Advisers who think their existing advice proposition will buy them a ticket on the auto-enrolment gravy train will be sorely disappointed. There may be a capacity crunch about to hit the pensions market but that, warns LEBC chief executive Jack McVitie, does not mean existing models will work.
What is more, the intensity of competition for auto-enrolment business means even propositions unveiled today will become obsolete by the middle of next year.
“The challenge for advisers who want to play in this market is to recognise that their business model will have to change. If advisers think people will pay huge amounts of money for a relatively set process, they may be disappointed. So there will be systemisation. If advisers approach this from a pensions perspective, they will miss out,” says McVitie.
Instead, he argues that advisers will need to invert their proposition to be able to deal with customers at the right price.
“Traditionally in this market, it has been a case of technology sitting behind the adviser. For the employers coming into the system next year, it is going to have to be technology sitting in front, with the adviser sitting behind it and if you haven’t got that model, you will be found out. Basically, when you get to sub-500 employee companies, you will be obsolete if you haven’t changed,” he says.
With so many stakeholders looking to secure chunks of the massive new piece of financial services distribution that auto-enrolment is foisting onto the nation’s businesses, standing still is not an option, argues the chief of the Edinburgh-based national advice firm.
“The market is rapidly evolving solutions, so much so that solutions available today will be obsolete within three to six months. This is a big opportunity and there is a whole bunch of people with vested interests in securing this market who understand that innovation will work. You will see different launches in the coming months – and we will be one of them.”
For McVitie, that means accepting that his own firm’s AE Comply offering will soon become obsolete in its current form even though it was only launched in May. “If we weren’t reinvigorating AE Comply, then, yes, it would become obsolete pretty quickly.”
Having already taken several employers through their staging date, including the early staging of his own firm, McVitie believes the complexity should not be underestimated and says it creates a massive opportunity for advisers that can change the way they interact with employers.
“The impact on the employer is that it is an extra layer of admin which will become a bit like doing a VAT return. As long as they get the right system in place, they will be OK but they are going to have to do it and they are going to have to keep on doing it because the workforce will be continually evolving.
“There is an underestimation of the complexity for employers in the initial administering of auto-enrolment. The Government has played this side of it down because it wants to focus on the successful outcomes and that is entirely understandable but the reality is somewhat different and that is an opportunity for employer services,” he says.
But that means reinvention of advisers’ propositions.
“The current model is for the employer to engage with the consultant, who understands what is needed and then provides a solution and then delivers a support team that helps install the system.
“We know that model won’t work between May and August next year when the torrent of business starts to fall. So we are adding an additional front onto AE Comply so employers can input their scheme details and then queries are dealt with by a call centre.”
LEBC has taken a license of Aviva’s compliance tool for its AE Comply proposition.
“Its system is both payroll provider and pension provider agnostic. It doesn’t tie the employer into any other Aviva products, it’s purely a maintenance and governance tool,” he says.
“In my experience to date, in a great deal of cases, the auto-enrolment provider will and should be different from the current provider. So the ability to be able to interact with the new mastertrusts is extremely important. The idea you can just enrol people into existing schemes is ill-considered.
“We have licensed a system from Aviva, which is fantastic, but in most circumstances employees will not be ending up in an Aviva pension. In most circumstances, members will be landing in those providers I describe as the willing, being the likes of Peoples Pension, Now: Pensions and Nest.”
LEBC has also partnered with Standard Life to offer a packaged auto-enrolment solution.
This tie-up gives LEBC’s SME clients a packaged auto-enrolment option in the form of the provider’s group flexible retirement plan as well as streamlined compliance with the regulations, an actively managed default fund and a suite of communication materials.
While such an arrangement would have meant little as far as clients are concerned a couple of years ago, as the capacity crunch approaches, it is likely to become an increasingly valuable facility to be able to offer clients.
“We think the real capacity issues will be felt by providers. Innovation in the market means we think there will be enough capacity to supply the governance and compliance needs of employers but it is when it comes to getting a provider to actually take the scheme, that is where the real pressure will be felt.
“So with Standard Life we have set up this arrangement to secure a certain amount of capacity for our clients. I know they have just increased their capacity significantly but we think all providers are going to have capacity issues, so we wanted to make sure we have a provider to take our schemes. There is no point in us getting business and then having no provider there to take it.”
So does McVitie therefore think that employers who miss the boat by not acting quickly enough will find themselves with no alternative but to go to Nest?
“Yes, it may well be that they end up there. As former Pensions Regulator chief executive Bill Galvin said, this is a massive social experiment and no one knows precisely what will happen,” says McVitie.
McVitie says for many employees it will be the first time they have engaged with financial services products and many companies are also having a rethink about how they reward employees. He says many companies are thinking ‘right, we have got to do this, what else can we do’ and are now looking at benefits they can do at nil cost to them such as bikes to work.
Away from auto-enrolment, other factors are also shaping the pensions industry. The Office of Fair Trading’s landmark review of workplace pensions has raised several awkward issues for the pensions industry.
McVitie believes the jury is still out on whether the OFT’s report will result in a removal of commission from all schemes or just those set up to deal with the new auto-enrolment challenge. But he thinks the long-running debate around active member discounts, given fresh impetus by the OFT’s call for them to be banned, is riddled with contradictions.
“There are clear anomalies in terms of outcomes that would not be logical if AMDs were banned outright. If you take someone from a scheme where their AMC is 0.7 per cent as a deferred member and then move them into a scheme where the charge is a flat 1 per cent, that can’t be an outcome anyone is looking for,” he says.
“Part of the problem with the debate is nobody actually knows what is going on across the market at the moment, so there is still a considerable amount of consultation to go.
“There are schemes out there with a 0.2 per cent active and 0.5 per cent deferred AMC but if you pay £10 a year on leaving, you can keep the 0.2 per cent. How much bad practice there is, nobody really knows.”
This could mean the subject gets kicked into the long grass for the next year or so, possibly to coincide with the conclusion of the ABI review of legacy schemes, which is not timetabled to be completed until the end of 2014.
“We may end up in a situation where we kick the consultation around for a couple of years because people are not sure yet what the target is, how excessive these charges are and how much of a problem there actually is. I can understand where the OFT and DWP are coming from from a risk perspective. We have soft compulsion pushing people into savings vehicles and if they don’t get a grip on their charges, then there will be some political embarrassment for them years down the line but it would have been better for this whole debate to have taken place a couple of years ago,” he says.
But it is the scandal of the annuity market that McVitie says really needs to be addressed.
“The annuity market, with the flop-over into an annuity with the existing pension provider, is the biggest scandal facing the financial services sector. Finally, there seems to be some sense that something will be done about it but you have to wonder whether authorities have been asleep at the wheel on this one.
“When you look at the data we have from our Retirement Adviser business, which has between 65 and 70 per cent of people getting some form of impaired annuity that can be 20 per cent better than the best on the market, then you have to wonder,” he says.
So, does McVitie support Labour pension shadow Gregg McClymont’s proposal for retirees to default to a minimum of an execution-only annuity broker, which would be a member of a government-approved panel, rather than be given the option of rolling into the holding provider’s option?
“There are other market solutions out there but that proposal is a difficult one to argue with,” he says.
As well as separate auto-enrolment and at-retirement units, LEBC’s most recent launch is targeted at the long-term care sector. Its care fees planning service, launched in September, has been designed to help smaller IFAs without the expertise to advise in this complex area.
“Long-term care is an area that we have chosen to operate where there are issues around a group of customers who have different needs to mainstream clients and who therefore have to be dealt with differently,” says McVitie.
Setting up units for identifiable groups of customers with particular needs – whether they be employers staging auto-enrolment schemes, people hitting retirement or those needing long-term care – is becoming a hallmark of LEBC’s approach to the market. To succeed in one would be good business. Success in all three of these growing areas would leave LEBC very well positioned for the next decade.