The extent of links varies but arguably the most integrated to date is that between Scottish Widows and the People’s Pension.
Nest says it is open to working with everyone but has gone furthest with Aegon, Aviva, Standard Life and Widows. Some alliances have been encouraged by advisers asking for joint pitches. Other systems, such as Aviva’s multiple pension scheme solution, will provide employers with a system to ensure that all their pension arrangements comply with the auto-enrolment requirements.
Explaining the link-up with the People’s Pension, Scottish Widows’ head of corporate pensions proposition Peter Glancy says: “Most employers would like to have a single provider but they want a rich, flexible proposition for the core staff as part of an attractive EB package and they want a low cost solution for part-time workers. The big employers are finding that no one can offer the utopia solution. So you offer them a two tier solution.”
Glancy says that employers worry about the potential for additional costs arising from two providers but he believes Scottish Widows’ software, the automatic enrolment solution, addresses this by giving themthe same admin experience for employers as a single solution would. He says employers alsowant the schemes to look similar as well.
“Purely coincidentally, when they were thinking of entering the market, we realised the B&CE scheme looked very like ours. The investment content is almost identical. They are mono-charge and have the ability to tailor the outputs, say, to put on the chief executive’s photographor amessage from the HR director on the website. It looks like the same scheme albeit on two different platforms. There is a niche in the market we can fulfil with this tieup, but it is only because our schemes look so similar. It would be difficult to meet that niche if you were stringing together different schemes.”
The People’s Pension director of customer development Paul Murphy echoes many of these sentiments. He also points out that the existing market showed how the alliance could make sense.
The B&CE stakeholder GPP scheme has around 500,000 members and tends to serve the more modestly paid in the construction industry while Widows already offers schemes in 20 per cent of the 50 biggest construction companies. “There are already situations where this fits with our existing customers, so it made sense to widen it across the auto-enrolment pension arena,” he says.
Nest says it is open to talking to everyone. Nest’s director of communications and engagement Graham Vidler says cooperating with other schemes is “positive and inevitable”.
He adds: “Having been set up to complement existing provision, we worked out you had to do that within individual employers as well as within the market as a whole. We have employers with complicated existing arrangements. What is right for head office may not be right for the branches. In those cases, advisers are saying they want two tiers and that has been part of our bread-and-butter approach.”
Although it has offered to work with everyone, Vidler says the running has been made by four offices Aegon, Aviva, Standard life and Widows. “We are working with each of them on live examples, where we will sit down in front ofa major employer and discuss a joint solution where that is the right thing for that employer,” he says.
It may make sense to have a starter arrangement which is a no frills, lowest common denominator for the lower-paid, high turnover employees. The scheme adviser is able to deliver a packaged solution that also wraps up the more complex and more sophisticated solution for higher-paid employers in one package. Overlay the auto-enrolment processes on top and you candeliver it to employers with a ribbon around it
He adds that the level of cooperation varies. “It tends to be the adviser’s call. Sometimes we get asked to present jointly with A. N Other provider. Other times we get asked to go in by ourselves and talk about how we would service a part of the population.”
Standard Life’s head of workplace strategy Jamie Jenkins says it has been speaking to Nest for some time. “We have put forward some of those propositions and tenders, though it is not across the board. Some employers also want a single provider and we will work very hard to provide that. But Nest won’t offer self-investment or drawdown for example, so a number of things make the division quite easy.”
The third low cost solution, Now Pensions, also says it is open to talking to anyone.
Chief executive Morten Nilsson says: “We are seeing interest from providers in these kinds of collaborative solutions though from an employer point of view, it is important they see one solution covering them. Whether that is provided by more than one provider underneath the hood is less important. It is very important for employers to have a solution that works from an administration and communication point of view. There will be different ways to get to that goal.”
He says he is seeing a wide range of demands, some of which depend on employersize. Some larger employers are talking to Nowabout covering as yet uncovered employees which might suggest two solutions, but employers are considering a number of other options including reconsidering their whole provision or getting through auto-enrolment and then considering it. He thinks it likely that smaller employers will be looking for one solution.
Corporate advisers and industry consultants see a number of factors driving the two tier trend. Buck Consultants’ head of DC and wealth Philip Smith says some providers obviously won’t want to deal with the high turnover/low contribution end of the market. But client demand is driving things too.
He says: “Most of our clients want to keep their existing scheme and don’t want the terms to suffer due to lower quality members joining that system. Some of those clients want two tier solutions. For employees who actively enrol and make contributions they may have a high quality scheme and for those not making an active decision, they will put them into a basic arrangement.”
He says Buck has already arranged this for two clients setting up a GPP or trust arrangement along with Nest.
However, he adds that Buck will also look at Now and the People’s Pension given their flexibility around transfers and the lack of an upfront deduction.
Hargreaves Landown’s head of pensions research Tom McPhail says: “It may make sense to have a starter arrangement which is a no frills, lowest common denominator for the lower-paid, high turnover employees. The scheme adviser is able to deliver a packaged solution that also wraps up the more complex and more sophisticated solution for higher-paid employers in one package. Overlay the auto-enrolment processes on top and you candeliver it to employers with a ribbon around it.”
He says the firm’s offering is still a work in progress but it has had discussions with both Nest and B&CE to date.
“We are open-minded about this. We are happy to put together whatever package will work for clients and whether that is the same solution or a mix and match one remains to be seen. I don’t think anyone predicted the market would move like this but it looks like the route we are going down,” he says.
Independent consultant Rachel Vahey also identifies several important factors driving the market. She says: “Certainly when you are considering the larger employers one size pension scheme is unlikely to fit all employees, so it makes sense to have a feeder provider. There is no reason why that feeder fund should always be Nest as long as other providers can do the job just as well. Many employers are against using Nest seeing it as ’Government-tainted’, so it’s feasible that as the profile of People’s Pension and Now Pensions grows, employers may consider them to be desirable providers.”
Vahey says that the other factor to consider is the sort of deal that can be struck between the main provider such as Widows and the secondary provider. “Widows are the main introducer and they will only perform this role if it is economically viable for them. They have to see it as financially desirable,” she says.
Barnett Waddingham partner Mark Futcher says the market has presented an interesting set of challenges. He gives an actual example of a 3,000 employee workforce with 300 people in the pension scheme.
The current provider may not want the 2,700 arguably lower-quality remaining staff. He says this has left a choice of three compared with the 15 or so providersavailable to better quality schemes. However that is much better than Nest alone.
But he also welcomes the developments such as the Widows, People’s Pension link up saying that the admin solution provided by Widows’ middleware may be very interesting to clients and expects other providers to look for similar deals. However he suggests it is a “big call” for established pension firms pinning their colours to another firm where there is a risk of capacity issues.
What is right for head office may not be right for the branches. In those cases, advisers are saying they want two tiers
Deloitte lead RDR partner Andrew Power believes such arrangements are likely to be the norm. He says: “Providers want to make it as easy as possible to offer a range of pensions. If you take a big retailer, they will have lots of part time employees, so some employees may be unattractive to the provider. They aren’t earning much, they are in and out of the scheme but they have to be enrolled.
“The provider wants to say: ’We can link in and offer the big hitters a Sipp, perhaps a regular GPP for middle management and for part-timers we will link into Nest or a People’s pension’. They want to minimise the downside of losing their big accounts. Most of the large pension providers will be likely to go along this type of route.”
But what is the Legal & General approach given that Futcher says that arguably they are also offering a mass market solution?
L&G pensions strategy director Adrian Boulding says he is happy tobe considered in thatgroup, but he also believes most schemes will want one provider. “This is a volume game and if you can get lots of people, even lower earners, then you can run it at low cost.”
He says in a small number of cases employers want two providers and says L&G is pitching for a scheme along with Nest, respectively for permanent workers along with a large number of seasonal workers. But he believes this will prove to be the exception. He says employers are telling them that they want a single provider and L&G have gone away and priced such a service.
He says: “An EBC may organise a pitch and it might include us following a combination. We will see quite a bit of that. We think we will win because the single scheme proposition will prove more attractive, because employers won’t want to tell half their staff you are not in the proper scheme but in the Government scheme.”
Nest may face another challenge. The advisers spoken to raised the issue of restrictions on Nest, saying it may put them off future recommendations. Nest’s Vidler says advisers have said as much to him and the organisation would like the restrictions lifted. Other providers divide in their opinion.
Boulding wants to see the restrictions remain and says they are the price Nest paid for receiving a £120m low cost loan from the Government to allow it to meet EU requirements about not creating unfair competition to the private sector.
However, Jenkins, representing a firm which is arguably closer to Nest, wants to see them lifted.
Significantly the Work and Pensions select committee has just joined calls for both the contributions limit and the transfer restriction to be lifted which may address advisers concerns.
But there may be another issue about two tier pensions in general. Could two sets of pensions be unfair or perceived as such?
Futcher says the big concern for most employees is how much the employer is putting in, rather than necessarily the type of scheme. He also points out that we already have a bigger divide between DB and DC.
Smith suggests that there could be issues where a workforce was divided by gender for example wherea strongly female shop floor was offered a low cost arrangement while a mostly male management had another.
However he suggests this should be okay “if you say if you want to join actively you get ’x’ pension and if you don’t join actively get ’y’.”
Finally could this also apply to one pension that facilitated consultancy charges and one that did not?
Glancy says: “We think it isabout replacement ratios. We are moving to flat or flattish state pension. If you are earning £10,000 and doing de minimus, after auto-enrolment, you are going to retire on about 80 or 90 per cent of your earnings. If you are on £60,000 per annum and have the minimum, you may retire on 25 or 30 per cent. You will have a big problem in terms of standard of living. You really need advice so that is the argument for paying for our pension.”