Private sector pension providers are struggling to make the economics of serving small employers work, prompting concerns Nest could soon be the only option for millions of firms.
Last week, Money Marketing revealed B&CE, the group behind The People’s Pension, is considering introducing a new charge for small and micro employers using the scheme to comply with auto-enrolment.
Several major insurers have already introduced minimum contributions and set-up charges for employers, but the three master trusts committed to accepting all types of employers have so far been silent.
However, Money Marketing understands B&CE board members have privately discussed the possibility of a fee paid by smaller employers, in addition to the 0.5 per cent annual management charge on members’ pots.
The People’s Pension director of policy and market engagement Darren Philp warns the intense timetable for smaller employers staging in the next few years and regulatory pressures might mean a different model is needed. He says no changes will be made before 2016.
With Now: Pensions also suffering admin problems, will the Government-subsidised Nest become the only viable option for small businesses? And what implications could this have for the successful implementation of the flagship auto-enrolment reforms?
The number of firms hitting their auto-enrolment staging dates rapidly increases in 2016, jumping from the low thousands per quarter to over 200,000 a quarter by 2017.
Philp says: “We are currently looking at how we make sure we can meet our commitment to be open to all and serving that market.
“We haven’t made any decision yet on what the model will be but we reserve the right to have a different model for different sectors, as any provider would. But our key objective is to make auto-enrolment work for next year.”
He adds the firm will be pushing for regulatory change to ease the burden on small employers and pension providers, and to how The Pensions Regulator’s levy is applied.
At the moment, neither Government-backed scheme Nest nor Danish provider Now: Pensions levy a fee on employers.
However, Now: Pensions also appears to be under pressure. Last month, Money Marketing reported the scheme – an offshoot of Danish pension fund ATP – was warning advisers and employers its online systems would be suspended over Christmas as it switches administration provider.
In addition, employers have been told they could be hit with punitive charges if they continue to use BACS to pay pension contributions after the firm migrates to using JLT Employee Benefits for admin services.
With The People’s Pension and Now: Pensions creaking, there are growing fears employers’ choice of pension providers will be limited solely to Nest.
A senior pensions industry insider says: “It doesn’t take a genius to see how difficult the economics are at the small end of the market.
“There has to be a big question mark about whether Now: Pensions is still in the market, given the problems they’ve got and Nest is creaking at the edges – you can barely get through to them on the phone.
“I’m worried; 2016 is where the train wreck happens I think.”
Nest chief executive refutes this claim.
Chief executive Tim Jones says: “We have strong service level agreements with Tata Consultancy Services, our scheme administrator, to ensure we provide a great service to our members and employers.
“The vast majority of calls are answered in less than a minute, for example, in November over 99.4 per cent of calls were answered in this timeframe. We also launched web chat in February to offer our customers a good service, for those who seek help online.”
Most of the major insurance companies have already imposed minimum requirements before taking on new auto-enrolment business. For instance, Standard Life levies a £1,200 annual charge on small employers who have agreed a deal above the incoming 0.75 per cent fee cap, while Legal & General charges a £1,000 “set-up” fee for schemes with fewer than 500 members.
Pension Playpen founder Henry Tapper is surprised B&CE is waiting until 2016 to impose an employer charge.
He says: “That’s a very long time to wait. I’m surprised they aren’t considering an employer charge sooner. It really worries me because the only people with deep enough pockets to deal with this are Nest and it’s not really Nest’s pockets, it’s our pockets they’re raiding.
“Now: Pensions and B&CE tend to benchmark themselves against each other. It is the obvious thing they have to do to protect their business but they are also doing it to moderate flows. A small number of cases at a profit is better than a large number of cases at a loss.
“It’s like a sluice gate – it stops them getting swamped.”
Now: Pensions would not rule out introducing a new employer charge.
Now: Pensions chief executive Morten Nilsson says: “Those providers who wish to service the entire market have to give consideration to how they ensure their charging model is sustainable, equitable and robust.
“For our part, we have a self-imposed voluntary service obligation and at the moment our focus is on improving our service to current clients and ensuring we can meet the needs of employers staging in 2015.
“We are just beginning to formulate our strategy for the 2016 market and this will be shaped by our learnings in the market and the regulatory and competitive landscape.”
Principal Financial Solutions director Chris Daems says if B&CE and Now: Pensions do increase fees they will have to justify higher charges with extra services, otherwise employers will simply turn to Nest.
He is worried about the impact on competitive tension in the micro market but is not in favour of Government intervention. Instead, Daems suggests making it easier and cheaper for employers and providers to comply.
“If you make it more simple for employers to comply, the admin burden on providers is reduced as there is less manual intervention and as a result they can better manage their costs”, he says.
LEBC divisional director of group savings and investments Glynn Jones says there could be benefits if Nest were left to scoop up the thousands of micro employers.
“If millions of people are moving job to job in a certain segment of the workforce and they’re going from employer to employer and staying in Nest, clearly that could potentially be beneficial.
“But if Nest becomes the dominant force in the marketplace, then the restriction of choice won’t be helpful and is not what anyone’s trying to achieve.
“If we’re left with the overwhelming majority of employers trying to go through Nest’s pipes come 2016 there is more chance of problems than if it’s spread between three master trusts plus one or two quality providers.”
The People’s Pension – 0.5 per cent annual management charge
Now: Pensions – 0.3 per cent AMC and £1.50 per member per month administration charge
Nest – 0.3 per cent AMC and a contribution charge of 1.8 per cent on each new member contribution
Providers shouldn’t be expected to be auto-enrol policemen
Of the two-market failures that led to the introduction of auto-enrolment, the one that remains a key concern is the appetite for providers to serve employers who were not considered economically viable.
Although auto-enrolment has been introduced and Nest created, the underlying cause of this market failure still exists. And while auto-enrolment has gone well so far, we have only actually enrolled 3 per cent of the employers and are operating at small contribution levels. Whilst it is great to see so many positive news stories about pensions, there is a real danger this is masking a huge challenge ahead as auto-enrolment reaches down to the smallest employers.
So what is the issue? Well it is simple mathematics.
From January 2016, we will start to enrol over one million small employers, the vast majority of which will have fewer than 10 employees. Based on a 0.5 per cent charge, we estimate the auto-enrolment minimum contributions of 2 per cent of banded earnings will generate less than £10 in income per annum in its first year. That’s per employer, not employee.
By contrast, the costs a provider will face in regulatory fees, compliance support, set-up, communications and administration are considerably higher.
Take the Pensions Regulator’s general levy as one example. It is a simple 86p per member, regardless of pot size. For a master trust charging a 0.5 per cent AMC a pot needs to be around £170 before it covers the cost of the levy (£230 in years when a fraud compensation levy is payable).
The levy is especially regressive because it penalises providers striving to serve low paid or transient workers, precisely the people auto-enrolment was designed to help. And at the time of writing, two-thirds of members of The People’s Pension don’t generate an income that covers the basic levy.
Then there are additional “voluntary” regulatory fees, such as the significant costs of obtaining the independent assurance framework, which TPR expects master trusts to obtain.
The rules and regulations don’t help either. The auto-enrolment regulations mean that there is a real onus on providers and trustees to act as policemen. The legislation puts a disproportionate burden on providers in chasing late payments and dealing with insolvencies, not to mention the additional support we may need to give to smaller employers to help them comply with the complex auto-enrolment regulations. And all of this has to be delivered beneath the Government’s proposed charge cap.
The basic problem is current regulation costs more for good quality schemes. It is our view that both scheme members and providers should benefit from good regulation, and not just be saddled with additional cost.
Darren Philp is director of policy and market engagement at The People’s Pension