Auto-enrolment comes into effect for the biggest employers later this year but so far only two alternatives to Nest have been launched. B&CE Benefit is one organisation that has taken up the challenge and it is hoping that its experience running a sizable stakeholder scheme will make its auto-enrolment scheme, The People’s Pension, a similar success.
The company recently announced it has signed up its first client, construction group Morgan Sindall, and says its experience dealing with companies with high turnover of staff make it well placed to deal with some of the issues that auto-enrolment will present.
The People’s Pension director of finance and strategic delivery Patrick Heath-Lay says signing up Morgan Sindall to its auto-enrolment solution in January was a real boost.
He says: “Getting confirmation that our customers want to come with us for auto-enrolment is really good because it means they see us as a viable solution. A lot of our clients are quite diverse – gone are the days when construction meant purely construction. That is why B&CE launched The People’s Pension, to make what we offer available to everyone.”
He says The People’s Pension offers businesses a range of choices for providing pensions to their employees by either providing pensions for all their employees or just a section of the workforce not yet offered a company pension.
“They might be using multiple providers or they might have lower-earning areas of their workforce with no provision and that is where we come in. Auto-enrolment is providing that impetus for employers to organise themselves.”
The design of The People’s Pension has been kept deliberately simple. It has been established as a super-trust and offers three risk-based profiles and four extra funds, together with a 15-year glidepath.
Heath-Lay says: “It is a not for profit, large volume, low-charging sort of framework. We already had a trust structure under our stakeholder pension and it is a very efficient way of doing occupational pensions for the masses.”
It charges a single annual management charge of 0.5 per cent AMC, something Heath-Lay says is at the centre of The People’s Pension’s offering.
“It was very important to us that it was a single charge. The flat rate makes charging absolutely crystal clear. Typically, when you have a composite investment product, you get these embedded AMCs within them. What you could be saying is 0.5 is in reality an additional 10 basis points.”
Heath-Lay says that in the past, B&CE’s investment managers have used embedded charges. “It was a nightmare to disclose them appropriately, so we moved the entire £200m fund to a different manager. Now when we say the charge is 0.5 per cent, we know it is.”
Nest will levy both an AMC and a temporary contribution charge to pay for the set-up costs. Heath-Lay says the single AMC is sustainable because The People’s Pension has made savings elsewhere.
“We have not had to build a whole infrastructure from scratch, so from a systems perspective we are saving money there although we have had to adapt some of our frameworks for auto-enrolment in terms of adding online portals and so on.
“Systems aside, we are confident that this charging structure will work because our stakeholder scheme already has a lot of small pots so we know how to work with them. Our prediction of 0.5 per cent is based on the reality of what we have already built.”
This means The People’s Pension can service transient workers in all types of employment, such as retail, which also has a high turnover.
’A simpler structure might give us an edge but then being a perceived Government body might give Nest an advantage’
Heath-Lay says: “We process around 12,000 starter and leaver events every month. The average employment in construction is about eight months, so our business model matches this.”
Compared with Nest’s 0.3 per cent AMC plus a contribution charge of 1.8 per cent, The People’s Pension’s 0.5 per cent AMC could give it a competitive edge.
“Trying to explain a multiple charging structure could be hard for Nest. A simpler structure might give us an edge but then being a perceived Government body might give Nest an advantage.”
Heath-Lay also says the AMC will be reduced in future, when the scheme gets to sufficient scale.
He says: “We will bring down our AMC from 0.5 per cent. We operate a tiered structure in our predecessor scheme so as your fund builds up, the charging comes down. It does not make sense to have the same AMC for someone with £200 and someone with £10,000. I am not sure if it will be tiered by how many years someone has been in the scheme or by pot size but I look forward to the time when we can start to make those changes.” Heath-Lay regards Nest as a natural competitor to The People’s Pension. “Alternative, competition, whichever way you put it, we are both firmly in the mass pension market. It is under-served, either because the employer has not made provisions or because providers have counted themselves out of that market. Both Nest and The People’s Pension are targeting that demographic.”
The general misconception that Nest and auto-enrolment are one and the same thing could hold some providers back but Heath-Lay says education could help address this problem.
He says: “We need a level playing field. Too often, there has been confusion that Nest equals auto-enrolment although lately I have seen Department of Work and Pensions posters advertising auto-enrolment rather than Nest and that is the right thing. I think the balance is improving.”
One area Heath-Lay firmly believes The People’s Pensions compares favourably with Nest is in its investment approach. The pension scheme has decided not to go for the safety-first approach of Nest and has included a bigger element of risk in its funds.
“Our approach is perhaps more traditional. We see this as long term saving so we are not quite as risk-averse in the short term.”
“We need a level playing field. Too often, there has been confusion that Nest equals auto-enrolment although lately I have seen Department of Work and Pensions posters advertising auto-enrolment rather than Nest and that is the right thing. The balance is improving”
Heath-Lay concedes that people do like to have certainty of outcome but says that with educ-ation, savers can put the element of risk in pers-pective and understand they need to take some risk to generate a big enough fund to pay for their retirement.
“There is this mindset that human beings do not comprehend short-term detriment for long-term gain. People think, ’I am putting a reasonable amount of money away and I want to know where it is going to get me’ but there needs to be an element of risk so people have enough in retirement.
“Once people realise that if they are putting in 1 per cent and their employer is putting in 1 per cent, they end up with 2 per cent, so it is a good deal. But the risk does have to be managed.”
This is not to say the scheme has a cavalier approach to investment risk. It has gone for a longer than usual lifestyling period, with investment risk starting to be reduced from 15 years before retirement.
Heath-Lay says: “We take the risk off the table 15 years before retirement, so from quite a long way out, we are de-risking the fund.”
He acknowledges that getting the default fund right has been crucial, pointing out that 90 per cent of people take the default option. It is 80 per cent equities and 20 per cent bonds and cash.
“We recognise that it is important to get the default funds right. We provide a really good, robust index-tracking fund and although it is the same no matter what age you are when you enter the scheme, we do balance that out with the glidepath.”
In addition to the default fund, The People’s Pension offers one fund with less risk and one fund with more investment risk.
“If you do not want the default option, we have a less risky option and a more risky option. We wanted to keep it simple, because the more funds you offer, the more people are put off.”
It also offers four extra funds – an ethical fund, a cash fund, a pre-retirement gilt-edged corporate bond fund and a Sharia fund.
There is an extra element of flexibility to B&CE’s investment proposition. Heath-Lay says: “People often do not conform to expectations, so they can override both the 15-year glidepath and the weightings if they like. They can split their investment across all the funds except the Sharia one and we will manage that for them.”
With the design of the scheme in place and the first company signed up, the next job for The People’s Pension’s is to get its message across.
Heath-Lay says: “IFAs obviously have a key role in auto-enrolment – we believe 90 per cent of companies will take advice on it. This could be from big IFA groups but also accountants and actuaries, so we have been working very hard with engaging with these groups.
“People maybe do not know as much about us as other market players but we have been listening to advisers and building their recommend-ations into our solution. The fact that we have been in the low to moderate earner space for 10 years certainly helps.”
He hopes to attract employers looking for dual options. He says: “You will find a management layer, where there is already a scheme and an adviser in place, and a workforce layer, that may not have a pension at all. Some providers may want to take the management scheme and extend it down but the lower-paid individuals might cause some detriment to the AMC. This means there is a need for a dual approach, where we or Nest come in.”
Heath-Lay expects plenty of mid-market competition. “Nest and Now:Pensions are probably the main alternatives but I think some mainstream providers will change their outlook and dip down. You could get some other entities in there as well such as IFA networks.”
He is less certain about the potential market penetration of smaller players. “It depends on whether they can operate efficiently because the key to this is mass. There will obviously be a limit as to how much mass new providers can acquire and it is also difficult to spread the cost of the model out, so it could be expensive for smaller providers.”
But there could be a phase of consolidation as auto-enrolment unfolds, according to Heath-Lay. “Employers with existing schemes in place might go through a rationalisation programme. Equally, maybe those providers who do not make it in the market could have things to pass on to others. We could see some interesting things happen.”
To begin with, Heath-Lay believes The People’s Pension is well placed for auto-enrolment, with 6,000 employers on its books. But he says the firm is not just for the construction industry and is already looking at other businesses with similar charact-eristics. “We are getting approaches from sectors deemed outside of B&CE.”
The company is naturally positive about auto-enrolment but Heath-Lay says there are still issues that need to be addressed. “The treatment of small pots will only get more magnified under auto-enrolment. There are too many charging practises. Do we want one pot for life or not too many pots for life?
“I would like to see the industry set its own blueprint on how to deal with this rather than reacting to the calls of the Government or the regulator. Let’s base changes we make now on what we want the industry to look like in 15 years.”
- The People’s Pension was launched in November 2011 by construction industry pension provider B&CE
- It will service low to moderate earners in trans-ient industries, not just construction
- It takes the form of a super trust and is not for profit
- It has an AMC of 0.5%, which it plans to lower proportionate to either pot size or length of time spent in the scheme
- It offers three risk-based investment choices from passive tracker funds managed by L&G
- The default fund is 80 per cent equities and 20 per cent bonds/cash
- There are four extra funds – ethical, Sharia, cash and pre-retire-ment gilt-edged corporate bonds
- It operates a 15-year glidepath
- It offers an employer assistance tool that helps employers monitor the amount of money they are deducing and an online portal for staff