It was always widely predicted that the workplace pension reforms and accompanying changes to remuneration for advisers would bring a dramatic slowdown in the switching of schemes between providers. The question now is whether scheme sponsors and trustees will once again begin to consider changing provider.
Advisers remain split about whether the switching market will spark back into life in a meaningful way, although most can see potential drivers in the next couple of years.
Advisers surveyed by Corporate Adviser last autumn said the quality of the default investment strategy was the top priority when reviewing schemes, narrowly followed by charges and then service levels. It remains to be seen whether these drivers will be enough to persuade sponsors to go through the task of switching.
Clearly a great deal of bandwidth has been taken up in the last five or six years with the need to make sure existing schemes qualified, the setting up of parallel schemes and for many employers the setting up of theirfirst ever pension scheme.
Hargreaves Lansdown head of retirement policy Tom McPhail says: “Where employees had to set up auto-enrolment schemes for the first time, that saw them review existing provision and perhaps making a decision to move. Where they had selected an auto-enrolment provider, it is probably too soon to see employees revisiting that initial decision and then looking to move on again.”
Yet calls on time aside, it is the combination of the charge cap and the commission ban and the follow-up decision to axe consultancy charging that represent the two most significant changes according to advisers.
Howden Employees Benefits head of benefits strategy Steve Herbert says: “The desire to move providers of schemes is now much lower than it was 10 years ago.”
He lists three factors. Firstly, virtually all new DC pension schemes are competitive and much more attractive in charge terms than they used to be prior to the start of the auto-enrolment project. Secondly, with the removal of commission from the equation, there is now a much bigger switch/ installation cost for the employer to consider.
Finally, employers have – for the moment – moved their focus from pensions to other and currently more immediately pressing key elements of the employee benefits offering such as mental health and financial education, says Herbert. But this doesn’t mean there won’t be switches, he adds.
“Employer pension contribution costs will increase when the next AE minimum increase takes effect in April 2019. Then the need to ensure that the employer is getting a decent return on investment (ROI) for their significant spend will again become much more apparent. Indeed, I often remind employers that the pension costs may already be their biggest employee benefits annual spend, so the desire to review and ensure that ROI will only increase again over time,” he says.
So what will drive scheme switches in the immediate future? “From the interaction that I have with HR and finance people, my feeling is that the strong drivers for scheme switches are now around support and communications and of course administrative competence, rather than charges and investment choices. Employers are looking for that ROI, and they will only get that if the scheme works effectively and information is available easily to all employees. So schemes that are failing to deliver on these areas are the ones most likely to be moved. In addition, workers will often value a scheme that is easy to understand and use over one that offers better terms but is less well communicated and delivered.”
Buck head of DC & wealth Mark Pemberthy says: ““Participating employers in any master trust that doesn’t complete the authorisation process will be forced to change the scheme. There may be a default route offered to the business, but this may instead be a catalyst to undertake a market review. After April 2019, employers will also have a clear idea of their long- term pension membership once the contribution increases and any change in opt-out rates have been worked through. This could be a natural time to review pension arrangements to ensure they are the best plans in place for their pension objectives.
“We are also seeing a continued trend of occupational DC schemes moving to bundled DC solutions such as master trusts’ in order to reduce costs and governance burdens on the sponsoring employer.”
Some advisers note that the reason for a move may be provider- specific. These include corporate shake ups such as the big changes at Standard Life, whose pension arm is now part of Phoenix Group. While Standard asserts it s business as usual, and has in fact been winning new schemes, some rival providers are understood to be arguing privately that the move justifies the consideration of switching.
The other issue involves the well-documented administrative and performance issues at Now: ensions.
LEBC director of public policy Kay Ingram says the factors driving switches include scheme admin, scheme charges, default fund performance and process.
She also highlights the admin problems at Now: Pensions that have driven some switching though it also brings some other problems too. “Moving can be difficult until the client and adviser is certain all contributions have been allocated correctly,” she says.
She also suggests that schemes with advisers do not necessarily need problems to get out of hand before considering a switch. She says: “As advisers we constantlyreview the providers used by our clients for DC pension provision and consider, charges, service and investment options to be amongst the key criteria in selecting and reviewing scheme partners.”
Some corporate advisers say administrative failures can drive switches though they stress they may not be all that widespread.
Pemberthy adds: “We are not seeing widespread pension administrative failures. Much of auto-enrolment’s challenge in the early years was with processing, but this is now an embedded part of the payroll process for most employers. Persistent poor administration can definitely be a driver for change.
“Company HR and payroll are stretched for resource so poor pension administration can be a huge irritant. When you add the impact of poor administration on member confidence it does not take long for patience to wear thin. If there isn’t a clear plan of remediation and evidence of improvement, then moving scheme could be the most attractive option.”
Pemberthy says that switching schemes should not be undertaken lightly. He says: “Redirecting future contributions can be relatively straightforward, but effort does need to be made on communication and investment transition to make sure the benefits of changing scheme are captured and that members appreciate the reasons for the change.
“In our experience it is rare for administration to be the main reason for change and in reality it’s much more likely to be triggered by improvement to features such as communication, engagement, retirement options or investment capability, and we’re likely to see a spike in scheme reviews this year.”
Ingram adds: “With proper advice and guidance, it is not hard to change provider. No employer should feel they have to put up with poor service, as it is a competitive market and changing provider need not be a barrier.”
With Ingram pointing out the benefits of advice, other advisers say employers that did not go down the advised route may regret that decision.
Cavendish Ware partner Roy McLoughlin says: “A lot of employers needed to tick the box to offer a scheme, yet they were reluctant to pay a fee for an adviser and are now realising they have terrible administration. They may also be asked by staff ‘who are the People’s Pension, Now or even Nest?’. Employees may appreciate brand more. Some of the more senior people especially may prefer the Avivas, the Royal Londons and Scottish Widows of this world.”
“I suspect the tide is turning. But the big issue is how are employers going to pay for it, for the adviser has to charge a fee.”
McPhail adds: “There is always a tension here. You want good provision to be rewarded and poor service and charges to be penalised. You need some competition in the marketplace, but the nature of this part of the market is that it is pretty inert stuff. “You also don’t want to be too disruptive where employers and trustees are making decisions on behalf of employees. Turning over the scheme too frequently will be unsettling and disruptive. My sense is there has been remarkably little turnover of schemes. We might see that change in April when contributions rise. That could be a watershed movement.”
Financial Technology & Research Centre director Ian McKenna has a much stronger view and believes that what we are witnessing is market failure.
“Our view on that it is a moribund market – in this context RDR is an example of saying: ‘well the operation was a great success; regrettably the patient died’.
“It completely killed the mechanism through which corporate advisers can be remunerated to give people advice to switch.
“Schemes that started out as shells back in 2012 have millions in them and hundreds of thousands going in them month by month. Yet the charges haven’t changed. There is no incentive to the employer to move the scheme, employers won’t pay for advice – the employees could be getting a really poor deal.
“It is just not an efficient market and this desperately needs addressing.”