Much still to be done
Pensions professionals see much still to be done if the vast auto-enrolment project is to proceed without hitches. Gill Wadsworth reports
With less than one year to go until the first wave of employers must meet auto-enrolment deadlines, more than 100 companies are already in the National Employment Savings Trust (Nest) pipeline.
Ministers have hailed this modest inflow a victory for early adoption of the auto-enrolment reforms and claim it represents widespread recognition of the new pension requirements.
Pensions minister Steve Webb said he was “very pleased to see employers engaging with the upcoming changes”, while Tim Jones, chief executive of Nest Corporation, said it was “incredibly encouraging” that “so many” employers were getting ready for auto-enrolment ahead of deadline.
This upbeat attitude from government is not, however, reflected to the same extent among financial advisers, providers and UK employers working at the coalface.
The most recent rain to fall on the government’s auto-enrolment parade came from Adrian Beecroft, who was charged with suggesting ways to reduce regulatory burden on small businesses. Beecroft recommended delaying the 2012 deadlines while exempting entirely the smallest companies from pension reform.
More gloomy forecasts for auto-enrolment come from various pieces of industry research which has done little to suggest employers are up to speed with the new requirements.
A survey of 200 companies undertaken by Standard Life, published at the end of August, found that 93 per cent of larger employers do not have firm plans in place to meet auto-enrolment regulatory requirements.
Similarly, an Association of Consulting Actuaries’ (ACA) report found two-thirds of small employers without a staff pension scheme had no intention of ever introducing one.
Robin Hames, head of technical and marketing at Bluefin says: “That suggests there is a significant education campaign required.”
However, Hames notes that the picture is mixed. Levels of understanding are high in instances where employers have engaged with advisers, but he adds: “For those employers who don’t have a consultancy or who are not already engaged in the pensions process, awareness appears to be much, much lower.”
Hymans Robertson says it is the larger employers that are on top of pension reform, quoting its own research which found 97 per cent of employers with over 5,000 employees had heard about the government’s plans.
Simon Hankin, senior consultant at Hymans Robertson, says: “We also see a similar picture in small and medium-sized organisations. The vast majority are aware that auto-enrolment is coming and those that aren’t still have the time available to their initial staging date to understand the implications.”
While Hankin is confident there is still time to get employers up to speed before the auto-enrolment deadlines kick in, other advisers and providers are acutely conscious of their huge workload in preparing for the new regime.
Paul Goodwin, director of workplace savings at Aviva, says preparations for auto-enrolment can take anything from 12 to 18 months, leaving some businesses with scant time to get started.
“We are finding most employers underestimate the amount of time it is going to take to get the processes and budgeting right, and to communicate all this to their workforce,” Goodwin says.
The problem for many advisers at this point comes in convincing employers to grasp the nettle now. When deadlines for compliance are as late as 2015 for some businesses, coupled with uncertainty about whether reform will happen at all, it makes it difficult for consultants to convince clients to take action.
Goodwin says: “The dilemma is getting auto-enrolment to be important enough. To get round this, advisers are talking to employers about the gap between current and potential take up and what that could mean in terms of extra pension contributions. That’s what normally gets this issue on to the board agenda.”
Once auto-enrolment is on the agenda it is up to advisers to make clear that while cost is undoubtedly a concern, the real problems with auto-enrolment come in the complexity of setting up a qualifying scheme.
Hames says: “There is still a tendency to underestimate the complexity, particularly from an administrative perspective. There has been a strong focus, unsurprisingly, on the immediate costs of increased take-up, while the implications of ensuring that all areas of the employer duties are fulfilled are still being kept, by some, as a background issue.”
The first challenge for advisers is that no two clients will be the same, even where there are similar existing schemes and processes, the businesses are likely to have different objectives when it comes to complying with auto-enrolment.
Advisers need to meet with each client giving enough time to get them ready to hit their compliance deadline.
Hames says: “Based on our initial work with clients on staging dates, we’d estimate over 500 will begin auto-enrolling over a six month period in 2013. So clearly if too many leave planning to the last minute, our resources will come under strain. But then again, that’s our job: ensuring clients understand the planning requirements and raise the issue on the corporate agenda. Having said that, I’m sure there will still be a few late nights worked in 2013.”
There is a huge task list for advisers to work through with clients, whether they have a scheme in place or need to start one from scratch. Hymans Robertson’s Hankin says the starting point should be to assess the capability of an organisation’s infrastructure to deliver auto-enrolment to their employees. “That is the biggest hurdle that could stand in the way of being ready in time and it should be the number one priority to assess whether the right capability exists in people, systems and technology and if not, how it will be developed or sourced,” he says.
The next question is whether an existing scheme will qualify under the auto-enrolment regulations. Where it does qualify, and employers are keen to extend existing arrangements to their entire workforce, Hames says advisers need to make employers aware of the myriad considerations and complexities involved.
“An employer may feel that if the current scheme broadly meets the minimum contribution criteria, increased cost is the only concern. However, the nuances of the legislation have significant implications and that is a fundamental part of the education process that consultancies have to offer.”
He adds: “Delving into the details of agency and contract workers, secondees from overseas, segmentation of the workforce, delivery of the IT infrastructure, and communication in an automatic enrolment world. All of these and more will need a significant lead-in period for a successful strategy to be implemented.”
While employers may be willing to extend arrangements to all employees, Ian Price, divisional director of pensions at St James’s Place, says they may find that their current pension provider is unwilling to allow auto-enrolment into the existing scheme.
He notes that where employers have a high turnover or low salaries, or a combination of both, some providers may be reluctant to take the business.
“Advisers need to understand the scheme that’s in place and whether it will qualify. If you consider the retail and leisure industry, for example, with a massive turnover of staff who will be in and out of their schemes, providers might not want to play there,” Price says.
Goodwin admits that Aviva is having difficult conversations about balancing the need to help employers meet the auto-enrolment demands while keeping its own book of business profitable.
“We may have written a scheme for a retailer’s management and they want to put all of their employees into the scheme, which means dealing with completely different classes of employee in terms of turnover and contributions. These are all the things that could affect the profitability of the scheme,” he says.
Goodwin adds that Aviva is working with employers and advisers to find solutions that work for all parties.
Other providers, too, are considering how they can develop products suited to an auto-enrolment environment. Standard Life, for example, is believed to be developing a plug-and-play offering which essentially delivers ’compliance in a box’.
It is critical, then, that advisers manage employer expectations since they may not be able to offer employees the scheme they want.
Whether employers are able to find a pension solution from the private sector or they opt for Nest, advisers need to come to terms with the amount of clients who will be running a core scheme alongside a feeder scheme.
How such arrangements work would, again, be on an employer by employer basis and will likely throw up numerous procedural and administrative challenges.
Goodwin says: “Employers might want to keep the core scheme for higher paid employees and use a feeder scheme, which may or may not be Nest, for other employees. All that has to be thought through and costed before the employer makes an important decision.”
The ACA auto-enrolment survey found nearly half (49 per cent) of respondents supported the idea of Nest as a fallback qualifying scheme, while a tenth may use Nest as a foundation scheme in addition to running a supplementary top-up scheme.
Since Nest is expected to feature in so many employer arrangements, Price says advisers shouldn’t underestimate the importance of getting to grips with how the trust works.
Indeed the government reveals that large firms such as Travelodge and Sodexo are interested in Nest, alongside the smaller, more typical auto-enrolment targets.
“Nest will become the preferred solution for the vast majority so getting to understand what Nest offers and its website is going to become very important for employers and advisers,” Price says.
Communication is another key area where advisers will play a critical role in preparing employers and their workforces. This is a particularly delicate exercise since employers will be dealing with differing demographics, pay scales and ultimately retirement goals.
Goodwin says: “Employers and advisers need to think about how they are going to communicate auto-enrolment to employees. How will they explain opting out, the default fund, and contributions, and do it all so employees have sufficient time to make informed decisions?”
The retail distribution review (RDR) creates yet more issues for advisers. In a post-commission world, where advisory costs are no longer covered by providers, advisers will need to think about how they package and charge for advice and support on auto-enrolment.
Goodwin notes that where employers are unwilling to meet advisory fees, advisers may turn to product providers to plug knowledge gaps and offer resources.
“Post-RDR, are employers willing to pay a fee for the help they need with auto-enrolment, and if they are not then the advisers will look to the provider community to help,” Goodwin says.
Advisers hoping to set up new schemes before the end of commission at the close of the year are, according to Price, going to have their work cut out.
He argues that there will be relatively few clients attractive enough to providers to set a new scheme up on a commission basis by the end of the year.
“If you want to set up a new group scheme the first thing the provider does is a credit worthiness check on the employer before they take the business. There aren’t that many attractive employers out there without a scheme already, so the actual chance of doing anything [commission-based] now is slim,” Price says.
The majority of employers have time enough to ready themselves for what amounts to sweeping changes to workplace retirement provision, but it is up to the advisory community to ensure the time remaining is used judiciously.
Auto-enrolment may still be a controversial reform but it offers the genuine opportunity to boost savings and improve retirement incomes.
As Hankin concludes: “Getting an organisation ready for auto-enrolment is far from straightforward, and the penalties for failing to do so could be significant, but there are some real gains to be made by proactively responding to the challenge.”