The implementation of automatic enrolment is causing industry self-examination on a scale not seen since stakeholder pensions were launched in 2001. That, and especially the RU64 rule, led to wholesale repricing of personal pensions. Its effects are still keenly felt today, especially among providers, whose business models became heavily dependent on policyholder retention, with no clawback of costs from those who moved on quickly.
Advisers meanwhile have seen steady reductions in commission levels from stake-holder-priced products, making the economics of commission-based advice on such products very challenging.
Auto-enrolment will bring a similar seismic shift, with Nest setting the new price benchmark for all corporate pensions and not just for its direct competitors. While there is no formal price cap planned for auto-enrolment schemes, there will undoubtedly be consumerist and competitive pressures on charges, at least in the contract-based market. Providers and advisers will need to be able to demonstrate the value they provide, with higher charges being justified by additional features appropriate to customers.
While that presents a challenge, we should not see it as a threat. Nest and its direct competitors are potentially very beneficial for established providers and advisers. They largely remove the need to target the lower end of the market, leaving us free to serve the parts we understand and where we can add real value. This can be through employer-specific arrangements, including features such as customised investment options, company-branded literature and additional support with financial planning.
But the real opportunity of the new regime is in allowing advisers to mix and match to meet the needs of employer clients and maximise pension opportunities for staff.
Providers are making it straightforward for employers to operate a segmented approach. This includes producing the right communications for all groups of staff and directing contributions to the correct pension schemes. By developing close links with low-cost schemes, providers can also make the process as straightforward as possible for advisers. And the segmented approach means that higher-paid employees receive added-value features at charging levels that compare very favourably with those of the lower-end providers.
So, we should welcome Nest and the other new kids on the block. If they focus their efforts on those who are currently not providing for their retirement, they will complement existing provision and help ensure a thriving market. It is about developing solutions for clients, with product selection rightly taking second place in the process. That must be good news for everyone.
Ian Naismith is head of pensions market development at Scottish Widows