the most complicated employer want.”
Advisers said the DWP’s estimate of the cost of extra admin caused by auto-enrolment, at £100 per employer, laughable. The truth is, new systems will for some employers start at hundreds of thousands of pounds, and with time will rise cumulatively into the millions. At this sort of price tag, employers, says Latham, will depend on the big players to come in with a solution, and “take their problem away”.
But some EBCs will indeed devise their own middleware, covering most or just some parts of the auto-enrolment processes to add extra value to clients. These will need to mesh with provider solutions.
Robin Hames, head of technical and marketing at Bluefin, which prides itself on technologically integrated service, says: “It’s easy for us to say it’s Standard Life or Aviva’s problem. I actually think it’s going to be a challenge for us. I think ’go to speak to the providers’ is going to potentially be a quite weak statement from a consultancy.”
To the question who should be providing the technology that will link all the parts of the chain together, Andy Cheseldine, consultant at LCP said demand for choice means employers want as many options as possible, even though this will cause problems for providers. “Because every client will want something slightly different,” he said.
Craig Rodger, director of JLT Benefit Solutions, said he will want to have conversations with the employer about what they can provide, how to make this work with provider solutions and then look for terms which reflect any work done by the employer.
There is quite a range in what providers are looking to offer. Cheseldine said: “Some are very advanced, and they’ve said yes, we’re going to do everything. Others say yes we can do everything but can’t actually demonstrate anything. Others are saying no we’re not doing that and we can have lower cost as a result. At the end of the day you pick the right one for the right employer.”
“The DWP’s estimate of the cost of extra admin caused by auto-enrolment, at £100 per employer, is laughable”
And some providers will bundle in the software with their total cost, others will charge middleware costs separately.
Bluefin expects to develop its own portal to do a lot of the middleware work, and its conversation with the likes of Aviva will be how the two systems talk to each other. Some clients won’t be prepared to pay for the full suite of services, and in those cases Bluefin will refer them back to provider systems.
Cheseldine pointed out that consultants were concerned about pension provider sustainability, and that if companies fail fully to reflect the cost of middleware in their pricing, they will have serious problems.
Edmund Downes, pensions policy manager at Aviva, foresaw a much simplified service for smaller employers, who won’t be able to pay the full middleware cost. Hames reckons there is an opportunity for the likes of Paradigm, to provide software to SME IFAs. Goodwin says particularly post RDR it’s going to be a challenge getting SMEs to pay for services.
Mark Futcher, partner at Barnett Waddingham, said systems that are ready for auto-enrolment present major business opportunities to payroll providers, but they haven’t taken advantage.
One, said Cheseldine, is being clever, by doing pension payroll in one module, and auto-enrolment in another, thus forcing the client to buy the extra module.
Much of UK pensions, including a proportion of EBC business, will be swept off into Nest. Latham worried the state-sponsored scheme fails to solve the middleware problem.
He said: “Nest is just the qualifying scheme for those who can’t find one.”
Paul Goodwin said that when Aviva personnel went to visit Nest they were shown a 7-stage joining process for employers, all on-line. The actual process isn’t that different from the way other providers do things, said Downes.
Some round the table were sceptical about whether Nest systems will work. Tata, the company running the scheme, is working on the basis of one operative to 15,000 members. Consultants consider this ambitious. Goodwin noted that Axa claimed a 1:6000 ratio on a scheme a few years ago. He says: “I think 1:15,000 is fine if they’re dealing with a small number of very very large employers. But once they get into the micros that’s a very different ball game.”
Futcher said he would simply treat Nest as one of the products available to his firm, amongst others and that he would never normally put a large amount of business with an untested provider that is brand-new to the UK market. He’s expecting Nest not to be able to cope, and to fall over at some point.
But Cheseldine countered that Tata has the scale and capability. It already runs pensions for 1.5 individuals in the UK, providing back office services, and has introduced 30m bank accounts for Bank of China within months, said Cheseldine. He argued once auto-enrolment gets down to below the 100-member level, it will actually be the employers, not Nest, who will fall over. A proportion of the million-odd firms of this size could fail to get it quite right, he said, adding: “Tata will get the blame for employers not bothering to read the rules and do stuff.”
Cheseldine did expect glitches with bottlenecks however, as data goes to India for processing. Only 999 member records can be sent at a time, because of data protection worries. With 10m potential members, this means there well could be hold-ups.
Futcher was concerned that when problems do arise, there won’t be a support structure at Nest to help. His clients will simply come straight back to his firm instead if there are problems, creating issues for how consultants manage Nest relationships. He said: “It’s going to be very very difficult for us to get involved and charge them for it and recover our time.”
Hames said advisers will have to have clear terms of engagement, including the fees and costs of additional service.
Intermediaries can make auto-enrolment a success for those employers who are able and prepared to commit resources to it. Whether the rest of the economy will avoid descending into chaos is less certain.