Auto-enrolment, the government policy which will see all qualifying workers saving into workplace pension unless they actively opt out, has been running since October 2012.
The staging dates for larger companies have passed and the industry is now dealing with the first tranche of small to mid-sized enterprises (SMEs: companies with employees of 30 or less).
The first staging date was 1 June this year. A further 450,000 will need to be enrolled by 2016, with 800,000 by 2017. Many of the problems faced by the industry on launch of auto-enrolment have now been resolved.
So is it all plain sailing or have further issues taken their place?
Provider willingness to engage with auto-enrolment has improved. Most were slow to deliver in 2012-2013, and the standard 1% fee was rendered obsolete when the 0.75% charge cap for default funds was introduced earlier this year.
Providers reduced their charges accordingly, but a new issue has emerged: several providers have introduced employer charges for this low-margin business (Aviva and Standard Life are examples).
According to Sterling & Law IFA Laurence Sanderson, the number of providers layering in charges of this nature throughout 2016 and 2017 is likely to increase.
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“This is a problem for us. We are whole of market, but this practice restricts the market. An additional charge of £100 a month is too much for most employers.”
Providers are also struggling with capacity problems, according to HWWA Consulting employee benefits consultant William Annison: “Some providers such as Aegon won’t take on clients at short notice and others are cherry picking. For example, Scottish Widows is looking for high average contributions and won’t take on employees that are paid weekly.
“Similarly, Royal London is not available to all advisers. It is managing its inflow business. This means the auto-enrolment market is more restricted than it should be.”
Although small firms are easier to enlist into auto-enrolment than the larger firms already signed up, many advisers are noticing a secondary market emerging with larger firms revisiting their commitments.
Clear Workplace director Nigel Sycamore said: “Many bigger firms were rushed through and now want to rework their pensions scheme in a more mature market. We have seen an increase in enquiries.”
Annison is seeing the same pattern: “The rules were badly written in 2013 and, although the secondary market is only a small percentage of our auto-enrolment work, we expect this to grow.
“The BBC is an example of an organisation that may be in the wrong scheme. It used NEST for many thousands of employees, but they could now get a much better deal in the new market.”
Advisers specialising in auto-enrolment have found that links with accountants are helpful, where accountants manage the payroll and advisers manage communication and the pension requirement details.
Sycamore’s Clear Workplace also comprises an accountancy firm, and Sanderson’s Sterling & Law is affiliated with accountancy firm THP.
But some accountancy firms manage auto-enrolment without help from advisers, meaning it is being painted as a payroll issue rather than a pensions one. The result is that firms are signing up to unsuitable pensions, using suitable payroll systems without adequate advice.
Sycamore said: “Some payroll providers produce files in the format required by pension providers with whom they have strategic alliances. This has streamlined processes but made the focus too narrow.
“Some accountancy practices provide pension products that synchronise best with their payroll software, with little or no consideration for suitability or retirement outcomes.”
Bank House Corporate director of employee benefits Tom Binstead agreed: “Auto-enrolment is regarded as a technology problem and many of these solutions don’t actually look at what the employees want.”
Lack of payroll functionality was a genuine industry issue in 2013, with few payroll providers having the capacity to manage complex auto-enrolment systems. But with big players such as Sage and IRESS in the game, this problem is less acute.
That there are now myriad payroll providers with different requirements means advisers must be aware of which suits what provider when setting up a scheme.
A pressure group, Friends of Automatic Enrolment, is trying to introduce a common data standard around payroll services. But there is some doubt regarding its likely success.
Sanderson said: “Frankly, they have about as much chance of landing a person on Mars as establishing payroll standards. Product providers won’t change their own schemes and systems
to accommodate this. It is up to the adviser to work out which payroll systems work best with which providers.”
Many smaller firms use HM Revenue & Customs’ (HMRC) free service payroll, which may begin to pose problems for advisers as they work through the upcoming tranches of small companies.
“The HMRC service does no assessment and there is very little detail attached to the employer number,” Sanderson added. “There are middleware solutions that solve this problem, but advice assessment and other details are normally better kept in payroll. HMRC’s solution is not particularly slick.”
Get the message?
One common complaint advisers have with the payroll focus is it overlooks the issue of communicating the details of a pension to employers and employees. This is one of the big strengths for advisers specialising in auto-enrolment.
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Sycamore has three fee scales offering different levels of communication: standard by email, bespoke communications, and workplace seminars. The employer can choose the level according to the complexity of their need. A tiered offering of this sort is fairly common in the industry.
These communications can help address questions about postponement, when new employees should be brought into the scheme, definition of earnings including calculations, how to incorporate basic overtime and band earnings issues, and how they relate to pensions.
That advisory firms are now focusing on smaller firms will make the process more straightforward. But there may be a few glitches as ordinary advisers with little or no experience of auto-enrolment are drafted in to complete work for current clients (see box below). Larger firms will have been more likely to seek help from auto-enrolment specialists.
Another issue may be that some firms originally categorised as small may no longer be. Sycamore said: “We have several clients that have grown very quickly that still need to be managed.
“We are gearing up to deal with a company with 958 employees for the 1 August staging date. This is a particularly complicated business: a care home with 30 payrolls, 50 sites and a high turnover of staff.”
Similarly, smaller firms with non-standard issues such as overtime, bonuses and seasonal workers can be complicated work for the uninitiated adviser.
Change for the better?
All tranches of auto-enrolment will be complete by February 2018. But will this mean that auto-enrolment-focused advisers will be out of a job? Sycamore said the relationships developed will be maintained after 2018.
“Auto-enrolment generates a lot of residual business. Our IFA arm wins, on average, £110,000 of new individual assets per enrolled firm. The sort of additional work these relationships generate include trust work, death service and other forms of protection. The relationships are ongoing.”
Binstead said of the same issue: “Like many firms, we don’t make a huge profit from auto-enrolment because commission from a group scheme is low.
“But we often go on to provide private medical insurance, and business protection, as well as conduct pension switches and (in some cases) set up more complicated retirement plans for employers and employees.
“We view auto-enrolment meetings with employers as a marketing opportunity.”
Although the pensions policy has evolved considerably in just two years, many predict further changes. Sanderson predicts that funds and investments offered with auto-enrolment will evolve in line with pensions freedoms to become more like a ‘lifestyling’ service.
“Auto-enrolment tends to opt for default funds. These include annuities, and some cash, but as more employees become aware of pension freedoms, we are likely to see products offering increased drawdown and other flexibilities.
“Auto-enrolment needs to accommodate the new market complexity.”
He also expects the minimum salary before contributions of £10,000 to be lowered to bring more people into the net.
Finally, although opt-out rates are currently low, Sanderson expects this to increase as smaller companies become involved: “If a company just comprises owner wife and son or daughter, they may well want to establish pensions using alternative means.”
Another change might be the transfer of group pension schemes onto financial platforms. This would simplify the process for advisers, but is it likely to happen? Annison thinks not.
“Some 70% to 80% of auto-enrolment candidates go in on the lowest contribution basis phased in with postponement. It just isn’t a very profitable business. As such, it probably is not commercially viable for the majority of platforms who work on very tight margins.”
This evolving market is one that frequently throws up issues. But the much-talked about mess of 2013, with inefficient payroll and high provider rates, has been ironed out. It is with this in mind that many advisers hope the current issues about capacity and communication can be resolved as the market continues to mature.
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‘A steep learning curve’: Tips for the uninitiated adviser
Advisers that have been unfamiliar with auto-enrolment may find themselves dealing with the nuances of the practice as smaller companies reach their staging dates.
The Financial Planning Practice paraplanner Anne Turner recently dealt with her first auto-enrolment client and found the experience disconcerting.
“We have one client, a software engineering firm with 44 employees, with a staging date of 1 August. They have been a client for some time and asked us to set up auto-enrolment for them.
“We are making very little money on the job. But I had found it almost impossible to get answers to questions I had.
“The first was whether the company should be enrolled on a Tier 1 or Tier 2 contribution level. Aegon automatically put the company in on Tier 1 at 9%, but I suspected they should be Tier 2 at 8%.
“I tried to get clarification from The Pensions Regulator (TPR), but they were useless. I was passed from pillar to post. Eventually, I got the clarifying information from Aegon and they were put into Tier 2.
“I also needed to know whether the firm needed a statement of investment principles, but TPR’s website information was unclear as were the spokespeople. Again, eventually Aegon were able to tell me this was applicable only to DB and DC schemes, yet the information was hard to come by.
“In all, the process has been labour intensive and I don’t trust the regulator to provide accurate information. None of the spokespeople there had any understanding of the auto-enrolment market. It has been a steep learning curve.”