The pension industry’s capacity to meet demand as auto-enrolment rolls out has been the subject of debate since the policy was first mooted.
Just six months into the process we are getting dangerously close to the point where parts of the system could grind to a halt.
Pension provider systems are not going to start toppling like dominoes any time soon but some predict we will start to see them change the behaviour we have become used to in recent years, as demand for their scarce resources leads them to increasingly pick and choose who they work with and what they do.
Yes, providers have been getting increasingly choosy about who they will deal with. But we are not talking about 20 life schemes being turned down by big name providers. The snowballing number of firms being auto-enrolled could lead to some effectively closing their doors to new business by the end of the year.
It could happen even sooner if Towers Watson’s recent research into provider capacity is anything to go by.
The consultancy’s survey of the industry’s state of readiness for auto-enrolment found that pension providers will be operating at full capacity by May, and will be running at seven times normal capacity at the end of the year.
Towers Watson went and asked group pension providers how many personnel it takes them to handle schemes of certain sizes, how many staff they have, and how many they were planning to recruit by the end of the year.
Factoring in the exponential number of employers reaching their staging dates and the simple maths tells you that the private sector pension industry is going to be tested to its limits some time soon.
Any satisfaction there may be today over the smooth implementation of the first few hundred schemes will evaporate into thin air when the real work starts. With 7,000 employers meeting their staging date by October this year, it is clear the phoney war is soon coming to an end.
The reality is that providers, and advisers for that matter, will all probably be OK. All the providers I speak to know they have a big job on dealing with their existing book, but at least they know the scale of the problem.
It is the employers who should be worrying. They are the ones who will be rushing around trying to find a pension provider that will take the new populations within their workforces that need to be automatically enrolled. They are the ones that will find the provider which deals with their HQ staff will not take on their rank and file employees around the country, or if they will, will no longer offer on-site visits, hand-holding or communications materials.
They are also the ones who will find that their data is weeks if not months away from being able to plug into one of the automated systems offered by the big master trust providers, including Nest.
But not surprisingly many of these employers are blissfully unaware of the task they face in meeting their auto-enrolment obligations.
All this would not be so bad if the situation was not compounded by the fact that providers and many formerly commission-based advisers are in a state of limbo about whether they are allowed to use consultancy charging or not, and if they can, how.
It looks like we might get some sort of view from the Department for Work and Pensions just about the time the industry reaches capacity.
Add to that the fact that providers and advisers are now having to divert energy to the Office of Fair Trading investigation into workplace pensions.
It is ironic that massive demand for pension providers’ services will surely enable them to push up their costs just as the OFT is investigating charges.
Providers and advisers will face challenges, and some will doubtless get things wrong. But it is the rump of unadvised employers without providers trying to meet their obligations where the real pain is likely to be hurt.
Will mass fines for non-compliance lead to calls for a pause in roll-out? We willll have to wait and see.
John Greenwood is editor of Corporate Adviser