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Is Nest the last scheme on the shelf for small employers?

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?

Regulatory burden

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.

Admin troubles

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.”

Employer charges

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.”

Competitive tension

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.”

Mastertrust charges

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

philpdarren

Expert view

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

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. Nest is the ONLY scheme for small employers. Most of their employees will contract out. At least those where the employer has actually registered.

    In view of the fact that you have to make an initial contribution and then have it repaid I guess Nest will have its work cut out.

    How long TATA will keep ‘skin in the game’ at these margins will remain to be seen.

  2. Another case of scheme providers with eyes bigger than their bellies.

    It was never going to be possible to take a large section of market share and succeed with implementation/running at the costs originally agreed. Ask Aviva what happened when they took nearly 25% market share on stakeholder.

  3. We have enrolled 2 employers (60+ employees) in the middle of the year with NEST. They provided webinars, training videos and whilst not the simplest of processes, the support staff were superb and assisted as much as they could over the phone. However, I was also told that phone contact would be terminated at the end of October to be replaced by on-line chat, as they didn’t have enough staff to provide an on-going service .

    Unless NEST drastically increase the number of support staff (and by implication, their overheads), and recommence personal phone contact for employers again, there are going to be even greater problems than currently being forecast.

    It should come as no surprise to anyone that he ‘big players’ have costed themselves out of the SME market. Stakeholder was a prime example where everyone thought that they would make ‘loads o money’ but over a two year period, the providers quickly changed their minds, leaving only 2 or 3 offering the service.

    Anyone seen ‘One flew over the cuckoo’s NEST?’ A tragic film about trying to fool people, and eventually getting their comeuppance.

  4. Like most thing the ‘experts’ in power ignored the industry, as it did with stakeholder, and blundered on with auto-enrolment despite the fact that it is an economic suicide for providers to deal with small employers.

  5. Christine Brightwell 5th December 2014 at 11:12 am

    Steve D, good point. Scheme provides need to look at the whole picture, including legislative requirements and duties on the trustees and scheme levies in the initial planning stage.

    The trustees have to be trustees, even in master trusts; the duties are not reduced just because the job is onerous. Trustees have duties to police their scheme and the legal requirements that apply to it. This is trite law and should have been understood at the outset.

  6. Small business, less than 5 employees. Employer makes contributions to Pensions for all 5 but they all have different arrangements. Come stagging I don’t see any of these employees wanting to participate in a workplace savings scheme. They still have to go through the remit of AE set-up but with no contributions ever being collected by any AE provider.

    How many companies will be in this position over the next 2/3 years and how much will it cost NEST to accommodate these employers? Why would the private sector want to get involved in something that does not make them any money, in fact its an albatross!!!!

    Any new Pensions Minister should take a fresh look at the feasibility of AE for the smaller employer – PLEASE

  7. It is well documented that some providers are stepping back from this market and there are concerns about NEST’s ability to cope with volume. I don’t believe that NEST is your only option. We have designed a master trust product that we believe offers advisers an opportunity to recommend a product that provides employers with tremendous value for money. We are not naïve – it won’t be for everyone, but if an employer is being forced by the government into providing a pension for their workforce why would they not take the opportunity of making sure they give their employees a good one. One that provides active management of the funds from a multi-award winning fund manager – Quilter Cheviot. One that also offers an end to end fully managed Auto Enrolment service – assessing and categorising the workforce, issuing all member communications, managing Opt Outs and Opt Ins, leavers, joiners, automatic re-enrolment etc. A service that also produces assessment reports and contribution reports for integration into payroll – and keeps records indefinitely. On top of this we have also bolted on some key employee benefits – a set of Wills at no cost to the member (important with any product that has death benefits), an estate planning review that can generate additional income for IFAs as well as identifying financial services opportunities that are passed back to the IFA. We also provide every employee with retail discount card and top up card accepted in M&S, Boots, Sainsbury’s etc.
    In summary we are offering a rounded service – a “pension in a box” with additional employee benefits that will only grow in the future.
    At Family Asset Pension Trust we want to provide a quality service for the employers that want to offer their workers something better than simply just doing what they have to do to comply with the legislation. And, we do it all within the charge cap.
    Therefore NEST is NOT your only alternative. Find us in the Auto Enrolment zone on Panacea Adviser http://www.panaceaadviser.com/main/p116/26,0,0/auto+enrolment+zone.htm
    And soon on The Pension Playpen at http://www.pensionplaypen.com

  8. I am one of those small employers as a farmer. So not sure how I ended up on your website except wondering about auto enrolment for my few employees on a cold Saturday morning. Seems for me a positive nightmare to get a scheme set up. Our first port of call at the NFU mutual tell me they are not going near them because of the admin costs and knowing they’ll get loads of small employer farmers as the provider of default – not it seems the sort of client they want! My other farmer buying group is doing something so seems I ought to turn up at one of their seminars. Didn’t realise what an admin burden it is going to turn into – should be no more difficult than an online monthly payment like I now do with my PAYE software but clearly not!

  9. A case of politicians meddling with things they do not understand, clearly the numbers do not add up. I am sure that the intention all along was for NEST to be the dominant player and justify the default position, but I cannot see how the strategic partners will make any profit if they do the job right.

    As others have commentated, providers are too quick to put their hands up and claim that they can run schemes below cost, then pull out when the reality sets in.

    We are now approaching the thin edge of the wedge in terms of quality companies wishing to set up a suitable scheme, but the thick end in terms of numbers of companies reaching their staging dates. It is not surprising that advisers and providers will now cherry pick and leave the unprofitable or uncooperative firms to NEST, who may not have the resources to deal with the volume.

    Personally, I have too much to do serving my paying clients, which include companies wanting quality employee benefits, and I am sure I am not alone. Auto enrolment is employment law, and it is not the responsibility of the adviser community to ensure successful implementation.

    Some advisers will be able to make a success of it, and some may say it opens up opportunities for selling further services, that is not a commercial risk that I can afford to take and not the market I want to be in.

  10. I am disgusted at the Pension Providers as a whole, as none of them have stepped up and grasped the nettle. I have been talking to these companies for 3 years and they have pussy footed around when in my opinion they should have been taking action. We have Auto enrolled around 3000 employees across a number of schemes and had 20 employees opt out of that number, so potentially that will be nearly 3000 people paying 8% of salary in 4 years time.

    More that forward 20 years and the funds under management from Auto Enrolment will be huge, how does that not make good business, the pensions companies were ripping clients off for decades with high charges and capital units plus selling them annuities that were inappropriate for them so in my opinion its time to give something back!!!!

    Now Pensions are creaking for sure and a lot of SMEs will not pay the £1200 fee to set a scheme up with Standard Life for instance, the success of Auto Enrolment will hinge on how it plays out in the SME market as over 90% of the people affected work for these companies.

  11. After reading through a lot of these comments it seems that most employers don’t know where to find a provider designed for the SME’s that doesn’t call for you to do a lot of the work.
    Berkeley & Wharf are providing a pension scheme designed by STAFFPLAN designated for just that market, at an incredibly reasonable price they will do all of the administration taking all of the stress out of workplace pensions.
    For more information and quotes on this Auto Enrolment scheme please email info@berkeleyandwharf.com or alternatively visit our website BerkeleyandWharf.com

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