While pension freedoms have been stealing the limelight, another flagship initiative has been quietly rumbling away in the background – auto-enrolment.
Surprisingly low opt-out rates have been heralded as a sign of the project’s success.
But there is a growing disquiet about the lax controls governing a market that will grow to over 10 million savers in less than two years.
Providers continue to dig in their heels about the perceived unfairness of Nest, ahead of the Department for Work and Pensions’ consultation deadline on radically redrawing the remit of the Government-backed scheme.
There are also unanswered questions around how best to future-proof auto-enrolment, and how to strike a balance between boosting contribution rates and preserving opt-out rates at their current lows as far as possible.
Across the market, advisers, providers and regulators are questioning what the blueprint for auto-enrolment should look like, and how to finish the job post-rollout.
Former Tisa policy director Malcolm Small recently carried out a review of the auto-enrolment market for Intrinsic Financial Services.
Small, now managing director of The Lyncombe Consultancy, says he was shocked by the lack of information available on master trusts providing auto-enrolment schemes.
He says: “I am quite astonished just how little information is out there on how firms operate, who runs the scheme and how much they charge. While there are exceptions, so many websites have nothing. I was flabbergasted when I was researching the market that there is no comprehensive list of firms.
“If we cannot tell who is in the sector and what their propositions are, it is going to be very hard to regulate.
“This market will be responsible for the futures of 10.5 million people when auto-enrolment is in full flow when we reach 2018. The industry needs to raise its game. It is unacceptable to not know how master trusts are operating and charging. You have to ask the questions: how robust are some of these firms, and how long are they going to be around for?”
I am astonished just how little information is out there on how firms operate, who runs the scheme and how much they charge
In his report, Small argues the ability of advisers and employers to carry out appropriate due diligence of auto-enrolment providers is limited. He says existing “gatekeepers” are either commercially conflicted or are rating the market on potentially inappropriate measures, such as added features rather than clarity of investment choice.
Small is also critical of the poor disclosure by some master trusts, and in particular the smaller players.
He says: “We need to know what charges are being levied, how a fund is managed and how it operates. In addition, scale is the other issue. If a firm does not have scale today, given the current market, I doubt very much that it is going to have scale down the line.”
Former pensions minister Ros Altmann warned earlier this year about the dangers of weak master trust regulation. She says: “I would certainly share concerns over master trusts. There is not enough regulation, and they are too easy to set up. A master trust could fail and savers could potentially lose their contributions.
“I have concerns about the quality and security of master trusts being set up. It is quite clear that not all master trusts can succeed. More than a million of the smallest employers are setting up pension schemes and many will know nothing at all about pensions. The danger is they get enticed into a master trust where there is no proper protection.”
As part of the Queen’s Speech in May, the Government unveiled a Pensions Bill which will introduce tougher standards for master trusts and greater supervisory powers for The Pensions Regulator.
Now: Pensions chief executive Morten Nilsson is counting on the Pensions Bill to deliver the governance standards that have so far been lacking.
He says: “When we were setting up in 2011, we asked the regulator, how is it a firm is able to just set up a master trust with no capital adequacy requirements. That cannot be right. Now we have the Pensions Bill, that should go some way to addressing this. We are very keen to get the Bill through.”
Flying the Nest?
As more master trusts spring up, Government-backed scheme Nest continues to come in for heavy criticism. In the year to March Nest’s loan from the DWP has swelled from £387.1m to £459.6m.
The DWP is also consulting on whether to allow Nest, originally set up as a default auto-enrolment provider, to offer retirement products such as drawdown and allow more people to join the scheme. The consultation closes on 28 September.
The People’s Pension director of policy and market engagement Darren Philp says: “Nest has been an important part of auto-enrolment and the pension landscape. But it needs to focus on what it was designed for and that is to help build up peoples’ savings for retirement. I would be concerned if Nest became an all-singing, all-dancing product provider, and on top of that one that is sponsored by the Government.”
Aviva head of financial research John Lawson agrees. He says: “Nest was developed as it was thought the market was not prepared to serve employers where average contributions were low or the workforce was transient. In practice, private sector and non-profit providers have offered near 100 per cent market coverage. The market already provides a full range of competitive drawdown solutions so it is less clear today that Nest should seek to offer solutions to retiring customers than it was back in 2007/08 when Nest potentially plugged a market gap for accumulation savers.
“An extension to the Nest remit needs careful consideration given the significant cost to the UK taxpayer – it could represent poor value and also distort market competition. Given how the market has responded to the challenge of auto-enrolment, it is difficult to see the case for a taxpayer subsidised Government-backed scheme to provide services and products that the market is able to provide in its own right.”
Nest chief executive Helen Dean says Nest has always been about paving the way to a good retirement, and points to the annuity panel set up in 2011 to help members with small pots.
She says: “The world has changed since then and we need to continue to meet our members’ needs.
“There will be a wide range of pot sizes among our membership approaching retirement over the next few years, and research shows most people want to convert their savings into a lifelong income.
“The challenge is how to provide our members with options that meet competing needs of security and flexibility – particularly when pot sizes are modest by traditional market standards – and to give them access to a straightforward journey they can follow with confidence, at low cost.”
The Government is set to review the success of auto-enrolment next year. Beyond master trust standards and the future of Nest, the review will also have to grapple with increasing contributions above the 8 per cent phased minimum. Nilsson would like to see a 10-year plan for annual incremental increases to allow employers to plan and mitigate a “hard” increase for savers.
Lawson is hopeful low opt-out rates can be maintained when contributions are increased. But he says the issue of catering to the self-employed is less clear cut.
He says: “One idea that has been put forward is to increase rates of National Insurance for the self-employed, say by 2 per cent or 3 per cent. If a self-employed person subsequently opted into saving for a pension, they would get this 2 per cent or 3 per cent NI contribution paid into their pension if they agreed to match the amount.”
Clearly, auto-enrolment’s success relies not just on savers or providers, but also employers.
Pensions Ombudsman Anthony Arter says: “We expect many of the auto-enrolment complaints we receive over the next few years to be about employers rather than pension schemes. For example, small businesses with one or two employees who may come to informal arrangements with staff to get round auto-enrolment requirements. These cases could well come to us if a few years down the line the employee feels misled or the relationship with his employer sours.”
We are at a dangerous phase in terms of auto-enrolment. We have processed the larger and medium-sized companies which have the capacity to comply reasonably painlessly. But as we go down the scale, it is going to get more problematic, we will almost be going past businesses to essentially people who do jobs for other people. I worry they are just going to ignore it.
From an adviser perspective, we will have more businesses needing help with less money to pay for it. Auto-enrolment might start to wobble or fall over – if a million small businesses do not comply, what can the Government do?
Expert view: Darren Philp
Lots of master trusts were set up in the wake of auto-enrolment and the market has changed quite a lot in recent years. Overall I would say master trusts are good if done well. The issue is they are too easy to set up and there is not a coherent regulatory framework to govern them. The Pension Bill in the autumn is aiming to rectify this, by establishing a regulatory regime for master trusts. This will increase the barrier to entry into the market and there will be regulations around capital adequacy for the very first time, at least this is what we expect.
The key message on auto-enrolment given the size of the programme is so far, so good. The opt-out rate is 10 per cent and there are good levels of compliance within the employer community. However, contributions are still very low and there is a question over what will happen when they rise. The gradual phasing in of increases should dampen the blow, but the reality is 8 per cent for the vast majority of people will not be enough.
Nest has been an important part of auto-enrolment and the pension landscape. But it needs to focus on what it was designed for and that is to help build up peoples’ savings for retirement. I would be concerned if Nest became an all-singing, all-dancing product provider, and on top of that one that is sponsored by the Government.
It is worth noting people in Nest will tend to have very small pots. Nest needs to think about how best it can support these savers.
Darren Philp is director of policy and market engagement at The People’s Pension